Pay Up or Shut Down

In this year's first quarter, Homestead rang up just $1.1 million in revenue from all sources. But in May, when the company announced plans to go public, it hinted at much bigger hopes, calling such tie-ins with commercial sites "a unique opportunity for companies seeking to build their brand, attract new customers or distribute their technology.''

If Homestead's strategy works, it will represent a fresh (and smarter) way for high-traffic sites to get e-commerce revenue. So far, free sites haven't fared well with their in-house stores -- mostly because there's no obvious connection between their site's mission and the ubiquitous candy stores that suddenly show up on a corner of their sites. Visitors just don't do much online shopping in such settings.

By contrast, Homestead is betting that its patrons will choose only those elements that truly make sense for their own sites. If so, shopping traffic could be much more significant. And that would translate into more revenue for Homestead.

Of course, sometimes the best revenue strategy is the simplest: Just ask people to start paying you. That's what eBay did earlier this year, a few months after acquiring alondo.de, a leading German auction site. To build traffic, alondo allowed sellers to list items for free -- a much more generous approach than eBay's stateside habit of charging people a listing fee of $0.50 to $2. Like eBay, alondo collected a success fee of 1% to 5% if items actually sold. But if merchandise didn't change hands, German sellers could keep listing it at no charge.

That didn't square with eBay's thoughts about the right way to run an auction site. Listing fees help pay for site upgrades, seller verification, and other services, explains Steve Westly, 43, a senior VP at eBay. What's more, he contends, listing fees help weed out unappealing items, which do nothing more than take up space.

So on February 5, eBay implemented listing fees for sellers on its German site. At the time, 1.2 million items were for sale on eBay Germany. Expectations within eBay were that the policy switch would no doubt shrink the listing tally a bit -- but not dramatically.

To Westly's horror, the German listing count over the next two weeks plunged to just half of what it was -- and kept falling. At one point, the site had only 240,000 items to offer. Sellers barraged eBay with emails complaining that they didn't like the switch. An upstart German rival, ricardo.de, began boasting that it had more items than eBay Germany.

Then the situation turned around. Sellers noticed that a much higher percentage of items on eBay Germany actually sold, because the chaff was gone. So they began posting more merchandise, boosting the total number of listings to more than 400,000. All told, the German site became a bigger money-maker for eBay after the policy switch than it had been before. And ricardo, after a brief run as a high-flying stock, missed analysts' forecasts and was forced to merge with another European auction house, London-based QXL.

For eBay's Westly, the strategic lessons of the German campaign are obvious. "Everyone likes it when things are free,'' he says. "But people need to ask themselves, 'Am I looking for good service? Am I looking for trust and safety?' Doing those things right costs money. We do a lot of things that others don't do, and we've always believed that charging for that is a good thing.''

George Anders (ganders@fastcompany.com), a Fast Company senior editor, is based in Silicon Valley.