Exactly How Many Active Users Do the Middle East’s Leading E-commerce Sites Have?

Saturday, October 6, 2012
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Registered Users is a Poor Proxy for Active Users

eBay is notoriously guarded about statistics on its user base. From 1996 to 2006, the company released statistics regarding its total number of registered users. Starting in 2001, eBay published a new “active user” metric which was defined as any user who had bid, bought, or sold in the trailing twelve month period. From 2001 to 2006, however, both the total registered number of users and the active user metric were published in official filings which provides an interesting insight into the number of registered users on an online marketplace relative to the number of users who actively use the site. In the case of eBay, on average 42% of its total registered user base actually conducted a transaction on the site annually based on 2001 to 2006 data. A perhaps disturbing finding is that the number of active users showed a declining trend over the few short years that both metrics were made public. This finding shows that publicized numbers of total registered users can be misleading if active users are in fact only a small portion of the registered user base. Since most of the online retailers in the Arab World are private companies, published statistics typically reflect total registered users.

eBay’s Registered Users Versus Active Users

Publicized numbers of total registered users can be misleading if active users are in fact only a small portion of the registered user base. Since most of the online retailers in the Arab World are private companies, published statistics typically reflect total registered users.

The Costs of Maintaining an Active User Base have Increased Dramatically

The data points above highlight two issues of potential concern to online retailers in the Arab World: In order to expand their user bases, they must appeal to and acquire consumers who historically have used traditional means of commerce to purchase goods. At the same time, if consumers are not active on their sites they may be unable to gain efficiencies in operating costs and the costs of acquiring new customers which could adversely impact their businesses. In fact, an Elance posting from 2010 seeking a survey design consultant from Souq.com describes exactly the same issue unfolding in the region:

“One of the issues that Souq.com is facing and that we wish to solve through this study is the stagnation of repeat users. In the last year, we have noticed that if the number of registered users keeps going up, the number of repeat users is not. We are looking for explanations for this phenomenon and to find whether it is related to the brand, the services or the product (site) or a mix of issues.”

Turning back to our eBay example, we observe that sales and marketing expenses, for what eBay calls its “sustaining marketing phase” in which its primary objectives are to create a more managed brand message, acquire new users, and increase the activity of existing users, have increased 72% from 2001 to 2011. As of 2011, eBay spent $24.25 per active user on sales and marketing. However, while sales and marketing has increased dramatically, revenue per active user only increased 30% from 2001 to 2011. While sales and marketing expenses have grown, revenue per active user has exhibited decreasing returns to scale. This is a particularly important lesson for emerging online marketplaces in the region,  suggesting that the “sustaining marketing phase” to maintain an active user base is costly and requires ongoing spending that does not always lead to higher revenue, even for very large marketplaces.

The Costs of Maintaining an Active User Base have Increased Dramatically

While sales and marketing expenses have grown, revenue per active user has exhibited decreasing returns to scale for eBay. This is a particularly important lesson for emerging online marketplaces in the Arab region, suggesting that the “sustaining marketing phase” to maintain an active user base is costly and requires ongoing spending that does not always lead to higher revenue, even for very large marketplaces.

Will Surging Regional Internet Penetration Rates in the Arab World Lead to E-commerce Growth?

In the Arab World, increased internet penetration rates are often cited as a key driver of the potential of e-commerce in the region. However, this assumption ignores economic development trends in the region concerning the growth of middle class consumers over the last decade that heavily influence the buying power of the population in a number of countries.

While internet use increased 27 times to 82 million users over the last decade, the fastest regional growth rate in the world, regional per capita gross domestic product adjusted for purchasing power grew at an annual rate of only 4% to $8,507, with the strongest growth in the Levant and North Africa. However, with the region’s quickly growing population, this growth rate trailed all other developing regions of the world (Bank 2010). Although several of the Arab countries have placed amongst the fastest growing countries in the world, only 105 million, or approximately 30% of the population, are estimated as middle class based on a definition which includes the number of people with daily expenditures between $10 to $100 per day.

It is estimated that the Arab World represents only 6% of the world’s middle class, and spending represents just 4% of total spending by the world’s middle class. By 2030, the middle class is expected to grow to 234 million or 44% of the Arab population, representing 5% of the world’s middle class and 4% of global middle class consumption.  While such estimates are not exact, these figures suggest that large growth rates are slowly producing a growing middle class and eliminating rampant income inequality, but other regions like East and Southeast Asia have made huge gains compared to the Arab World (Secretariat 2008; Kharas and Gertz 2010).

The slow growth of the Arab World’s middle class, who are likely potential users of online marketplaces, makes the assumption that increasing internet penetration rates alone will fuel e-commerce significantly less convincing in the majority of countries in the region. It seems more probable that increasing internet penetration rates might drive registered users, but household income growth trends in a number of countries across the region will ultimately determine how active these users will be. The low level of middle income households in a number of countries in the Arab World suggests that revenue from active users may in fact be much lower in quantitative as well as transaction value terms than international benchmarks like eBay. The lack of a middle class in several Arab countries also suggests a potentially limited geographic target market in the region for online marketplaces.

Estimating the Number of Active Users on Souq.com and MarkaVIP

Based on the eBay assumption that an average of 42% of registered users are active users and publicly available press accounts of the number of registered users, we estimate that Souq.com has approximately 273,000 active users. This means that eBay’s user base is 154 times larger than that of Souq.com. Using the same assumptions, MarkaVIP, which recently hit the 2 million registered user mark, would have an estimated 840,000 users.  However, Groupon’s recent quarterly public filings suggest the registered to active user ratio for daily deal sites may in fact be as low as 20% of registered users with revenue per active customer in the low $70s range (about $26 higher than eBay per active user). Similar to eBay years ago, Groupon stopped releasing figures on its number of registered to active users in February. This means sites like Souq.com could have as low as 130,000 active users, and MarkaVIPs 2 million registered users would potentially be reduced to only 400,000 active users. Though many variables are unknown, it remains uncertain if these rather small active users bases can sustain viable marketplaces without consolidation.

Estimating the Number of Active Users on Souq.com and MarkaVIP

Based on the eBay assumption that an average of 42% of registered users are active users and publicly available press accounts of the number of registered users, we estimate that Souq.com has approximately 273,000 active users.

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