This Week's Agenda: New Pricing for a New Century

  |  November 12, 2001   |  Comments

The Web isn't a supermarket, it's a bazaar. For all the tech advances, we're back to wheeling, dealing, haggling, and negotiating in a virtual market square. What's your pricing strategy -- and will it work online?

The fact that eBay is now worth more than $15 billion, almost six times more than Amazon.com's more than $2 billion, is more than an interesting business story.

It's an invitation to reexamine how you should be setting your prices.

The idea of a fixed price is a fairly recent and very American invention. Throughout history, in most of the world, prices have been set in market squares, through haggling and negotiation.

When Americans began selling by mail order and establishing larger retail stores, fixed prices became a necessity. Brands eventually became a pricing medium. The size of a store and its marketing budget were perceived as evidence of value. Thus we have the "big box" retailers and "warehouse" stores, where vast quantities of goods are supposed to mean lower prices for consumers.

Auctions don't work that way.

Business-to-business (B2B) companies such as FreeMarkets have buyers set requirements. Suppliers then bid on contracts. As there is one buyer and many sellers, prices are cut to the bone. The shift of risk from buyer to seller has enabled the Web to have a significant deflationary impact on business.

eBay proves that the reverse can be true. On eBay, each auction has one seller and many potential buyers. The result is that sellers get the highest possible price. The bigger the auction house, the more buyers there are. Hence, the better the price for the seller.

That's why copycat attempts by Amazon.com, Yahoo, and others to establish their own consumer auctions failed. The nature of the auction creates its own network effect. The model is winner take all. eBay won.

Because an auction guarantees sellers the best possible price, all kinds of product suppliers have been flocking to eBay. In addition to liquidators and middlemen, there are big-name manufacturers, such as Sun and IBM.

Customers, such as you and I, conduct our own auctions when they shop online.

I read recently in Consumer Reports that the Panasonic's Technics SA-DX1050 receiver is a "best buy."

We want a new receiver for Christmas (ours is 15 years old), so I checked shopping bots and search engines before settling on a New York merchant, Tek Discount Warehouse, whose price was $270 (compared to a list price of $350.)

Maybe merchants are getting "hep to the jive," as they said in the 1940s. A best-buy rating from a national consumer magazine is a powerful demand driver. A day after I placed my order, Tek emailed to say, oops, we accidentally sold out of that model.

The other day, I checked Half.com, eBay's fixed-price adjunct, and found that the lowest price listed for the SA-DX1050 is $290 from a private party ($330 with shipping).

The point is that on the Web, price is a fungible concept, not a fixed one. Amazon.com experimented a while back with the idea of setting different prices for different buyers and backed off, with apologies.

Perhaps Amazon.com didn't go far enough. Pricing on the Web is a dance between buyers and sellers. Information is the currency. Don't set a street price. Learn the auction price, and base your own price on it dynamically.

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ABOUT THE AUTHOR

Dana Blankenhorn

Dana Blankenhorn has been a business reporter for more than 20 years. He has written parts of five books and currently contributes to Advertising Age, Business Marketing, NetMarketing, the Chicago Tribune, Boardwatch, CLEC Magazine, and other publications. His own newsletter, A-Clue.Com, is published weekly.

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