Dynamic Pricing

Think back to the first time you bought something on an auction site and try to remember how it felt. It was pretty fun, wasn’t it? Now businesses are getting into the action as auctions play a greater role in business-to-business commerce.

Today’s auction sites come as close to one-to-one online marketing as you can get, but for some companies, the marketing risks of selling through auctions may outweigh the advantages.

A company’s customers have a wide range of purchase criteria – some customers are very price sensitive, while other customers emphasize non-price criteria. One way to serve both segments is to add a link on your site that takes the price-conscious customers to an auction site where they can bid for products. This allows you to separate customers into two broad categories: low-price shoppers and total-value shoppers.

Many people initially thought online auctions would be used by companies mainly to sell off surplus or out-of-date products; however, auctions have had a tremendous impact on the way corporations do business. So much so that Forrester Research predicts about 50 percent of online business in 2002 will be conducted via auctions.

Most of the talk about “dynamic pricing” has centered on web-based auctions where the buyer determines the price (within limits set by the seller). However, the use of exchanges – similar to stock exchanges – that compare the bids of multiple buyers to the available products from multiple sellers can help buyers find the absolute lowest price for a particular product.

Typically, dynamic pricing works well when the features and quality of the product are well known to the customer, and the main variables are availability and price. Take, for instance, the stock market. Each share of IBM common stock is just like all other shares of IBM common stock. The auction-style bidding that takes place at the stock exchange matches bidders and sellers who know what the “product” is.

Manufacturers are starting to experiment with conducting their own private auctions to accomplish several marketing goals. In addition, another type of auction – reverse auctions – allows a company to publicize its need for products of a particular type, quality, and delivery schedule, then receive bids from potential vendors.

Corporations have been rather slow to adopt auctions as a way to make purchases, mostly because they have established procedures for certifying new vendors. And they also have concerns about quality, warranties, and delivery times.

The implications for marketers looking for ways to differentiate their products can be dramatic. Why should a company participate in auctions where they don’t have control over the price?

Benefits

There are a number of benefits for a company selling products online at auction:

  • Reaching new customers who are price sensitive.
  • Helping dealers move used and refurbished products.
  • Providing your best customers with a private market for your products.
  • Tapping into a customer base looking for low prices over non-price features.
  • Targeting unsuccessful bidders as new sales leads.

Pitfalls

However, there are a few potential pitfalls as well:

  • Diminishing the image of high-price/high-quality brands.
  • Reducing margins on products sold via auctions.

It does appear that the dynamic pricing model, whether it’s auction or exchanges, will have a significant impact on the way companies sell and distribute goods. In the near future, it’ll be important to integrate outsourced or company-operated auction systems into both marketing and procurement systems. There are a number of auction software products and services that can be used to add auction functionality to your site or enable participation in industry-wide auctions.

If you have a committee studying how to implement enterprise resource planning (ERP), it should expand its planning to include dynamic pricing systems.

While you consider using dynamic pricing in private auctions for certain customers, keep in mind what Mr. Robinson and Mr. Patman said many years ago about the legal implications of giving special prices only to certain customers.

In the near term, you may want to start planning to participate in online auctions in a limited way to gain experience with this form of selling. And while you’re exploring dynamic pricing models, hop onto one of the auction sites and experience making some of your personal purchases through auctions. It’s fun, exciting, and can sometimes save you a chunk of money.

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