The Internet does not make everything easier and better. I still have to brush my teeth every day, I still have to drive to get gas, and it will never make me a decent basketball player. What users have found is that the web’s ability to disseminate expansive, sortable information instantly around the world can make SOME things easier and better. For example, you can find a 1952 Life magazine with the original “Old Man and the Sea” on eBay for $24 and trade your company’s unused bandwidth with Enron. This resource-sharing power has enhanced the effectiveness of some dynamic pricing models to the point that they have become significantly more attractive to a large number of people.
The auction form of dynamic pricing is one such model. It is particularly dependent on timely price information and on the mass of qualified buyers and sellers. Whereas before you could visit an auction downtown, now you can visit an auction that is worldwide. If you had three item choices at a downtown auction, now the possibilities are nearly limitless at an online auction. And if you’re a seller, this is a plus for you, too. Would you rather have 35 people bidding on your item or 500,000?
So from a theoretical view, online auctions make sense. And they’re proving practical, too, as is attested by their appearance on more and more top B2C and B2B sites. So what’s going on?
According to Forrester Research, 50 percent of online business in 2002 will be conducted via online auctions. Another report shows the values of goods sold at auction rising from $10.1 billion in 1998 to $64.9 billion in 2002. GartnerGroup says that by year-end 2002, B2B and B2C web-based auctions will be the leading method of liquidating surplus goods and services. These figures are estimates but display the rising trend in this kind of transaction.
In simplest terms, the main benefit of the auction format for the seller is the ability to sell excess inventory at a higher recovery cost. The main benefit for the buyer is the ability to buy items at lower-than-advertised prices. Here’s a breakdown of some of the benefits and drawbacks.
- Reach more price-sensitive customers
- Move excess inventory that’s aging
- Get a higher recovery cost
- Minimize inventory-holding costs
- Determine optimal price for goods; test pricing
- Increase host site’s traffic and stickiness
- Acquire new customers cost-effectively
- For every winning bid there are typically 300 registered bidders (Numbers are from FairMarket.com.)
- Losing bidders: Emails sent to internal list cost an average of $2 per sale compared to emails sent to a rented list at $286 per sale. (Forrester Research)
- Refer them to similar items currently on auction
- Offer them coupons for purchase at the retail site
- Add them to a newsletter highlighting special deals (opt-in)
- Notify them the next time that item goes on auction or on sale at a certain price threshold at the retail site
- Diminished brand image on high-end/high-quality goods
- Reduced margins (If it’s on auction, the selling price will be less than the advertised retail price.)
- Lack of anonymity: Sellers don’t want their current customers to see them giving a better deal to someone else, and buyers don’t want competitors to see the types of purchases they are making as well as any proprietary specifications that they require.
Auctions will stake a claim in the online business world and will become widely used to move inventory that’s simply commodity or has become surplus or dated. They won’t, however, dominate all sales by businesses any more than online sales will dominate offline sales (in the near future). GartnerGroup cautions that through 2003, most businesses will procure less than five percent of their goods and services through web-based auctions.
The key is analyzing the particular market, the types of goods sold, and the needs of buyers and sellers and then fitting the right model to the market. A type of dynamic pricing may prove to be the best way to maximize returns on that inventory. I was just outbid on the 1952 Life magazine on eBay. Maybe the going rate is $25.50 these days… $26.50… $27.50… OK, I’m out… last one… $28.50…