As e-business develops, many companies are investigating the potential of e-markets to reach new customer sets. Online auctions are gaining credibility as many of the major suppliers in the computer industry are exploring the pros and cons of a dynamic pricing model. Sun Microsystems, a self-professed success story, claims to be auctioning products in excess of $100,000 every week. But for some, such as IBM, it is a steep learning curve. Is the dynamic pricing system as transparent and unfettered as the leading companies pretend it is? Are customers gaining, or is it just a clever channel for advertising?
IT analysts, the Butler Group, outline the benefits of dynamic pricing for suppliers in the B2C (business to consumer) and B2B (business to business) marketplaces: 'Information exchange is central to the auction system. It gives the seller data indicating the price the market is willing to pay for a particular product at a particular time. Real time dynamic pricing allows suppliers to control supply and demand, almost like turning on a tap. The floor price can be lowered when inventory needs to be cleared, and increased when demand is high.'
In the B2C marketplace, adopting an auction model has allowed many companies to exercise greater control over pricing, inventory and information flow. Dell has used the B2C model for reducing transaction costs of selling off-lease equipment, as well as providing an arena for consumers and small business customers to sell old computers. Dell launched its own site in 1999 and operates on the Fairmarket auction network. 'There has been tremendous interest - at any one time you can find thousands of listings on DellAuction. We've found consumers to be very receptive to this buying and selling process,' says Bryant Hilton, spokesman for Dell Consumer Group.
The B2B market is characterised by greater volume and higher price transactions. In addition, these auctions tend to have less diversity in products, and concentrate on volumes and economies of scale. The main participants are SMEs. The benefits can be seen in reduction of transaction costs, for example time, effort and money, as well as reduction in fixed costs tied up in premises and staffing. Examples of online auction sites for B2B are; eBay, Acequote, TekSell, and Dovebid.
EBay, one of the larger auction sites on the internet, hosts both Sun and IBM authorised auction sites. Paul Witten, director of business development at eBay, explains how the auction works: 'The seller lists an item for sale, specifying the starting price, the reserve price (if applicable, and hidden from potential bidders) and the duration of the auction (usually from 3 to 30 days). IBM and Sun include the description, photographs and technical specifications, along with links to their web sites for any further details. Bidders then place a bid on eBay up to the maximum they are prepared to pay, and at the end of a successful auction, eBay makes contact with the seller and the winning bidder to inform them of each other's identity. Fulfilment is handled directly between the seller and the winning bidder.'
The eBay site does not take responsibility for the transaction and the provenance of the goods. 'The eBay model is built on low cost and a wide audience developing a thriving trading environment. Most online competitors follow the eBay model, although with less success, as they have not developed the large community of users who come specifically to buy and sell,' Witten says.
Sun has been involved in online auctions since 1999, primarily with eBay, and sees the internet as the cornerstone of future business. In the last year and a half, this sales method has provided 25 per cent of all new customers, claims the company. Alexander Rublowsky, manager of Sun's auction programme, says: 'The online auction is an efficient way to distribute inefficient products, for example excess inventory. It is a useful tool to maximise revenue potential of these systems. Sun is very pleased with the results, and we seem to be meeting the needs of customers who are looking for new ways to get products.'
Sun auctions second hand, or as they call it, 'remanufactured' products, as well as new systems, excess inventory and end-of-life configurations. The warranty offered on the second hand items, claims Sun, is the same conditions as the new items. The level of technology ranges from workstations, through mid range, enterprise servers, and storage systems; recently Sun sold a $155, 000 enterprise storage unit through the eBay site. Delivery of the auctioned item should be two days after payment is received.
Sun acknowledges that there is a learning curve when employing dynamic pricing. Most people want a consistent product at a steady price, but more and more realise this is not the only way to buy. 'Dynamic pricing will be part of the way everyone will do business in the future. But just a part,' claims Rublowsky.
IBM is relatively new to online auctions, putting its first item, the p680 server, up for auction on eBay just before Christmas. More recently, in March, the company offered configurations of RS/6000 and eServer p460 models for auction. Although the auction generated a large number of hits on each site, no servers were sold.
Despite the lack of success in the pSeries auction, IBM remains optimistic and determined to use this new medium to market its products. The company is considering a rolling sequence of eServer products on auction, but not a continual presence of one product set. 'We've become aware of many types of e-market we could use in the future with different server products in different countries to different customer sets,' says Martin Beckwith, channel sales manager, IBM Webserver. 'We have not changed our minds on our twin assumptions that:
- E-channels will increasingly figure in e-business
- Our business partners are, and will remain, the primary fulfilment channel for complex server products.'
The technology companies obviously see the advantages to a dynamic pricing system, but what's in it for the punters? No matter whether the company is selling newly released products or old, redundant product lines, the supplier has the option of setting a hidden reserve price. If a bid is lower than the reserve price, even if it is higher than the floor price, the supplier does not have to sell until the reserve price is met. This ensures that the supplier does not have to sell the product at a loss.
In this way, 'dynamic pricing' is controlled and the market does not in reality reflect the true value of a particular product at a particular time. Beckwith admits that the reserve price is pre-set. 'The reserve price at auction is deliberately set with reference to the current actual sale discounts for each product,' he says.
Although the floor price could be set as low a £1, the reserve price of a new product in many cases does not appear to be significantly lower than the listed price if bought directly from the company. In the case of IBM, many new items have a discount of less than 10 per cent. The most significant discount appears to be with Sun's 'remanufactured' products, where the floor price is set as low as a third of the listed selling price.
Ian Charlesworth, Butler Group analyst, says: 'You have to ask the question of what they are trying to achieve by using an auction strategy. If the reserve price is not significantly lower, it is possible that they are using the auction site as a test market. If the company was fairly confident with the demand of the product, then the reserve price could be lower. Other possibilities could be that they are taking advantage of the image that auctions are 'bargains', or maybe it is just a cheap way to advertise products.' He suggests visiting worthguide.com, which provides information on the prices of products across all of the auction sites.
BI route to ERP
Acequote, a UK B2B technology marketplace, has taken a opposite tack and has set up a reverse auction where the price goes down until a bid is received and the deal is closed. In a reverse auction, the buyer has the opportunity of communicating with a large base of sellers. 'Companies are looking for complex solutions for their needs, not just the cheapest price,' claims Helga St. Blaize, co-founder and communications director, Acequote. 'The more complicated scenarios need hardware connectivity and convergence, which is not a straightforward solution. IT managers must make sure the project is delivered on time, on budget and on target.'
'The reverse auction allows the buyer to be selective. The buyer posts a request and gets on average five quotes back from suppliers. We don't encourage open bidding as a lot of information has to go back and forth before things are completed. Our user profile shows that buyers are increasing in confidence, and are posting up far more complex requests and tenders involving internet infrastructure, convergence, consultancy expertise and /or training services,' claims St. Blaize. Acequote gives personnel support and can hook the buyer up with the seller. All business is conducted off line.
The site is an open marketplace for resellers to business buyers. Acequote provides a closed marketplace only for Compaq.
ERP suppliers want you to use their homegrown e-business and integration solutions. Tool and e-business application suppliers and systems integrators say their products and services are faster and more responsive. Everyone stresses the importance of an enterprise-wide approach. But this is terra incognita, and no single supplier has the big picture.