They've Got a Deal

By SmallBusinessComputing Staff | Posted October 17, 2001
By Michele Marrinan

Marya Triandafellos heard the hype about auctions, reverse auctions, barter, and other variable-pricing structures that have become popular in the virtual world. Tempted by promises of major cost savings, she went on line late last year to purchase office furniture for MET Design Inc., her New York City-based branding and e-business solutions firm. The lack of selection she encountered forced her to go to IKEA instead.

'I wanted to get some good deals, and I was reading a lot about [dynamic pricing] at the time,' Triandafellos says. 'Everything suggested this was the next big thing, but it was a really clunky process. I felt like I was just spinning my wheels.'

The concept of dynamic pricing is intriguing: prices change based on such factors as demand and buyer makeup. eBay.com, the ubiquitous online auction house, has implemented the model with great success, and Priceline.com remains a popular site, despite major stock drops. Other sites, such as uBid.com, AllBusiness.com, and Half.com, have also built strong companies based on dynamic pricing. In May 2000, Forrester Research predicted that the industry in the United States would grow to $746 billion by 2004 from $59.5 billion this year.

Nevertheless, success has eluded many dynamic-pricing practitioners, and the model hasn't done away with fixed prices quite yet, through many predicted it would. when it works...

A report released by Forrester in April 2001 found that just 15 percent of organizations bought products or services through an online auction - a slight decrease from 15.8 percent the previous quarter. The study also found that 20.9 percent of manufacturers used online auctions, versus just 7.5 percent of non-manufacturers. Companies that purchase large volumes of goods and services tend to use online auctions more frequently - 23.4 percent, compared to 9.5 percent of firms that make purchases in small volumes.

Did people expect too much of dynamic pricing? Michael Granfield, Ernst & Young's partner in charge of economics and transfer pricing for the consultancy's Southwest division, thinks so. 'When someone comes to me and says they bought an automobile, a house, a diamond ring, or some other item, and that they've beaten the market by some margin, I don't believe it,' he says. 'If it is true, it's probably a one-time event, not something you can institutionalize.'

That's the problem with dynamic pricing: sometimes it works and sometimes it doesn't.

Maria Marsala saved about $500 earlier this year by buying a refurbished Sony laptop at uBid.com. The Poulsbo, Wash.-based business-life coach logged onto the site on a Thursday in late March of this year. By Saturday she had purchased a seven-pound laptop with a 13GB hard drive and a DVD player for $1,300 - a lower price than she would have paid for a new model at that time. The refurbished computer arrived in the mail the following Wednesday, complete with a one-month guarantee from uBid.com and a three-month guarantee from Sony.

Buying office equipment through an online auction site takes time. Before she visited uBid.com, Marsala spent several hours on line researching laptops. When she found the perfect model, another buyer outbid her. Her second attempt, however, proved more fruitful; she got a machine with more features for less money.

'With bidding sites you have to be patient,' Marsala admits. 'You'll get a really good deal, but you might spend a little extra time doing it.'

Where's the Love?
Business owners who purchase products at online auctions may find themselves giving up more than time. David Simchi-Levi, professor of engineering systems at the Massachusetts Institute of Technology, says that companies should be wary of the effect that such purchases can have on business relationships. Although his research shows that companies generally save 10 to 15 percent on the products they purchase through online auctions and other dynamic pricing models, Simchi-Levi says the tradeoffs can be painful.

'Those are significant numbers,' he admits. 'Whether or not this is enough to justify the investment in time, I don't know. Whether or not this is enough to justify losing long-term relationships is another story.'

Dynamic-pricing models essentially put suppliers or buyers in competition with each other. In a reverse auction, for example, a company posts its needs for products or services and waits for suppliers to bid on the contract. The supplier that can provide the best product and/or service for the best price usually wins. Even with a traditional auction model, suppliers know that they're competing with other suppliers for your business. That pressures them to give you the lowest possible price, but does little to foster good will, which could be vital if you have a special order or a rush job somewhere down the line.

'When you're determining who the supplier is based on price, that eliminates long-term relationships with suppliers and does not allow you to better coordinate your supply chain,' Simchi-Levi says.

Keep It Simple
Simchi-Levi does not advise using dynamic pricing to purchase products that are vital to your operations. He says companies are better off confining dynamic-pricing activities to generic items, not the materials you need to manufacture the products you sell. Even Triandafellos, who had such a terrible experience trying to purchase office furniture on line, is thinking about buying office supplies through some type of dynamic-pricing site. Those products are more generic, so businesses can save money by buying according to price, not brand.

'You don't really care if your paper is from HP or Xerox or whatever,' says Triandafellos. 'You can basically get what you need when it's more of a generic product.'

Purchases of technology components can also work well with dynamic-pricing models. Andrea Michalek, an independent chief technology officer for start-up companies based in Philadelphia, Pa., has bought servers and other technology components for her clients from uBid.com and eBay.com at average savings of 25 percent each.

'With very early stage companies or companies that don't have their cash flow smooth yet, buying through non-traditional channels makes a lot of sense,' Michalek says. 'If you can spend one quarter of the cost, it makes a lot of sense.'

The selection of computers and peripherals is generally pretty comprehensive and available from individuals, manufacturers, and resellers. Keep in mind, however, that customer service and shipping options will vary, and often not to your liking. Make sure your business won't suffer from the uncertainty.weigh the cost

Before placing any bids, ask yourself this question: What do I want from this purchase? If it's selection, quality, customer service, or fast delivery, better stick with a catalog company, a brick-and-mortar retail store, or an online store that uses a traditional-pricing model. On the other hand, if it's the bottom line, head for a dynamic-pricing site.

'If you're really looking at what meets your needs at the lowest cost, this type of channel supports that,' Michalek says. 'So, I don't think it can be ignored.' Just don't bet your budget on it.


Getting Started

BountyCity.com
This site allows you to post a cash reward for a product or service. You can also respond to a posting or refer someone to the site.

eBay.com
The popular auction site has a business section featuring office equipment, furniture, supplies, and telephone systems. You can also browse the Equipment & Supplies section for industrial products or check out the Industry Focus area for products and services in your industry.

Priceline.com
If you can deal with the sometimes inconvenient terms of Priceline's deals, you can save a lot of money on business travel, long distance telephone service, hotel rooms, rental cars, and more. Name your price and see if Priceline.com can meet it.

AllBusiness Barter
Remember BigVine.com? AllBusiness.com is the redesigned version of that popular barter site. You can list your goods and services or buy someone else's.

uBid.com
At this auction site, you'll find a large selection of computers and other office equipment, from scanners and printers to telephones and office furniture. Michele Marrinan is a frequent contributor. In August 2001, she explored the pros and cons of hosting your own Web site.

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