Rules for Success in the New Economy #5: Sell at Any Price

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Imagine the day when consumers can surf over to their favorite online e-tailer and demand the price and purchase method they want. Well, that day is fast approaching, and your e-business must be prepared for it.

The state of e-commerce today is that the consumer is in control. He or she can surf from site to site and business offer to business offer, comparing prices, using automated shopping bots that can ferret out the lowest prices for any product or service, playing one merchant against another and forcing profit margins down to near zero. Given this reality, the current "one price fits all" model is obsolete.

Pricing will get personal. And by personal I don't mean just preferred pricing for repeat customers, but the delivery of customized price offers to each and every buyer.

Dynamic Pricing

In the real world, it's very difficult for retail stores to change prices after the price tag is applied. To do so would be a very labor-intensive process. But on the Net, prices can be changed in a second.

It's obvious that your e-business will ultimately succeed or fail based on what you charge your customers. Set your prices too high and buyers will stay away. Set them too low and profitability is impossible. With your competitors just a click away, your company must offer not only the right price, but the right pricing method for a particular customer and situation.

Auctions, reverse auctions, Dutch auctions, comparison shopping, exchanges—even bartering—and a host of other buying schemes offer individual tradeoffs for the ability of the buyer to choose his or her own price. It's important to understand and incorporate these new dynamic pricing models and their tradeoffs into your e-business marketing strategies if you want to stay atop the e-commerce wave and not be swamped by it.

Let's look at these dynamic pricing methods one at a time.

Haggle Pricing

Haggling, though not new in the real world, has come to the Net. This type of pricing model is a one-to-one exchange. Sites are beginning to use this pricing model because the technology of the Net makes it possible; you can personally haggle (negotiate) a price with a seller, or use an intelligent software agent. Two examples of haggling services: eWanted.com lets buyers post what they want and sellers bid on it; NexTag.com offers online negotiations for computer products, software, and consumer electronics.

Another form of one-to-one haggling is the "name your price" style, called demand pricing. Priceline.com started out letting consumers name their own prices for airline tickets. Since then, the company has added hotel rooms, car rentals, home mortgages—even groceries—to the lists of things you can demand a price for online. The tradeoff for the consumer is that you can't choose a particular brand—or, in the case of airline tickets, departure/arrival dates or times. The consumer trades price for convenience or brand.

Since then, other sites have caught on to this pricing model. Like Priceline.com, Microsoft's Expedia travel service lets consumers set their own prices for travel arrangements (airfare, cruises, and so on). eCollegebid even lets students set their own tuition, and see whether a college is willing to match it.

The consumer may not get exactly what he or she wants, but will get it at the desired price.

Online Auctions

One of the most successful and most imitated dynamic pricing methods on the Net today is the online auction. Online auctions are becoming increasingly popular. Forrester Research reports that goods sold through online auctions are expected to grow from $1 billion dollars in 1998 to $6.4 billion in 2003. Jupiter Communications predicts $27 billion!

There are basically three main business segments where auctions are used, with each method serving a different market space:

• Consumer to consumer (C2C). C2C auctions are an open market in which anyone can sell anything to anyone at any time. It's like a virtual flea market. eBay is one of the most successful companies in this online auction space.

• Business to consumer (B2C). B2C auctions sell either new or refurbished products from e-tailers or manufacturers. Merchants may have a limited supply of a certain product that they put up for auction, or they may put up a small amount at a time, replenishing the products from inventory when the original supply is auctioned off.

• Business to business (B2B). B2B auctions are in their infancy compared to the B2C auctions, but this trend is growing fast. More and more businesses see this sales method as a way to sell both excess and new inventory.

As in the real world, online auctions come in different flavors:

• The standard auction has grown exponentially on the Net over the last few years. It was the first alternative to fixed pricing, with the number of sites offering this pricing model growing dramatically. The standard auction is a seller-dominated market that pits buyers against each other to determine the highest price of an item. The highest bidder gets to buy the item. Online auctions are generally timed, so bids must arrive before a predetermined point. A variation of this auction is the reserve auction. In this case, a minimum price is set for an item; if that price is not reached, the item is withdrawn from sale.

• While in a standard auction bidders see prices climb steadily, the Dutch auction works backward. Dutch auctions are typically used when a seller has many identical items. In this case, many buyers can win a bid and buy as many of the items for sale as they want. Multiple people can win, and winners can buy more than one item. All winners pay the lowest successful winning bid.

• Reverse auctions turn the standard and Dutch auctions on their heads. When buyers dominate an auction, the reverse auction is used. In this case, buyers name the desired quantity and price of an item or service, and sellers bid down to get the sale. Here, the seller competes against other businesses instead of the buyer competing against other buyers.

Exchanges: Flex Pricing

Auctions, haggling, and aggregate buying are good examples of dynamic pricing methods. But the closest to an equities market model of dynamic pricing is the exchange, which uses flex pricing.

In effect, an exchange is a two-way, simultaneous auction, in which both buyer and seller price quotes float in response to supply and demand. This is very similar to a stock market. Though this method seems to be labor-intensive, making the merchant respond to every bid with an ask, in reality the technology of the Net can automate the process.

Here's how it would work. A merchant would set some starting price point for a product or service. He then would choose a set of rules that the flex-price computer program would follow. He would choose by how much or what percentage a product would rise whenever it's purchased. Conversely, he would choose by how much or what percentage a product would fall—and over what period of time—if the product doesn't sell. Eventually, it would reach a point—high or low—at which the product would clear the market, and all done automatically by the computer.

Though this dynamic sales method results in more efficient sales for companies than current dynamic pricing methods, it's also the most complicated and uncertain because the prices are always in flux. Some exchanges using flex pricing are developing now in the fragmented and large B2B sectors; it's only a matter of time until it migrates down to the consumer level, because the technology of the Net can make it happen.

Concurrent Dynamic Pricing

At its heart, Web-based e-commerce today is little more than a reflection of the way business has always been conducted in the brick-and-mortar world. After all, fixed price buying at a fixed location, online auctions, and group buying merely mimic the retail world as we've always known it. And exchanges, in and of themselves, are a reiteration of the equities world.

But concurrent dynamic pricing, a next-generation application of flexible pricing, has no analogy in the brick-and-mortar world. Concurrent dynamic pricing combines several of the current flexible pricing methods into one, allowing merchants to sell more product, faster and at higher prices than with other pricing systems. With concurrent dynamic pricing, an e-business doesn't have to decide whether to sell its goods via a fixed-price model such as Amazon.com, an auction model such as eBay, or a "name your own price" model such as Priceline.com. Instead, an e-business is able to sell goods and services through all of these methods concurrently, with the price of the goods or services fluctuating minute by minute, based on actual customer demand and price sensitivity.

Here's an example of how concurrent dynamic pricing would work. A company, which we'll call "Supplies-R-Us," sells a wide variety of office supplies, including stationery, pens, pencils, small office machines, and so on, through catalogs distributed throughout the country. The company has established an e-commerce Web site in recent months as well.

Among the products the company resells is the Acme Faxomatic, Model 101, which has sold below the expectations of Supplies-R-Us. Acme has just begun selling the enhanced Faxomatic Model 102, and Supplies-R-Us must quickly sell its excess stock of Model 101 units to make room for the new product.

Traditionally, getting rid of the excess inventory would involve sharply discounting the product, marketing it through the seller's Web site or through printed catalogs. These methods would result in reduced margins that barely covered the cost of maintaining inventory. In other cases, the entire lot might be sold to a liquidator for pennies on the cost dollar. In an effort to reduce the inventory cost quickly and maximize the return on the outmoded product, however, Supplies-R-Us has elected to sell the excess items via the concurrent dynamic pricing method on its Web site.

After setting a few simple business rules, Supplies-R-Us is ready to sell its fax machines. The fax machines will be offered to buyers via the "flex pricing," "name your price," and "auction pricing" methods simultaneously.

"Flex pricing" allows a buyer to purchase the fax machine at a price that fluctuates based on supply and demand over a certain period of time. If demand for the fax machine goes up, the concurrent dynamic pricing method automatically raises the price. If demand is slack, it automatically lowers the price, based on the business rules configured by Supplies-R-Us.

Simultaneously, faxes are also being sold through the "name your price" method. Offers are accepted or rejected based on a formula that incorporates the value that Supplies-R-Us has assigned to the entire lot of the Faxomatic Model 101 fax machines.

Meanwhile, the Faxomatic 101 sale also has stirred the interest of customers who prefer to buy via auctions. Auctions start at $1, and Supplies-R-Us has set a reserve bid price for the fax machines. Because the available stock of fax machines could be depleted by customers who are buying them via the flex pricing and name-your-price methods, the supply of fax machines sold via the "auction method" is constantly being reduced. Eager bargain hunters will have to wait until the time period has ended during which the product is offered to find out whether their bids are accepted. As in other auctions, bidders can increase their offers right until the end of the auction, increasing their chances of winning.

If the Faxomatic 101 turns out to be a very popular product, there will be few, if any, left at the end of the time period for the auction. If so, buyers are compelled to buy at the current higher flex price, thus giving Supplies-R-Us a better price for the product than if they sold it to liquidators. On the other hand, if the Faxomatic 101 produces little demand from buyers, Supplies-R-Us could still clear the lot in the auction process.

What new combinations of flexible pricing are on the horizon? No one knows. But, to be sure, they will change how, when, where, and at what price buyers will purchase goods and services over the Net in the future. And those e-businesses that succeed in the dynamic pricing game will come out winners, gaining the loyalty of their customers in the process.

And that's priceless.