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Part 1 (this page): [Auctions] [Trading Exchanges] [Price Matching]
Part 2 (next page): [Collective] [Placement] [Mass Customised] [Conclusion]
Case Studies: [eBay] [Reverse Auctions]
Customers are becoming more demanding and more astute. Globalisation has given them access to a wider variety of suppliers and products, either direct (e.g. using the Internet) or via importers. Globalisation and automated mass production has also led to over-supply. There is a relentless downward pressure on costs and relentless upward pressure for increase quality and functionality. Suppliers are caught between a "rock and a hard place". Commerce is, or in many cases has, switched from supplier led pricing to consumer led pricing.
Consumer led pricing puts the final arbitrator of the maximum selling price into the hands of the buyer. Of course, the seller has the option not to accept any price, but for those business with one or just a few product or service lines within a competitive market sector, there are usually short-term pressures to meet the customers' demands. To coin a well used phrase: The Customer is King at least until the number of suppliers have fallen and the remaining companies have a near monopoly position. At that point the government or the European Commission will intervene to regulate the industry on behalf of the consumer (e.g. automobiles) or the consumer will switch to substitute products (e.g. from rail to road transport), or the industry will restrain itself (e.g. Microsoft acquires Apple to ensure it survives in order to provide a notional level of competition).
Auctions are particularly useful where the market value is unclear, where
the items sold have a scarcity value, where there are a specific set of
specialist buyers, and where items must be disposed of quickly. Antiques
and the bulk selling of surplus stock are perhaps opposite ends of the auction
market. Now with the internet, auctions are equally being used for the main
stream middle ground.
| Auctions are near to a true marketplace. Providing bidders have good knowledge of the items being sold they will bid up to the current market value and then, almost in unison, stop bidding leaving the floor to desperate collectors or those prepared to speculate that the value of the item will rise in the future. In the case of surplus trade items the bidders will need to leave a margin for reselling and the risk of holding unsellable stock. Auctions are efficient in that they reduce channel overheads. There will be the sellers and perhaps also the buyers premium (i.e. commission) that pays the overheads of the auction house, the time and travel costs to attend the auction and maybe the cost to transport the purchased goods but nether-the-less, these costs could be repeated many times in traditional distribution chain. |
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Auctions have become one of the success stories of the Internet (see box above) with eBay leading the way ( see feature page article on eBay).
Reverse Auctions (1), where buyers set the
price they are willing to pay and then sellers bid for their custom, are
another phenomena that have been driven by the Internet.
PriceLine is one of the best known consumer reverse auctions, especially for travel. Forays into other categories have been reigned back after too many loses. (see feature page article on reverse auctions).
A variant of Reverse Auctions (2), is where
the supplier sets a high starting price that is then reduced incrementally
over time. For example, a white-goods supplier may initially advertise
a dish washer at £300 and then reduce it by £1 every hour.
The item goes to the first person to bid. In the US, Wal-Mart and JC
Penny use such auctions.
Auctions are ideal for disposing of surplus stock, that will include over-order
goods, distressed (soiled) stock, discontinued lines, special orders that
have not been collected, and returned items. By using an auction as a
distribution channel the supplier (particularly retailers) avoids
down-grading it's main stream image. With shortening product cycles and a
tendancy for even common items to have a fashion
varient (e.g. special editions), distributors and retailers
often have surplus stock and need to make way for new lines. Some suppliers
(e.g. the UK's white goods and electrical retailer Comet) have been so pleased
with auctions that they have established their own.
Using auctions Comet has been achieving 99% of the retail price for small electrical goods such as DVD players, compared to between 80% and 90% when such goods are discounted in its stores. For large white goods, such as fridges and freezers, they are achieving a respectable 60% (ref). A review of the web site did indeed show many bids approaching the full retail price. In addition there is a delivery charge of £7.05 for portable items and £23.70 for large items. Freeserve experimented with auctioning an identical TV using two different techniques. In one they set a reserve of £500 and in the other a £1 starting price and no reserve. The first attracted no bidders but the second many bidders and a final price of £600. LastMinute.com also achieves prices 30% higher when compared to fixed pricing (ref).
Internet auctions are already attracting academics. Prof. Richard Freeman, co-director of the Centre for Economic Performance at the London School of Economics and Harvard professor, is looking at users behaviour within auctions. He warns that users often get over excited and bid too high. As part of his research he has formulated a formula to estimate the final price of an auction. (ref.)
Trading Exchanges work like the stock market or commodity markets. They bring
together buyers and sellers who barter for goods until equilibrium is
established, thereby setting a price for a commodity at a particular point
in time (or in the future in the case of the Futures Market). Using the Internet
a number of specialist trading exchanges have become established for such
goods as oil, chemicals and electricity. Trading Exchanges can also work
effectively on a much smaller scale, as for example with HantsDOC (see
box).
Hampshire Emergency Doctors on Call (HantsDOC) is owned by over 100 doctors in North Hampshire, England. It was established to provide patient care out-of-hours (i.e. evenings, overnight and all week-ends). In the UK, doctors are contracted by the government to provide 24 hour service and the HantsDOC scheme allows them to take time off. Doctors are based in clinics and usually work in partnership with other doctors. To use the service, clinics pay a monthly fee based on the number of patients in their practice and then a fee for each patient that actually uses the HantsDOC service. On the other-hand, doctors can earn money by working a shift with HantsDOC. It was decided to use variable pricing for both the fees and the earnings. There were 3 types of patient services: telephone advice; patient attends a central clinic; a doctor visits the patient in their home. There were 8 charge / earning periods: week-day evening; week-day overnight; Saturday day; Saturday evening; Saturday overnight; Sunday day; Sunday evening; Sunday overnight. This gave 24 pricing points.
For each month a schedule was issued and doctors offered their services for particular periods. If the supply of doctors was insufficient then doctors could be mandated to work in order to maintain the service but this would be an indication of too low earnings fees, so in the next month the earnings fees and charges would be modified. In the early periods, until the supply / earnings and demand / price curves could be plotted, doctors had to work a minimum number of periods and clinics in the scheme had to participate for all periods. Over time these restrictions were relaxed.
Managing Change provided consultancy services to design and establish HantsDOC and to obtain government seed-funding. The scheme won HantsDOC an award in a national competition of over 70 entries. Click for a full review of HantsDOC.
Strictly speaking, price matching is not led by the buyer but by other traders.
In price matching trader A promises to beat any other trader's price. There
are usually various caveats (see John Lewis below). Price matching
is consumer led in the sense that it is usually up to the buyer to identify
a better offer.
For over 60 years the departmental store The John Lewis Partnership has has the motto "Never knowingly undersold" and has always promised to refund the difference is a consumer found they could buy cheap elsewhere. Of course there were rules such as being in the same locality, a time limit of so many days, the goods and after sales service being comparable, and the exclusion of special circumstances like closing down "fire sales". Now, in a bold move, the company recently announced that their price promise would now apply to comparisons with web traders - we are currently investigating any caveats.
An exception to the practice that consumers themselves have to notice a lower price, is the low price promotion of the Esso petrol (gas) company, part of the Exxon group. Esso's "Price Watch" launched in January 1996, involves each petrol station each day checking the prices of nearby competitors and if need be, adjusting their own prices - presumable equally up as well as down! According to Esso's web site some 13,500 competitive prices are checked every day and their record for adjusting prices is 44 minutes.
Barclaycard, the UK Visa merchant, is currently price matching a buyer's motor insurance renewal premium provided it is like for like. It is not however, price matching the lowest quote that the buyer had found. This presumably is on the basis that a renewal premium is likely to be higher than a new customer special price.
In the future we can expect to find individuals using the new mobile devices to broadcast their requirements to shops in the locality, or for them to deploy electronic agents that will "visit" suppliers and negotiate deals on their behalf.
to
Part 2:
[Collective] [Placement] [Mass Customised] [Conclusion]
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