August 19, 2017


















Article 8.15

INTERNET AUCTION PRICING IS OVER-RATED

Dotcom market makers and Wall Street analysts both quote research that forecasts that auctions will total billions in purchases as "dynamic pricing" will prevail over conventional cost-plus and list-less methods. Buyers are now "empowered" to post RFQs on market making sites to quickly attract more paperless bids from more potential suppliers. Does this mean that suppliersí prices, margins and profits will fall? Sure, if the sellerís costs drop by a similar amount as in the cases of on-line brokerage trading and channel volume conducted by fax and phone brokers. Public institutions that by law must let all would-be sellers bid and take the lowest priced bid should use internet auctionware. But, most B2B channel activity will remain untouched after perhaps a small wave of fad buying efforts by inexperienced, new buyers.

Why are the forecasts so misguiding? First, check the breakdown of independent research firm forecasts, 80%+ of potential auction sales will be for commodities like electricity, natural gas and coal. Surplus goods and close outs, small percentages of volume in many channels, will make up much of the rest. Why have Dotcom CEOs and their Wall Street underwriter analysts been so misleading? They are obviously conflicted by their stakes in the gold rush fever for dotcom stocks.

What about the buyer benefit of getting more quotes faster from more suppliers? Since the early Ď80ís, any end-user worth selling in mature channels has had the opposite problem of being besieged by too many suppliers. Here is an on-going, circular purchasing process that will persist. Buyers assess and weed potential suppliers on more criteria than just low price quotes in search of the lowest total procurement cost supply partner. The finalists do have to compete on price. Some "winners" have even been charged with continuously lowering total procurement costs every year. Then, the product needs may shift, and the process begins again. This purchasing process is obviously not going to happen through a web auction.

Net shopping bots, ironically, have already proven that price doesnít win over the superior economics of Ė perfect service execution and customized economics that create switching costs. MIT Media Labs did a six-month study on book buying on the net, an already mature market with decelerating growth rates and too many e-tailers. This site had a "shopping bot" that would get prices for a given book from the top 8 most frequently hit book e-tailers, it tracked both the average pricing and click-to rates for each site. Amazon averaged the highest price, BarnesandNoble.com was second highest about 2 percentage points below Amazon, and the lowest site averaged 15% off of Amazonís price. Eighty percent of the clicks went to Amazon, BarnesandNoble.com got just over 10% and the rest dropped off to virtually none for the lowest price site. In general, the higher the average price, the more business.

What can we infer? Amazon is reputed to have the best performing site, the best fulfillment execution, the patented "one-click" fast order button, book suggestions based on all past purchases and many times more customer reviews Ė all of which donít transfer to a competitorís site. Perhaps consumers learn more quickly in cyberspace that "bargain price, bargain service" isnít best total value. On the selling side, Amazon has a shopping bot for customers on its' own site. They have apparently learned exactly how much of a premium price they can charge for their superior total offering before too many customers click away to the next best site. These lessons should apply even more significantly to manufacturers and their channel partner distributors because the service opportunity variables for differentiation are even greater than in the e-tail world and only distributors within a freight-efficient distance from a customer can bid effectively.

Just because auctions are possible for some types of buying does not mean that the operational costs of similar sellers or their needs to make a profit as a cost of capital will go away. Customers have always and will continue to pay more for distinctive basic service well sold. A platform of basic service brilliance is, in turn, a pre-requisite for two channel partners to co-create lasting, win-win, integrated contracts that lower both selling/servicing costs and customer procurement costs. We just have to remember, re-visit, re-invent and re-sell these basic economic truths to keep naïve, pure price buying from causing too much lose-lose trouble.

Ó Merrifield Consulting Group, Inc. Article # 8.15