In the beginning it sounded like science fiction: intelligent agents crawling the Web and using sophisticated analytics to get the best possible deal for buyers and sellers.
But this vision of hypercapitalism in cyberspace never quite got off the ground. Pierre Mitchell, an analyst at AMR Research Inc. in Boston, says that part of the vision survives and thrives in the more mundane process of dynamic pricing: “Corporations are blown away by what they can buy on eBay (Inc.),” Mitchell says.
Added Excitement
And sell. For example, West Marine Inc., the giant marine sporting retailer in Watsonville, Calif. West Marine launched a retail Web site in 1997. “Initially it was a brochure site,” says Tony Gasparich, vice-president of Internet services at West Marine.
In 1999 it got serious and purchased WebSphere from IBM Corp. “It was a significant upgrade,” Gasparich says. “We created a true e-commerce system.”
But as so many learned in those heady days of e-everything, customers won’t come just because you have a great Web site; West Marine wasn’t getting the desired volume.
So Gasparich and his team decided to go where the action is. “In November of last year we started selling on eBay,” he says, “and the results were impressive.”
But success came at a price. “We were generating good volume, but it was difficult to manage,” Gasparich explains.
The reason for this, according to Erik Swan, CTO of CommerceFlow Inc. in San Francisco, is that sites such as eBay aren’t designed for folks such as Gasparich. “These sites were built with the buyers in mind, not the sellers. The assumption was that if the buyers are there, the sellers will come,” Swan says.
Whereas that may be true when the seller is an individual with a small inventory to unload, things are different for a business such as West Marine. “It takes at least 10 [minutes] to 20 minutes to post a single item on eBay,” Gasparich says. “Imagine posting 500 items each week. That’s a lot of overhead.”
Companies such as CommerceFlow are in fact making a business out of managing this overhead for clients. “[Overhead] is a big problem for sellers,” Swan says. “They like the idea of using outlets like eBay, but they can’t spare the resources to manage the process.”
West Marine uses the services of one of CommerceFlow’s competitors, Research Triangle Park, N.C.-based ChannelAdvisor Corp. “Here is what [ChannelAdvisor does] for us,” Gasparich explains. “We give them a list of SKUs [Stock Keeping Units] that we want to sell on eBay; they grab all the necessary information and post it for us.”
And there is a lot of action under the hood. West Marine’s inventory information is all kept in a DB2 database. So ChannelAdvisor has to have hooks into this back-end system.
It is the kind of industrial-strength systems integration that would have required a long implementation cycle just a few years ago. But ChannelAdvisor CEO Scot Wingo says that times have changed.
“Four years ago we would have had to send a team to the client site to sort out all the integration touch points,” Wingo adds. “And there is no telling how long the actual work might have taken. But now we can do it all in about four days, and we rarely have to send anyone out into the field.”
Two things, Wingo explains, make the difference. The first is XML and related Web standards, which simplify application integration. The second is consolidation. “There are really only a handful of top financial systems now – Oracle Corp., SAP AG, and PeopleSoft Inc., to name a few,” Wingo says. “It is relatively simple to build connectors to these. You rarely have to spend a lot of time figuring out how to map one system to another.”
The difference this makes to the client is substantial. Wingo says the integration work required for a typical implementation today costs between US$10,000 and US$25,000. But five years ago, he says, it would have been 10 times as much. “It is an open question whether or not we could hope to build a business with integration costs that high,” he continues.
ChannelAdvisor also works with the client to make certain marketing decisions, such as what the initial bid should be. “We have algorithms in our software to help decide these kinds of issues,” Wingo says.
Once the auction for a particular item is closed, the winning bidder receives an e-mail notice congratulating them on his or her victory. But, more importantly, the e-mail contains a link back to the West Marine Web site.
“The customer clicks on that link,” explains Gasparich, “and arrives at the checkout station on our Web site with the item already in the shopping cart at the winning bid price.”
The beauty of this is that no more integration work is required because West Marine has already tied its Web store into all of its back-end systems. And Gasparich likes it for another reason: “At that point the customer could easily decide to add more items to the shopping cart,” he says.
West Marine started working with ChannelAdvisor early this summer, and the entire implementation took less than 60 days.
Gasparich won’t say how much business the company is currently doing through the eBay channel, but he does say the results are more than satisfactory. “Our Internet business is growing and profitable. And the value that this [eBay and ChannelAdvisor channel] brings is added excitement and a way to reach more customers.”
Starting With Auctions
Dasan Networks Inc., the Korean manufacturer of routers, switches, and xDSL access devices, has established a U.S. beachhead in Santa Clara, Calif. “Last year we did about US$24 million in Asia,” says Dr. Gil Ahn, CEO of Dasan. “We hope to get started this year in the U.S. at about a US$3 million run rate.”
Some of that may come from auctioning products on-line – Ahn is currently thinking about getting professional help from CommerceFlow to make it happen.
“We are thinking that selling through sites like eBay would be good for us,” Ahn says. “It would reduce unnecessary margin costs that normally go to distributors, and it would be a way for us to find new customers in the U.S. and Canada.”
As does any good businessman, Ahn is weighing the issues of costs. “You have to be careful,” he explains. “If we hire CommerceFlow, they will take 10 [per cent] to 15 per cent of every transaction, and this is on stuff you have already marked down.”
On the other hand, Ahn continues, it could be money well spent because the cost of managing your own inventory on eBay is high. “It is very labour-intensive to do this yourself,” he says. “CommerceFlow would also take care of all the integration with our back-end ERP systems and our CRM software.”
One of the reasons Ahn thinks the time may be right to sell sophisticated networking equipment to businesses through auction sites such as eBay is that the market has changed. “It isn’t just that the economy has slowed and people are looking for bargains,” he explains. “But it is also the case that the network equipment market is somewhat commoditized now. It used to take a team of high-level salespeople from Cisco to sell a router. But now customers are far more educated, and the market is somewhat saturated.”
In other words, when people know what they want, there is nothing to prevent them from shopping for bargains on the Web – where dynamic pricing is king.
And in the midst of a down cycle in technology, when so many hopeful Web-commerce initiatives have gone bust, it all adds up to a somewhat surprising fact that AMR’s Mitchell summarizes well when he says, “eBay is the largest B2B site out there.”
Pricing Models
1. Forward auction – This is the one most people are familiar with: winning bid goes to the highest bidder.
2. Reverse auction – This is often referred to as RFQ (request for quote). Here the buyer is in control, putting out a request for an item or service and chooses the winning bid. The buyer is obviously looking for a low price, but price may not be the only consideration. The ability to deliver on time and other parameters may mean that the winning bid is not the lowest price.
3. Trading desk – Sometimes referred to as Bid/Ask Exchange. The most familiar example is the stock market. But recently energy companies including Enron have stared using this kind of dynamic pricing model.
Dynamic Pricing Is A Wise Choice For Einstein’s Garage
The stereotype of the customer who surfs sites such as eBay is one of an addicted consumer, but businesses are also developing the habit.
Fisher Scientific Co. LLC in Pittsburgh is one of the oldest names in science supplies, offering everything from test tubes and high-end centrifuges to specialized furniture. Customers include pharmaceutical companies, research institutions, universities, and the federal government.
Early in the summer of 2000, Fisher decided to start selling on the Web; the result was Einstein’s Garage. “We primarily serve the secondary markets – inventory that is refurbished, used, cosmetically challenged, surplus, or returned,” says Rob Carskadden, general manger of Einstein’s Garage.
Fisher Scientific is the biggest seller on the site, but Einstein’s Garage serves other suppliers also. “We aren’t just a Web store,” Carskadden says. “We also provide a full complement of asset management, logistics, and distribution services.”
For the Web piece, however, Carskadden decided to let someone else do the heavy lifting. “We are the poster child for the ASP model,” he explains. “I was told [Einstein’s Garage] needed to make money the first year. I didn’t have the technical staff to manage it, so the ASP option was very attractive.”
The ASP Carskadden chose is FairMarket Inc., based in Woburn, Mass. FairMarket set up shop in 1997 as a B2B exchange, but soon found that customers don’t automatically materialize once the doors are open. “It is hard and expensive to get a lot of buyers and sellers to come,” says Lou Shipley, vice president of sales and marketing at FairMarket.
FairMarket found out how hard it is to build a brand from scratch. So in early 1999, the company changed course, positioning itself as a hosting service for merchants with well-recognized names. “Some of our biggest customers now are Sam’s Club and Comet, the second-largest retailer in the [United Kingdom],” Shipley says.
“We can dynamically price goods in a number of different ways – auction and plunging price, to name a few,” Shipley continues. “Generally we build and host a private site, but we can also publish to eBay and manage that process if the customer prefers.”
FairMarket offers its merchants an automated system, based on XML, that grabs content from the merchant’s back-end system and publishes the appropriate listings to the Web site. Einstein’s Garage, however, has chosen a more primitive integration method: “They are still using Excel spreadsheets,” Shipley says.
Carskadden says the reason for the lingering Excel is that he doesn’t yet feel comfortable opening up Fisher Scientific’s back-end systems to FairMarket. “And doing it [with Excel spreadsheets] is still quite manageable,” he explains. “I only need one person dedicated to content management, and that isn’t a full-time job.”
At any given moment, approximately 15,000 listings are on the Einstein’s Garage site. Most are dynamically priced, but few are sold in straight auction format. “Usually there is too much product to make auctions work well,” Carskadden notes. “So most of it is sold in scheduled markdown mode.”
FairMarket has software to manage this – items start at a given price, and are automatically marked down according to a predetermined schedule. “We are looking at some analytical tools from other vendors to make this more precise,” Carskadden says. “There are several products that can help you maximize profits by choosing the right markdown strategy.”
The company is tight-lipped about money flowing through the Einstein’s Garage door, but Carskadden does say that he plans to double his company’s revenue in 2002.
