How retailers are using web auctions to let customers help them set prices
By Mary Wagner
It’s a long road a toaster may travel between the time it hits the store shelf at a 100% mark-up to the day it shows up in the bargain bin as the shopkeeper makes way for new models. That toaster’s price drops at sales honoring everything from Bastille Day to Halloween, until dollar stores and bulk goods brokers offer the only remaining chance for retailers to recoup any of their cost. This has been the likely end of useable but unsold merchandise ranging from stereos to sweaters as they near the end of their value cycle. But now the web is writing a different end to the story with online auctions.
The Internet’s interactive properties can let e-retailers keep a finger on the pulse of the customer. The web gives them an opportunity to move beyond fixed sale pricing to recover more of their costs at liquidation time with auction pricing based on supply and demand. But the potential value of auctions in e-retail doesn’t end with simply unloading unwanted merchandise. In addition to putting bidders together with clearance goods, auctions are providing data that retailers can use to help set fixed pricing for other merchandise post-auction.
While much of the buzz on online auctions is about person-to-person auctions at sites such as eBay, business-to-consumer auctions are growing at about double the rate. Sales at p2p online auctions will reach more than $6 billion in 2003, according to Cambridge, Mass.-based Forrester Research, while sales at b2c auctions will approach $13 billion.
Auctions are old stuff in the offline world. “Look at the whole cycle of pricing-first, there’s the full mark-up, then as time goes by, retailers will step the price down to different levels,” says Mark Gambale, analyst with Waltham, Mass.-based Gomez Advisors. “Auctions are literally the last step to remove merchandise from the balance sheet and it can be quite an effective way to liquidate items.” But often retailers liquidate excess merchandise in bulk, far from any brand identification. What’s different today is that online b2c auctions move merchandise under the brand umbrella.
J.C. Penney launched an auction feature for clearance goods on JCPenney.com in April. It’s a so-called English auction; the traditional model in which the highest bidders win. Shoppers bid competitively for the listed items and can check on a running bid history for the item before making an offer online. The English auction, in combination with a falling-price auction in which the retailer drops the fixed price of an item at rapid intervals until it sells out, racked up more than 50,000 user sessions within the first month.
Powered by FairMarket, which provides networked online auctions and other dynamic selling solutions, the auctions initially sold catalog overstock but quickly grew to retail store overstocks and supplier closeouts. The auctions, says J.C. Penney e-commerce President Paul Pappajohn, “have created a new community of JCPenney loyalists”—translation: they’ve made the site stickier and given the company another window to customer behavior.
Even the losers count
Egghead.com has had similar success with auctions. Since its merger with auction site OnSale.com, Menlo Park, Calif.-based Egghead has moved into auctions in a big way with a merchandise mix that includes not only computer and electronic goods but also new categories such as jewelry. Egghead uses a network of manufacturers, brokers and even, occasionally, other retailers to stock its auction site, where various types of time-sensitive auctions and reserves as low as $1 keep the incoming traffic from bargain-hunters brisk.
And at Egghead, unsuccessful bidders are as important as the winning bidders in delivering returns on its auction investment. Egghead keeps a close eye on data about customers who register to bid and the patterns that emerge on price points at which bids are clustered. Here’s why: when the available supply of end-of-model year DVD players sells out at auction, for example, the unsuccessful bidders receive an e-mail offering similar products or even the identical SKU should more product become available later—at fixed prices the data show they’re likely to accept.
“The e-mail campaigns from the auctions generate a return on investment of 600% to 1,000%,” says Merle McIntosh, senior vice president of merchandising at Egghead.com. “For every dollar we spend there, we’re getting $6 to $10 back in sales.” The popularity of auctions outstrips that of other reduced-
price formats on the site. In the past six months, 32% of Egghead’s visitors shopped the auction exclusively, triple the 10.5% of visitors who shopped the clearance area exclusively. Only the Superstore, Egghead’s main shopping format on the site, accounted for more exclusive traffic, pulling in 43% .
Which direction?
JCPenney.com and Egghead have the marketplace presence to pull in enough buyers to not only move goods at auction prices, but yield enough data to guide future pricing strategies. Auction sales can even help determine the pricing of new merchandise being prepared for market. Egghead, for example, sometimes shares aggregate data on auction bidders’ willingness to buy at various price points with manufacturers as they are establishing pricing for new models. But McIntosh points out that such data can’t drive pricing on its own, as it’s gathered on end-of-model rather than newly launched merchandise. “It’s really just directional,” he says. “You have to figure on pricing 10-15% higher for new merchandise.”
Many e-retailers don’t have the traffic and technology to create a successful auction marketplace for themselves online. But smaller-scale web merchants are nevertheless successfully using the auction format to move older merchandise and gather market intelligence through service and software providers. Woburn, Mass.-based FairMarket, is a 4-year-old, soup-to nuts provider of networked dynamic selling solutions, including auctions, for online retailers. FairMarket powers the JCPenney.com auctions, linking them with portals in its auction network such as MSN and Lycos. It works with smaller web merchants on auctions as well.
“In retail, pricing strategies are still pretty basic,” says Bryan Semple, vice president of product marketing at FairMarket. “But elsewhere, we’re subjected to dynamic pricing every day—every time you buy an airplane ticket, for instance. In the online retail world, as time goes on, pricing will become more dynamic.” Semple sees a day when short-run, dynamic pricing models including auctions will let manufacturers and retailers price-test new products and services among early adopters before launching product roll-outs.
Auction caution
?thers, however, advise caution in applying auction-based pricing, particularly the prices paid by early adopters, to other pricing strategies. “Auctions are famous for people overpaying, not underpaying,” says Robert Labatt, analyst with the Gartner Group, Stamford, Conn. “How translatable is that to the larger market? Early adopters might be willing to pay more than a mainstream user—or they might expect to pay less because they’re testing it as a beta-user.”
For the same reasons, Gomez’s Gambale adds that while there’s interest in experimenting with pricing based on data from auction prices, the data’s greater value to e-retailers may be the information it yields on shoppers’ intention and interests. “A lot of sites now sponsor person-to-person auctions,” he says. “There’s so much competition, in fact, that the earlier model of charging user fees has been dropped and instead sites are gathering data from the auctions and selling it as a package to research firms and retailers themselves.”
The data can show, for example, the age and demographic of consumers interested in various products. “And if consumers show interest in a particular item, they also may have interest in a similar one,” Gambale says. “It’s this aspect of personalization that has value to e-retailers of new merchandise. In terms of price, they can’t compete in some areas with the used marketplace, but they already know that and that’s not the information they’re looking for.”
Strategy crossover
When it comes to pricing in e-retail, the good news is that the Internet is giving merchants auctions and other dynamic pricing solutions for moving more merchandise and recapturing more inventory value. They can yield data that bring e-retailers even closer to their customers. But they must be used carefully—especially when combined with the fixed-price strategy retailers depend on to project and hit the quarterly targets that benchmark the company’s performance. In other words, in an age when shoppers can use a PDA to compare shelf prices with web prices on the spot, is there such a thing as too much price transparency, at least, for multi-channel sellers? Not, suggest industry-watchers, for merchants who look beyond price for additional ways such as service to generate value.
“We’re seeing an intermingling of pricing strategies and technologies online,” Gambale says. “The Internet is great at reducing the friction of buying commodity goods. At the same time, it can put additional pressure on margins, so pricing strategies have to be used the right way with the right products. That’s the challenge, but we do expect to see integration of dynamic pricing with fixed and fixed with dynamic.” l
mary@verticalwebmedia.com 
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