Case study: Internet auctions
The Internet has opened up many opportunities for increasing consumer power, and nowhere has this been more apparent than in the proliferation of Internet auction sites. Sellers are able to post goods for sale on sites such as eBay or eBid, with or without a reserve price, and buyers are able to place their bids from (theoretically) anywhere in the world. The price rises as more people bid, until there is only one buyer left, who then buys the product at the final bid price. Buyers can pay by credit card through an escrow company (that holds the funds until the goods are delivered) or can make arrangements directly with the seller for payment.
In recent years the process has moved a step further with the advent of reverse auctions. Firms such as Letsbuyit.com bring buyers together to bid for products. The philosophy is simple; rather than bidding against other purchasers, and forcing the price up, the reverse auction arranges for buyers to join together and force the price down. For example, a manufacturer may offer an LCD TV for £800. If, however, 100 people are prepared to place a single order, the price might drop to £600. If 200 people are prepared to buy, the price might drop to £500. The price paid to the supplier will be dictated by the number of buyers, so Letsbuyit.com begins by negotiating a series of steps at which the price will fall. The prices are posted on the website for a set period, but once the product is sold out it will not be available to later bidders. If the number of people wishing to buy the product does not meet a pre-set minimum, the purchase does not go ahead and the bidders pay nothing. Those who bid therefore run the risk of getting nothing; on the other hand, if the deal goes through they will undoubtedly walk away with a real bargain.
The implications of this for traditional High Street retailers are potentially extremely damaging. Although they might argue that consumers will still prefer to come to a store where they are able to examine the products, get advice from the staff and even try out products, there is obviously nothing to stop consumers doing this and then making the actual purchase via a reverse auction. The implications for manufacturers are equally far-reaching; although the power of retailers will be curtailed, which for many manufacturers would be a godsend, the power of consumers is likely to increase dramatically.
On the one hand, reverse auctions offer manufacturers a kind of instant marketing research; on the other hand, the process may mean the end of price skimming, psychological pricing and all the other tried-and-tested techniques for maximizing the profitability of innovative products.
In some cases, consumers have gone even further by cutting out the Internet service provider altogether. They have taken to sending tenders to car dealers and other retailers asking them to bid for supplying the product. On a new-car purchase an astute logged-on consumer might save hundreds or even thousands of pounds in this way – a saving that more than compensates for a few minutes spent sending out e-mails.
Questions
If these consumer-led techniques catch on, the outcomes are by no means entirely bad for manufacturers but the overall effect is a major change in the way pricing is carried out. Prices are much more directly controlled by the end consumer than ever before – and marketers need to adjust to that fact. 1. How might a manufacturer retain a skimming policy when dealing with a reverse auction? 2. How might a car dealer encourage a prospective customer to increase the tender price? 3. What advantages might there be for manufacturers in participating in reverse auctions? 4. How might a manufacturer calculate the appropriate price bands for a reverse auction? 5. What might retailers do to counteract the effects of reverse auctions?