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August 1, 2000 *4,000 subscribers* Volume 2, Issue 8 Online:
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The concept of dynamic pricing, commonly used in market economies and auctions, and popularized on the Internet by eBay, Priceline, eWanted, and Mercata, has extended beyond the consumer market. The Internet Exchange model is rapidly being used by both buyers and sellers in the B2B arena across a variety of industries to gain efficiencies in apparent supply, to eliminate information inequity, and to create new intermediaries and business models. One of the arenas of the online world that is changing most quickly is the marketplace. Nowhere is this more obvious than in the Internet Exchange, a term that refers to a set of websites used to sell goods at auction. Exchange members meet to buy and sell goods for a market price, negotiating according to a set of rules. In the process, they are creating a new power dynamic between buyers and sellers. Dynamic pricing is going to control a dramatically increasing proportion of transactions on the Internet. In the B2B markets, Keenan Vision estimates that $129 billion of the Internet economy will be conducted using Internet Exchanges in 2002. Dynamic pricing has included auction, haggle, exchange, and the traditional bidding process in C2C, B2C, and B2B transactions off the Internet, and now is moving onto the Web with vigor.

Dynamic pricing benefits:
Online dynamic pricing can help businesses in a variety of ways. It creates efficient markets by providing a mechanism to eliminate imperfect information, by increasing the geographic reach of smaller suppliers, and by streamlining purchasing processes. By eliminating inefficiencies, suppliers are able to decrease costs and increase revenues on inventory, decrease overhead, eliminate costly middlemen, increase inventory turns, and create new. In addition, dynamic pricing allows for "test pricing", and can yield increased revenue from new and unique items. All this is brought about through communities of buyers and sellers coming together to aggregate supply and demand. Internet Exchanges and auction technologies are creating a new class of intermediaries. These players create their own markets by inserting themselves into niches which previously had been dominated by entities who offered only fixed-rate pricing, and offer advantages to both buyers and sellers in the process. The speed with which new companies can enter this space is increasing with the rollout of new auction applications that are faster and easier to implement.

Better Experience:
A key factor in the movement to dynamic pricing is the buyer experience itself. In a book titled "The Experience Economy", Pine and Gilmore argue that the differentiation based on traditional factors such as price, customer service, goods, etc., is less apparent on the Internet, and that user experience is now the critical factor leading to repeat purchases. Auction sites including eBay, eWanted, and Mercata have shown the highest visitor time, and buyers and sellers in the B2B space require the same fast selection of the most optimum solution at the very best price. Exchanges with dynamic pricing and the largest apparent inventory, especially "distressed" and "limited-supply" inventory, provide this. Implementing dynamic pricing applications helps businesses decrease costs and increase revenues by creating more efficient markets. These applications also help companies deliver better Web experiences by providing more excitement, an increased sense of community, and a higher degree of personalization.

Industry Analysis:
Which industries will be first to move toward the Internet Exchange paradigm, and toward opportunities created by new, market-driven pricing technologies for Internet commerce? Distribution channels that are inherently inefficient, such as wholesale-retail chains, fragmented utilities markets, and small software publishers, may become re-intermediated by new middlemen with Internet Exchange technology. Keenan Vision estimates that in 1998, 10% of B2B transactions ($3.8 billion) were conducted using Internet Exchanges, and by 2002, that number will rise to 29% ($129 billion dollars).

Financial firms:
Online stock brokers, such as Schwab and E*TRADE, and online auctioneers ONSALE and eBay pioneered the Internet Exchange. E*TRADE and Schwab, the new intermediaries, have stepped in and taken the exchange function away from full-service brokers who used to supply the quotes. Middlemen offer a lower cost to a better informed investor.

Automobiles: provides a user interface for car buyers to submit a request for bids on cars they wish to purchase, and was an industry leader in this field. Processing of bids to sell, including the ancillary services of financing, insurance, and repair services, is propelling the automotive exchange to the number three category on the Internet in terms of dollars spent. In the year 2000 it is expected that over 2% of all automobiles will be purchased using dynamic pricing.

Business travel makes up the majority of travel dollars spent in the industry, and as B2C sites like have shown, travelers appreciate bargains, and purchasing agents appreciate them even more. Given the time constraints put on business travel, shopping around usually isn't a luxury that time affords. But as intermediaries appear on the horizon with technology and buying power, B2B travel exchanges may arrive sooner rather than later. One specific site, Vacation Point Exchange, charges a membership fee of $169.00 per year that provides full access to an online property directory as well as the ability to arrange stays at any of the member properties worldwide.

Computers, peripherals, and software:
Strong momentum in this industry, which exceeds 500 billion dollars, continues to make this the number one market sector. Dell and Cisco are moving towards 50% of their total sales generated over the Internet. Both have used extranet technology successfully to maintain top accounts, but the reverse auction model may help computer and parts suppliers liquidate older inventory for smaller businesses, which will undoubtedly be facing more pressure to integrate their business processes using expensive technologies that auctions may put within their reach. In the B2B space, liquidation specialist was purchased by Egghead Software, whose new business model includes purchase of distressed software inventory, especially older versions of popular software. Egghead provides market efficiencies for both software sellers and buyers on commodity software.

Industrial supplies and utilities:
This category includes semiconductors, other electrical components, and utilities, which together exceeded $585 billion in sales in 1998. These items are often sold as commodities, with market prices determined by non-Internet exchanges.

Telecom services:
Analysts predict that this $233 billion industry will shift a large fraction of its services to Internet exchanges, such as Arbinet, by 2001. Telecom companies are expected to learn how to provision Quality of Service (QoS) and rapidly adopt the practice of selling guaranteed bandwidth at auction.

Advertising agencies such as AdAuction, also known as OneMediaPlace, now a CMGI company, have created a market for Internet advertising inventories. Given the tight inventories in banner advertising on key sites, as well as the 80% unsold inventories (typically "run-of-site" at large portals), opportunities abound for both buyers and sellers to leverage auction technology for better market efficiency. Utilities: The restructuring of the electric power industry is fundamentally altering the methods by which electricity is priced. In place of published tariffs established by utilities and their regulators, restructuring is creating opportunities for suppliers to offer a wide variety of new products to retail electricity consumers. Among them are "dynamic pricing" products, which have retail prices that change rapidly in response to shifts in wholesale market conditions. The Utilities Exchange was conceived, developed and successfully tested in 1994/95. In its simplest terms, energy buyers and suppliers are linked by computer using specialized software to negotiate contracts with more speed, accuracy and cost-effectiveness than was previously possible. Reverse auction: now has a complete B2B section that includes Agriculture, Apparel & Textiles, Arts & Crafts, Autos & Transportation, Business Services, Computers & Electronics, Construction, Food & Beverage, Health & Medical, Industrial Needs, Maintenance/Repair Procurement, Mined Materials, Miscellaneous, Office Needs Packaging, Printing, Processing Equipment, and Publishing & Media. In addition to its B2C offerings, the B2B participation has created an exchange that spans the majority of business verticals in the United States.

Internet Exchange technology is founded on the concept of an auction object, and the auction object is central to the design of the leading commercial auction packages. Successful integration of auction technology into e-commerce applications will require Internet architects to link the auction objects into a robust and manageable network design. Using the n-tier architecture approach, application servers can be linked to distributed databasesand integrated into enterprise e-commerce frameworks in order to display prices, conduct price comparisons, and complete transactions. Five leading technology providers include Moai, Tradeum, and WebVision with enterprise application solutions, OpenSite (now Siebel) with a complete stand-alone application, and Microsoft SiteServer Commerce Edition 3.0.

Online auctions and exchanges can leverage every stage of the product life cycle and integrate with an overall pricing strategy. Businesses must first examine their overall product set, establish goals for a new dynamic pricing strategy, and then implement, observe, and adjust over time. Each implementation will vary by industry and target market, but the trends are clear. The Web is behaving as a growing organic system of buyers, sellers, products and services, and disintermediation is leading to the destruction of information inequity. As the Internet grows to offer an apparent "increase in supply", pricing will be set by the equilibrium created between communities of buyers and sellers, with the enhanced "experience" of market participation driving new Internet exchanges. - - -
Egghead Software -
Arbinet -
AdAuction -
uBid -
eSchwab -
Vacation Point Exchange -
utilityExchange -
Moai -
Tradeum - (Now Verticalnet)
WebVision -
Opensite - (Now Siebel)
Microsoft -

Let me leave you with a few of my favorite quotes this month:

I believe that for the short-term, dynamic pricing will be a driving force for a great deal of activity.  Some businesses will be caught up in frenzy of price-cutting, providing both the B2B and consumer markets with some terrific opportunities to pick up a few bargains.  Ultimately, however, like the "gas wars" earlier this century the trend will self-destruct--something has to give, probably quality and service. 
(Judy Wogoman, Publisher, NetNuggetz Newsletter)

Dynamic pricing will not disappear. But not everything will be negotiable and dynamic.

Dynamic pricing will continue for high dollar volume, infrequent purchases. It will not play a large part in low dollar, frequent purchases (unless its part of a package such as paying $20 for 10 gallons of milk, each gallon retrieved separately; even then this will have limited usage).
(Ken Aust, Portland, Oregon, USA)


I hope you enjoy this eZine.

See you in cyberspace,

Mitchell Levy

Executive Producer, <>
President, <>
Founder and Coordinator, SJSU-PD ECM Certificate Program <>
Chair, ECM Symposium (Oct 4-5, 2000) <>

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