Here's why online business-to-business auctions may be the best way for small companies to make?or save?a buck.
Business-to-business auctions may be the best way yet for small companies to make--or save--a buck
Over the past several years, on-line auctions have built themselves into one of the great E-commerce success stories, proliferating into hundreds of sites that clear millions of items a week. The most visible of these are the consumer-to-consumer auctions, which thrive on our apparently limitless interest in buying one another's cast-offs: barely used exercise equipment, slightly chipped Fiesta ware, and collectibles ranging from airsickness bags to antique barbed wire.
But while consumer goods have gotten the ink, visitors clicking their way a little further into on-line-auction sites, such as eBay, will find themselves in a very different marketplace. There buyers and sellers deal in bulldozers, 100-pound rolls of bubble wrap, industrial process-control software, 40-foot conference tables--even employees. Not long ago, eBay listed for sale an Internet service provider's entire engineering staff--one director, three managers, seven senior engineers, and five administrators--all prepared to go as a group to the highest bidder. (So long as they didn't have to move out of the Valley, of course.)
Media coverage notwithstanding, in dollar terms business-to-business sales dominate the on-line-auction market. In March 1998, Forrester Research Inc. projected that the value of goods and services sold in on-line business-to-business auctions that year would dwarf the value of those sold in consumer auctions by a factor of six ($8.7 billion to $1.4 billion) and would accelerate to $50 billion by 2002. An auction site selling power equipment to businesses recently announced it had set a new value record, receiving bids starting at $38 million for a pair of 1,000-ton steam turbo generators.
The reasons for the boom are manifold. Like consumers, many companies have vast quantities of goods and materials moldering away in closets, storage bins, and warehouses. Those goods include obsolete equipment; factory seconds; discontinued or repackaged models; used, liquidated, and rebuilt or refurbished items; overstocks; excess inventory; and products that failed to find distribution. While liquidators and brokers typically will buy such stuff, they often don't pay enough to make it worth the seller's while. As a result, much of the material appears on the market very slowly, perhaps only when companies go out of business or move.
On-line auctions, on the other hand, are a fast, easy, and cheap way for businesses to clean their closets. Price discovery or definition, almost always complex in ordinary markets, occurs automatically. Closing bids are usually lower than retail prices--which attracts buyers, but prices are still often higher than what liquidators will pay. And on-line auction sites attract huge, diverse groups of buyers, who find them far more convenient than slogging through a list of dealers.
And the advantages don't end there. As companies are discovering, auctions can advance promotion and publicity, drive traffic to sellers' sites, and generate lead lists for upselling to failed bidders and cross-selling to successful ones. Since the record of bids compiled at each auction shows exactly how much value buyers place on different products, sellers can mine it for valuable marketing data. Auction results can also be used to help sellers define prices for goods sold in the off-line world. And, increasingly, auctions are a vehicle for what is sometimes called "gray channel" commerce: resellers exploiting the anonymity of the medium to push the borders of their distribution licenses.
Although there are many types of business-to-business auctions (see "How Do I Bid on Thee? Let Me Count the Ways," below), most take place on one of two kinds of sites. General auctions like those run by eBay, Yahoo, and Amazon.com offer an unrestricted selection of goods and services to a broad range of buyers and sellers. Specialist auctions, meanwhile, concentrate on specific sectors or industries.
General auctions, as a rule, attract players in industries that don't yet support a specialist site, skilled auction manipulators with patience and pricing skills (hoping to skin naïve users), sellers for whom a heterogeneous buyer population is particularly important, and open-minded buyers positioning themselves for serendipitous opportunities.
Joe Martin, owner and president of Sherline Products Inc., a $5-million designer and manufacturer of high-precision miniature machine tools, is one such buyer. Martin says he has saved his company $20,000 over the past six months by buying on the general-auction sites, looking for rare and unusual items whose value is underappreciated. "You have to be willing to buy for more than your immediate needs to make out," he says.
Another patron of the general sites is Gary Sorrells, president of GLS Recovery, in Orem, Utah. A seller rather than a buyer, Sorrells auctions off repossessed and liquidated goods both on-line and in the physical world. On-line, he sells about 150 items a month, including as many as 20 vehicles at an average of about $8,000 each. Sorrells is struck by the speed with which items clear on-line compared with the auctions he holds in downtown Orem. "Here a bulldozer might take five weeks to sell," he says. "On eBay it would be gone in a week."
Sorrells explains that such quick sales reduce storage costs and accelerate collateral liquidation. Since on-line buyers don't have to gather at a central point, goods can be stored wherever real estate costs are lowest. And while the ratio of the value of on-line to off-line bids isn't consistent, Sorrells observes that on-line buyers seem willing to pay a 5% to 15% premium for industrial and construction equipment ("though that seems to be coming down"), while sports-utility vehicles attract higher bids locally.
Jeff Krolik, an engineer at Sobek Medical LLC, a 12-employee medical-device design and consulting firm in Campbell, Calif., uses both general and specialist auctions to stretch his employer's procurement budget. Krolik says he begins by checking the general auctions, since they tend to attract buyers and sellers who have no idea what a reasonable closing bid should look like for the complex and rare equipment that interests him. (He recently scored an expensive instrument for 10% of its usual price.) If he can't find a sheep to shear at a general auction, Krolik turns to a site specializing in laboratory equipment: www.labx.com. Between the two he can fill some of his employer's monthly needs for 50% less than if he were buying the material through normal channels, he says.
Compared with the number of industries around, not all that many specialist sites exist, and not all of those have yet built up sizable trading communities. (For a list of specialist sites, see "Industry Nets,") But specialist auctions, because their markets are so focused, frequently are more predictable than general sites when it comes to product availability, closing bids, and buyer demand. And buyers seem willing to pay for that predictability: closing bids for the same items often run 30% to 40% higher on specialist sites than in general auctions. In addition, such sites have a powerful advantage in their ability to provide services tuned to their particular sectors, including inspection and appraisal, member authentication, escrow, insurance, credit research, financing, and transport.
Specialist sites can also tailor their auctions to fit the peculiarities of the industry they serve. For instance, Ben Zaitz, proprietor of several agricultural auction sites, explains that cattle-feed contracts--one of his stocks in trade--are too complex for the normal auction format. Transport expenses vary with the distance between supplier and farmer; farmers contract not for a onetime shipment but for a delivery schedule; and the product can be packaged in several ways. Plus, "farmers don't want to wait for two weeks to see if their cattle are going to get fed," says Zaitz, referring to the length of the average on-line auction.
For those reasons, the action on www.cattleofferings.com doesn't look much like the average eBay session. Auctions (which are over in a few minutes or less) are held at a scheduled hour, in real time, with a human auctioneer moving things along in a Java-based auction program that allows him to "push" pictures and data to the bidders. Buyers are not committed to winning bids. And since it is cheaper for a professional feed dealer to accommodate a farmer's needs than the reverse, buyers state their demands and potential sellers bid down the price.
Recently, for example, a Michigan dairy called Med-O-Bloom posted a request on Zaitz's site for 150 tons of beet pulp, to be delivered as dried pellets, in hopper trucks, at a rate of one truck a month for six months. The proposal sat on the screen for about 30 seconds, during which time an observer could almost hear the spreadsheets being massaged out in cyberspace. Then a supplier tossed $104 a ton on the table. "Whoa," remarked Zaitz, who was watching the auction's progress. "That's a heckuva of a price." And so it must have been, since no other supplier was willing to touch it. Three minutes later the auction was over and Med-O-Bloom had its beet-pulp needs resolved.
Jim Good, owner of Med-O-Bloom, says that Zaitz's auction saved him $10 a ton off his usual price on beet pulp. The deal apparently convinced him that Internet auctions are worth including in his company's procurement strategy. "We're going to be exploring that Web site," he says.
On-line auctions can also play a role in companies' marketing and promotional plans. Sherline Products, for example, sells to a spectrum of buyers: professional model builders, high-end hobbyists, contract machine shops, and manufacturers. With very little competition worldwide, the company should have been selling around the globe, owner Martin says. But until recently, he could find no economical way of reaching customers abroad.
Then one day, while scrolling through eBay, Martin noticed the hit counters attached to some items, indicating how many people had viewed them. "There were some good numbers there," he recalls. The lightbulb clicked on, and over the next few weeks Martin began offering his own products for auction, seeking exposure rather than revenue. Although Sherline's products are general purpose, Martin listed them under some of their common applications, like "microscope-repair lathe" or "camera-repair milling machine," so they would be found by people searching under the terms "microscope" or "camera." Those clicking down to Martin's auction would see a link to www.sherline.com, inviting them to enter the world of precision miniature machine tools. Two months of experimenting with that strategy has made Martin a fan. "This is by far the most economical way I have found to make potential customers aware of my products," he says.
Companies willing to invest more in the auction model have an alternative to both general and specialist sites: rolling their own. Gibson Musical Instruments, Universal Studios, Sotheby's, wholesale auto dealer Manheim Auctions, and Cameraworld.com are just a few of the businesses putting their products up for bid on their own Web sites. While running a homegrown auction takes more work than selling through general or specialist sites, there are many advantages: companies can show their own ads, maintain total control over the data left by visitors, cross-sell accessories to successful bidders, upsell alternatives to failed bidders, and, of course, save on commissions that would normally go to the auction sites.
LeCroy Corp., a $130-million scientific-instrument manufacturer in Chestnut Ridge, N.Y., rolled out its own auction in early June. "We are using it to jump-start sales of slow-moving, discontinued, or about-to-be-discontinued items," says Laurie Macomber, the company's marketing-communications manager. "It also generates leads; people bidding on our site might get a call from one of our salespeople. Finally, we see this as a way of getting our feet wet in electronic commerce." The auction is so popular that Lecroy's own employees are pressuring management to run it over the company intranet so that they can bid during the day.
Until recently, a company wishing to host its own auction had to write its own software, but now several products are available off the shelf. Those include Emaze's Auction, OpenSite Technologies' Auction, Moai Technology's LiveExchange, and SimAuction's SimAuction. In addition, OpenSite, along with Fairmarket's Merchant Auction Place, offer auction-hosting services. And new features are being introduced almost every day, extending the power of the model. (See "Tools of the Trade," below.)
The cumulative effect of all these auctions may be to redraw the business models of many companies. Advocates of business-to-business on-line auctions--including, not surprisingly, the entrepreneurs launching them--argue that almost every industry has wasteful practices that auctions can mine for value, with the savings benefiting both buyers and sellers.
Robert Dobinski, for example, started Exhibitauction .com to streamline the handling of trade-show exhibit booths. Typically, he explains, companies ship the booths to shows, often over long distances, ship them back, store them, then ship them to another show. Not surprisingly, the costs are considerable.
Exhibitauction.com allows a company just finishing a trade show in one city to auction its booth skeleton to another company planning to exhibit in the same region (and, ideally, in the same hall). The buyer simply replaces the logo and signs on the booth with its own. Both buyers and sellers profit from the savings in construction, transportation, and storage. The auction site itself makes a commission on the transaction.
In another sector, FastParts Inc. is targeting the excessive time and energy that the nation's more than 1,500 electronics manufacturers spend on materials management. Each of these companies might work for many clients at once; each job might require dozens or even hundreds of parts; and any of those jobs might be changed or canceled at any time, leaving many of the parts on the shelf. FastParts hopes to lower the costs required to manage the chaos by using on-line bid-and-ask auctions to clear needs and inventories. (See "Deal Making at the Speed of Light," below.)
On-line auctions are particularly effective at improving market efficiency when distribution is fragmented and costly. Jeffrey Goodman, CEO of 18-month-old Dexpo.com, sees dental supplies as a case in point. The market is a swamp, says Goodman, with 1,000 manufacturers and 200 distributors all trying to reach 120,000 dentists, each of whom buys from many sources. The number of players and their small average size make promotion expensive, and few can afford to market to every buyer. Dexpo.com's goal is to bring all those suppliers into a central common market. At press time, about 60 companies were selling over the site and 500 dentists were bidding there, in advance of the company's major marketing push in July.
While the resulting competition drives prices down (typically 20% to 30% below retail), there is some compensation for sellers. Manufacturers get direct contact with their customers, Goodman points out, and Dexpo.com provides them with a database of information about their bidders. "They've never had that before," says Goodman. "They get to advertise to the whole profession. They have outlets for excess stock, products in old packaging, and products the distributors don't carry."
While this model seems to put distributors at risk, Goodman has found some of them to be aggressive early adopters. "Distributors often have a really intimate understanding of the market, and they can leverage that," he explains. For example, the CEO recently noticed one distributor that purchased more than it needed to fill an order, pocketed the volume discount, and then sold the remainder through the auction.
In the short term, the most powerful impact of business-to-business auctions will probably be felt by companies that act, at least in part, as dealers, traders, brokers, or agents. Sag Supply, in Deer Park, N.Y., has been buying and selling used and liquidated industrial tools (drill presses and lathes, for example) for 30 years. Historically, says sales rep Eric Barnett, dealers like Sag have operated on a high-cost, high-margin, slow-turnover business model. Dealers would buy inventory, perhaps at a bankruptcy sale, for pennies on the dollar, sort it, clean it up, and store it. Then they would wait months, or even years, for a customer who was motivated enough to pay for the continuously mounting storage and capital opportunity costs, the costs of the objects in the dealer's inventory that never sold, plus, often enough, referral fees from other brokers. The system was slow, hit-or-miss, and expensive.
About a year ago Barnett and some dealers in his area began selling through the general on-line auction houses. The result, he says, is that the dealer/trader model is developing into a low-margin, high-turnover business. He thinks that eventually businesses like Sag Supply will act as on-line-auction services and consulting houses, using their grasp of the market and pricing to evaluate different venues for sellers, package bid presentations, set up and track auctions, supply escrow services, and even handle fulfillment.
If Barnett is right, it will be yet another example of an industry created whole cloth from a business model born on the Internet.
Fred Hapgood is a freelance writer based in Boston.
How Do I Bid on Thee? Let Me Count the Ways
There are almost as many types of auctions as there are things to sell on them. Here are a few:
Certain auctions may combine several of these features. For instance, in "bid or buy" auctions, sellers specify a floor (a reserve), a duration, and a ceiling (a fixed price). Items go to either the highest bidder or the first person who is willing to pay the fixed price.
Tools of the Trade
The technology for conducting business-to-business on-line auctions is becoming increasingly sophisticated. The following is a list of tools that have just been introduced and some sites that use them.
Deal Making at the Speed of Light
FastParts is a rapid-fire game of give-and-take that lets buyers and sellers of electronic components converge on a fair priceSuppose you are an original equipment or contract manufacturer working on a $10-million circuit-board project. The project is canceled, leaving you holding several thousand units of inventory representing 50 different part numbers ranging from microprocessors to switches, for which you have already spent $50,000. Your friend Sammy the liquidator will give you $5,000 for everything. You can accept his offer. Or you can log on to FastParts' site.
The first thing you do upon entering the site is to survey requests from buyers looking for parts; all will have posted the quantity they need and the price they are willing to pay. Sometimes--but very rarely--the posted requests will take care of your problem. Normally, you will type in the parts and quantities you have to offer, as well as your asking price (which will be informed by the prices you saw in the buyers' corner). That offer will be both posted and E-mailed out to everyone looking for those particular parts. The fact that all buyers see the offer simultaneously puts pressure on the individual bidder to conclude a deal.
A buyer may respond at once, offering to take the entire lot at your asking price, but more likely you will get a counteroffer for a fraction of the quantity at a lower price. At the same time that counteroffer is presented to you, FastParts is E-mailing it to everyone else selling that particular part. (That puts pressure on the seller to conclude a deal.) If you respond with a counteroffer, that is also E-mailed to all the buyers.
In theory, the communities of buyers and sellers will converge rapidly on a price. If that doesn't happen, the parts will be moved into a conventional auction (also on the FastParts site), which discounts prices faster and moves goods more quickly.