When Weirton Steel Corp., a US$ 1.5 billion steel company based in West Virginia, wanted to attract more customers, it tried something a little different. The steel giant turned to an online auction site on the Internet (www.metalsite.net) to sell excess inventory and promptly doubled its customer base. In fact, customers were willing to pay more via an online auction. "By moving product to more customers, we've increased revenues by 10 percent on the same amount of volume," says Weirton Steel Vice President Earl Davis.
Anticipated sales from this year's online auctions: more than US$ 40 million.
Clearly, Weirton Steel offers a compelling success story that attests to the value of online auctions. Even more exciting, however, is the fact that this story is being played out daily-by thousands of companies and in a variety of industries -- across the Internet.
By now, the phenomenal success of eBay Inc. and all the excitement that it has generated around online auctions for consumers is well publicised. In March another heavy hitter -- Amazon.com -- joined the fray to create a space where individuals can buy and sell everything from rare books and signed first editions to antiques and sports memorabilia.
What may be less well known is the emergence of online auctions as a profitable way of doing business with other businesses. Indeed, the Web offers a solution to the limitations of traditional auctions: It can attract a larger audience of bidders, removes geographical boundaries and can continue for an extended period of time. According to Forrester Research Inc., sales from business-to-business online auctions last year generated US$ 8.7 billion. The Cambridge, Massachusetts-based market research company predicts explosive growth within the next three years, estimating that sales will top US$ 52 billion by 2002. If Forrester's predictions are accurate, business-to-business online auctions may well change the way that businesses operate in the future.
Buyers in the market for excess or obsolete inventory at a reduced price should consider the benefits of an online versus a traditional auction. For one thing, online auctions allow participation in multiple auctions simultaneously at any time from the desktop while eliminating travel expenses. And companies can avoid buying from liquidator brokers that offer only a slight discount or retailers that are selling refurbished goods at non-negotiable prices. On the other hand, if a company consistently runs into problems with moving excess and obsolete inventory quickly enough, an online auction can immediately extend a company's reach by tens of thousands of customers-and clear out a warehouse in a flash. Before sellers try their hands at the electronic gavel, however, several important things are key.
What Does an Online Auction Look Like?
In most business-to-business online auctions, buyers log on to a Web site, enter their bid and then find out-either immediately by watching the screen or later via an e-mail message sent by the auction site-how the bid compared with those submitted by other bidders. As with any in-person auction, bidding can continue until the final seconds before the gavel falls.
Once the winning bid has been made, the auction site typically helps the buyer and seller make arrangements for payment and delivery. Some auction sites introduce the winning bidder and seller at the end of the auction so that they can work out payment and delivery between themselves. In that case, the auction site gathers its fees from one or both participants and then quietly exits.
Other sites, however, operate as a middleman where they first purchase the excess inventory themselves and then handle the financial transaction and delivery. Still others offer strict confidentiality to both buyers and sellers so that everything -- bidding, sale, payment and delivery -- is done anonymously.
The length of an auction can vary greatly; one might last only four hours while another continues for four days. The frequency can also differ, with some offered every Wednesday at 10 a.m. and others offered only when there are enough products available to auction.
Fees also vary. MetalSite, for example, charges a transaction fee based on the steel's selling price and volume. As volume increases, the seller pays a lower percentage. At other sites, the buyer pays a fee that equals a percentage of the transaction. Fees can run as high as 2.5 percent of the winning bid.
Are There Different Types of Auction Sites?When adding online auctions to a company's e-commerce strategy-either as a buyer or a seller-it is essential to consider the various types of auctions and how they operate. Forrester groups business-to-business online auctions into three categories:Independent auctions, where companies rely on a third-party auctioneer to create the site and sell the goods. Think of an independent auction as a kind of electronic Sotheby's, where items from different people are sold by an auction house. The auction house-or, in this case, the online site-receives a commission or fee for each item that's sold.
Commodity auctions, where buyers and sellers come together at a third-party Web site. The difference lies in what they're selling and the fact that it's done at the last minute for last-minute bidding on quickly moving commodities such as energy and utilities. A commodity auction resembles the Chicago Board of Trade, where commodities such as pork bellies are frantically bought and sold by traders as prices dip and soar from one minute to the next.
Private auctions, where companies typically offer their own excess inventory from their own auction sites directly to customers. A private auction is something like a private yard sale, overflowing with items that your neighbour no longer wants. While your neighbour hopes to recover at least part of his original investment, you hope to spot a bargain. The important difference is, however, that you don't just happen upon a private auction, you must be invited to be able to participate.
In addition, sites such as Opensite Technologies Inc.'s BidStream.com (www.bidstream.com) can serve as a starting point for online auction participants to search for branded, reputable Web auction sites. Data is pulled from hundreds of auction sites, and buyers can search multiple auctions through one site.
Going Once, Going Twice...
Often, when people think of auctions, they immediately envision the common English auction, where bidding begins at a relatively low price and the price gets pushed up as bidders compete more intensely. The Yankee auction is a multi-item version of the English auction, where winners are determined by ranking bids according to highest price, then by largest quantity, then by earliest time. Bidders can specify whether they'll accept a partial quantity or not. In a Dutch auction, the auctioneer begins with a high starting price at which level no one is expected to bid and then lowers the bid gradually until someone buys.
A Buyer's Perspective
Putting aside the technical details for a moment, what are the business benefits of online auctions? For buyers, the most important advantage is lower pricing. Consider Bascom Global Internet Services, a young startup software developer that opened its doors in December 1995. "We realised that we don't always need cutting-edge technology and that we could get good computer equipment at a really good price at online auctions," says Bob DeRosa, Bascom's chief technology officer at the Hauppauge, N.Y.-based company. Since its initial purchase of two laser printers at Onsale Inc. (www.onsale.com), an independent auction site that offers excess inventory from companies such as Hewlett-Packard Co., the company has purchased tens of thousands of dollars worth of equipment at the site.
Other buyers agree that lower pricing is the major payoff. "One purchase saved us 14 percent," says Steve Felderman, purchasing agent at Northeast Memory Co. in Huntington Valley, Pennsylvania. "That's significant in an industry where you typically have a single-digit profit margin." Felderman's company last year purchased nearly US$ 450,000 worth of memory modules through FastParts (www.fastparts.com), a commodity site that auctions electronic components.
At Parisi Inc. in Philadelphia, director of construction Gary Neff uses the independent AuctionGate Interactive (www.auctiongate.com) site to buy electronic components for upgrading employees' PCs. Over the past six months he has purchased nearly US$ 4,000 worth of excess motherboards and chips and saved his company about 15 percent by doing so.
Availability is another key benefit. "Our customers often call and say they need material fast," says Arnie Koldenhoven, president of Arrowhead Steel in Burr Ridge, Ill. "MetalSite gives us immediate access to current inventory instead of having to contact a mill and then wait for a new list to be faxed." Online auctions also give businesses a lot more choices," says Bascom's DeRosa.
"You see things you didn't even think of," says Parisi's Neff.
Of course, every business opportunity has potential risks. Buyers can't be sure that they're purchasing products from a reputable company. Auctions can get bogged down with bogus bids. Communicating with the seller long distance makes it difficult to form a relationship. And fees charged by auction sites can add up. "The transaction fees are a bit stiff, so I don't do all of my business through them," says Northeast Memory's Felderman of his dealings with FastParts. Meanwhile, buyers sometimes discover that an auction isn't offering a certain product on the day that they had hoped to buy it or at a price that they would be willing to pay.
Receiving notification of a bid's status quickly enough can also be an issue.
"We need to know as soon as possible [from MetalSite] if we own the item," says Arrowhead's Koldenhoven. "In the past, we'd call the mills, order on the spot and know immediately whether we had the material. If we don't get it at auction, we will still need to find the steel somewhere else. So the question is whether we can live with the response time once the bid has been placed."A Seller's PerspectiveFor sellers, the advantages are impressive. Losses on obsolete inventory can be minimised by opening warehouses to customers instead of to brokers. Garmin International Inc. in Olathe, Kan., which manufactures and distributes geographic positioning systems, sells excess inventory on the FastParts auction site. "I'm getting 10 percent more for my electronic components than I would get anywhere else," says Jerry Hardy, director of special projects at Garmin.
"With brokers, I typically get between 1 percent and 2 percent," he adds.
Meanwhile, a company can also extend its reach to potential customers.
"Auctions make it easier for companies to sell excess inventory, increase their interactions with trading partners and broaden the customer base," says Albert Pang, a Mountain View, California-based research manager of e-commerce at International Data Corp., a CIO Communications Inc. sister company.
At the same time, inefficiencies associated with using a middleman in a traditional business transaction are eliminated, with buyers and sellers connected more directly. Auctions provide a valuable venue for determining pricing for new products. There is built-in protection for sellers. "We don't ship until the buyer has deposited money, so I'm protected," says Garmin's Hardy. And private auctions can reward loyal customers with special pricing by allowing them to buy excess and obsolete inventory that the general business populace doesn't have access to.
Selling products via an online auction also has potential drawbacks, of course.
For one thing, delivering the products quickly and efficiently can be a problem. Meeting demand can be tricky. And there is often a learning curve.
Norman Levy Associates Inc., a Southfield, Mich.-based company that has auctioned surplus industrial equipment for corporate giants such as Boeing and DaimlerChrysler for nearly 50 years, recently launched an independent auction site (www.nlainc.com). "We've spent more money than we've made [so far], but we're learning," says spokeswoman Catherine Gauvreau. "Sellers have asked for a fair market value that may not be realistic," says Gauvreau. "There was a fair amount of interest, but buyers wanted bargains. If we learn effectively, up to 25 percent of our total sales could be sold through online auctions by 2000."Future TrendsAs more companies tap into the Internet for auctions, the business model will evolve further. "Online bidding auctions are the next wave where, if you don't match all the variables, you can't bid," says Forrester analyst Varda Lief.
"From a technology standpoint, these auctions are more difficult to track and administer," she says. FreeMarkets Online Inc. (www.freemarkets.com) already has a head start. It offers a combination of proprietary bidding technology and services to companies that need to buy industrial components, agricultural products and energy commodities. Perhaps mirroring the anticipated growth of bidding auctions, FreeMarkets sales have skyrocketed from US$ 4 million in 1996 to US$ 501 million in 1998. FreeMarkets CEO Glen Meakem predicts that 1999 sales will total US$ 1.5 billion.
FirstEnergy Corp., a US$ 5 billion electric utility based in Akron, Ohio, has used FreeMarkets twice to buy coal. Before the auctions, FreeMarkets helped the utility line up suppliers and arrange logistics. On the day of the auction, qualified suppliers dialled into the FreeMarkets server and began submitting bids. They watched in real-time as other bids flowed in. Bidders can submit only bids that are lower than current bids, and no price can be raised once it's entered. At the end of each auction, FirstEnergy purchased from the low bidders. "In the event that prices are poor, we reserve the right to not buy," says Jim Parks, manager of fuel supply at FirstEnergy.
On purchases of about US$ 15 million, Parks estimates that the company saved between 1 percent and 2 percent. "If this works right, we hope to eventually see savings in the range of 2 percent to 5 percent," says Parks.
Internet portal companies, meanwhile, may enter the picture later this year.
"Business-to-business auctions are an area that we definitely want to evolve into," says Jeff Bennett, vice president of electronic commerce at Lycos Inc.
(www.lycos.com). "It's on our radar screen," says Mark Lockareff, vice president of classifieds and auctions at Excite Inc. (www.excite.com). Given the recent changes in the portals arena-especially USA Network's merger with Lycos and @Home's purchase of Excite-business-to-business online auctions may go prime time soon.
Regardless of how online auctions evolve, the ultimate criterion will always be whether they help companies increase revenues. At Weirton Steel, optimism runs high. "Five years from now, I wouldn't be surprised to see us selling more than 50 percent of total product over the Internet," says Davis. "This is the wave of the future."3 Ways to "SOLD"Independent Auctions: A Closer LookWhat's it like to use an independent auction site? For Cecilia Babkirk, owner of the San Jose, California-based Babkirk and Associates brokerage firm, it's quick and easy. In fact, Babkirk now offers and trades the majority of her residential loans-about US$ 25 million worth-through IMX Mortgage Exchange's (www.imx-exchange.com) independent online auction site.
Babkirk realised last year that she would increase her profit margin by focusing more on selling loans and less on paperwork. "I was receiving up to 150 rate sheets daily from lenders," says Babkirk. "And I had to renew my financial information with at least 60 lenders every year. I finally said, 'Enough of that.'" After comparing rates from her then-current lenders for six months with those available through IMX, she made the switch.
Three times a day, Babkirk reviews bids and expiration times posted by lenders such as First Nationwide Mortgage Corp. on the IMX site. (Lenders query IMX's database for loans that meet their criteria.) "If I see one that I like, I get details and then press 'Accept' to lock in on a rate." Since using the site, Babkirk's income has jumped 25 percent. "This approach means that a small broker can do more business with fewer hassles and offer better pricing to customers."Examples: www.imx-exchange.com, www.onsale.com, www.auctiongate.com, www.nlainc.comCommodity Auctions in ActionHow do you buy or sell on a commodity auction site? At Band-X Ltd.
(www.band-x.com), companies connect anonymously to buy and sell excess telecom capacity. Sellers first make minutes available at the company's London-based telecom switching hub. The rates are then immediately published on the site.
When a rate looks good, the buyer contacts Band-X, pays a deposit and buys the minutes.
The Band-X site offers a constant, real-time display of bids and offers. When a seller lowers its price, Band-X automatically routes bids to that seller. It's this high degree of responsiveness that makes online auctions ideal for commodities markets, according to Band-X founder Richard Elliott. "Price changes are effected immediately, and buyers take advantage of price reductions immediately," says Elliott.
Examples: www.band-x.com, www.metalsite.net, www.fastparts.comPrivate Auctions: By Invitation OnlySome companies decide to bypass the online middleman (independent and commodity auctions) and auction their products themselves. (Forrester Research Inc. predicts that the volume of sales from private auctions will grow from US$ 1.7 billion in 1998 to US$ 14.9 billion by 2002.) Ingram Micro, one of the world's largest distributors of computer equipment, launched Auction Block (www.auctionblock.com) in 1997 to auction its obsolete inventory to nearly 20,000 customers who have a history of purchasing equipment over its online site. The Santa Ana, California-based company auctions about 40 items each week. Buyers can bid from Monday morning until Wednesday at noon.
Sales last year on Auction Block totalled more than "seven figures," according to Ken Jenkins, Ingram's manager of special inventory operations. And the company expects this year to be even better. While the dollar volume pleases Ingram Micro, the company also has its eye on other benefits. "Auction Block is more a matter of lessening our loss [on excess inventory] than making money," says Jenkins.
Bid-up principle: The price keeps ascending, as in the English auction.
Bid-down principle: The price keeps descending, as in the Dutch auction.
First-price auction: A sealed-bid auction in which the item is awarded to the highest bidder.
Second-price auction: A sealed-bid auction in which the item is awarded to the second-highest bidder to alleviate bidders' fears of significantly exceeding the true market value.
Silent auction: A sealed-bid auction where bidders don't know who is placing bids but know the highest bid submitted.
(Source: Opensite Technologies Inc.)
If you're thinking about buying online...
Could online auctions deliver the kind of return that you're looking for as a potential buyer? Consider these points:-- Think about how you will incorporate online auctions into your current business model. After all, online auctions introduce a more flexible channel in which you can plan budgets in real-time and have more versatility in locating resources.
-- Evaluate your company's procurement processes to determine which divisions might benefit the most. Not only can you save money, you can also create an opportunity to streamline your company's requisition process.
-- Learn the nuances of buying at a specific site before jumping into the bidding process. For example, do you know how the site will deliver the product once you've won it?-- Reduce your risk of doing business with a disreputable company by asking the site if it qualifies sellers in any way.
-- Find multiple sites that sell the kinds of products you're interested in purchasing. By participating in multiple auctions simultaneously, you'll have more of a chance of finding what you need on any given day.
(Source: International Data Corp.)
If you're thinking about selling online...
Hoping that online auctions can move your company's products? Keep the following in mind:-- Determine if an online auction is the right vehicle for selling your product. Auctions work best for companies with inventory headaches. Auction items with a known value so that buyers realise they're getting a bargain.
-- Consider outsourcing to a third party since it doesn't always pay to run your own auction.
-- Make sure your site's policies (for example, payment and delivery of the product) are clearly established.
-- Gather enough traffic to your site to create critical mass.
(Source: Giga Information Group Inc.)
(Louise Fickel, a freelance writer based in Yellow Springs, Ohio, can be reached at RiceKid@ix.netcom.com.)
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