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Is That Your Final Offer?

The technology of the twenty-first century is bringing back the marketplace of the eighteenth. But do consumers really want to bid for their breakfast?

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A few weeks ago, I bought a big box of Kellogg's Raisin Bran at my neighborhood D'Agostino for $2.41. City-dwelling cereal aficionados will recognize this as the minor triumph it is -- $5 is the going rate in most Manhattan groceries. But why, you may ask, is it news? Because the $2.41 was my idea; I bid for my breakfast cereal on the Internet. I went to the recently opened Webhouse Club site (www.webhouse.priceline.com), looked up "Raisin & Bran Cereals," picked a few brands I liked, and entered a bid -- legally binding and backed by credit card. A minute later, Webhouse let me know that one of the brands I chose would sell me a box at my price. The company charged my American Express account, and I brought my Webhouse card to the closest participating store (most New York chains have signed on) to pick up my bargain-basement bran. The only catch was that Webhouse had the final word on brand; if I had insisted on Kellogg's trademarked two scoops, I'd have had to pay retail.

The big idea behind Webhouse and the better-known Priceline, of which Webhouse is a corporate descendent, is "dynamic pricing" -- systems that adjust the value of goods in response to short-term changes in the market. The stock market is the prime example of it, and auction Websites like eBay have already taken advantage of the way the Internet can gather "bids" to bring the concept to regular consumers. Priceline and Webhouse take the notion a step further by offering consumers cash savings in exchange for their giving up a certain amount of convenience -- usually the guarantee of getting their first-choice brand.

In 1998, Priceline began to apply the concept to airline tickets -- the cost of which are manipulated to fill unused seats at the highest prices. By allowing customers to name the price they would pay to reach a destination, then running the offers through a database of discounted tickets to check for matches, Priceline gave people the chance to save money in exchange for their ability to choose carriers and flight times. It could take a savings of $50 -- or $200 -- for someone to switch airlines, but Priceline's system is based on the concept that every brand loyalty has its price. "If you absolutely want Kleenex, you'll have to pay the Kleenex price," says Jay Walker, vice-chairman of Priceline and founder of Priceline and Webhouse. "But there's a price at which you'll make a trade-off."

Dynamic pricing isn't exactly a new idea -- the old economy called it "haggling" -- and people are used to making offers on cars and homes. What we're not used to is dynamic pricing for so broad a range of consumer goods. Priceline is already brokering cars and hotel rooms, and Webhouse brings the model to tuna and toilet paper. And those are only two of the systems bringing dynamic pricing from the stock market to the supermarket. At Accompany.com, consumers bargain down prices on everything from electronics to clothing by joining cartel-like "buying groups" eligible for the kind of bulk discounts once available only to retailers. Haggle.com offers more gimmicky "shoputainment" that allows customers to negotiate with a computer program until they reach a match. Then there are the Coke machines being tested that raise the price of cola as the weather gets warmer.

Walker, 44, is more responsible than anyone else for bringing dynamic pricing into the mainstream. A Queens native who looks something like a cross between Carl Sagan and a Kennedy, Walker talks like a polished salesman, which is to say, with great ease, and often. In his Stamford, Connecticut, office, familiar grocery products like Tide and Oreos cover every available surface except the bookshelves behind him. "Those blue ones are the patents we've received," he explains, pointing to a neat shelf of about fifteen volumes. Walker specializes in patenting not software but "business methods" -- a brave new (and recently court-approved) world of intellectual property that has made him one of the Northeast's few Web billionaires. Just underneath sit four shelves of red books. "Patents we've applied for," he says.

"The thing with dynamic pricing is that it makes more and more of the world feel like the meter is running."

The mechanics of his Webhouse Club are surprisingly straightforward. Manufacturers update the Webhouse on how much of a given product they're willing to sell at what price levels. When a consumer makes an offer over the Net, Webhouse simply checks it against its supplier's database. The matches become sales.

Grocers -- who guard their 1-to-2 percent profit margins hawkishly -- get their full retail price from Webhouse in much the same way they're reimbursed by manufacturers for coupons. Manufacturers get "found" revenue -- sales they might not otherwise have had -- and an easy way to liquidate surplus inventory without having to advertise lower prices. And Webhouse gets the grocery sales, a small membership fee, and sponsorship and promotional dollars from manufacturers. Everybody wins -- except perhaps brick-and-mortar warehouse clubs like Costco and Sam's Club.

Stanford University's Ward Hanson, whose Principles of Internet Marketing has become required reading at business schools, agrees that Walker's pricing system is ingenious, but he thinks Webhouse might be taking the model too far. "We went away from the Mideastern-bazaar model for good reason: the cost in time," he says. "I don't want to negotiate for my groceries." Mike May, an e-commerce analyst at the New York Internet-research firm Jupiter Communications, agrees. "There's a segment -- the coupon clippers -- who will see this as an opportunity to save a few dollars each trip to the store. But the majority will avoid it."

Of course, those "coupon clippers" are hardly a negligible segment -- 100 million Americans, according to the Food Marketing Institute. For their trouble, they save an average of $4 on each trip to the store. The average for Webhouse customers is $12.

The recent explosion in business-to-business e-commerce stocks like VerticalNet, PurchasePro, and FreeMarkets (up more than 500 percent from its December IPO) hinges on investor expectations that they'll be able to bring the increased efficiency of dynamic pricing to the lucrative world of corporate procurement. VerticalNet, for example, sets up electronic exchanges for industrial supplies so the process of offering and accepting contract bids can happen in moments instead of months.

We've become a nation of traders. An unprecedented majority of U.S. households now owns stock in some shape or form. Thanks to the Internet -- both the medium itself and the ballooning stocks that represent it -- we know our bid from our ask. The Web doesn't just feed our obsession with investment upticks but lets the truly trade-happy get up-to-the-minute "quotes" on everything from Cayman vacation packages to tubs of margarine. Wall Street-style commerce -- frenetic, efficient, and calculating -- is spreading like a computer virus.

Walker likes to take the long view: "The larger idea is that things that are not monetized today will be monetized in the future, because the free flow of information will allow it." Given the right tools, Hanson concurs, "even small businesses like auto mechanics and hair salons can practice this sort of yield management" -- the MBA term for getting butts in seats by constantly rejiggering prices. Ticket prices for a blockbuster movie could peak on opening weekend and fall from there. Hungry? "If you said, 'I'm willing to buy a meal at Le Cirque or Jean Georges or The Four Seasons and I don't care which one," Walker says, "but I'll pay $50 a person for four people at seven o'clock, and the first of these three restaurants that takes my business is where I'll go' -- that's an acceptable Priceline proposition. A restaurant might say, 'We're a little light tonight; let's take that business.' "

So far, Wall Street likes the way he thinks: Even at 69 percent off its 52-week high, the twenty-month-old company is valued at $9 billion. But Webhouse, which hasn't yet gone public, will still need to acquire customers quicker than it burns cash -- and it could be a close race.

The notion that convenience has a price and that that price can be traded for cash might seem downright dystopian -- does anyone really have the time to talk price with his PC? On the other hand, dynamic pricing has been the dominant economic system for most of history; there's always a chance that we'll look back at price tags from 2050 as a historical anomaly -- an economic growing pain on the path to perfect efficiency.

But there will certainly be growing pains along the way. A lot of new dynamic-pricing businesses are "ignoring the hassle factor," warns Hanson. As an example, he points out that most cell-phone users actually buy more minutes than they need just so they won't have to worry about how much money they're spending. "The thing with dynamic pricing," Hanson says, "is that it makes more and more of the world feel like the meter is running." Which, now more than ever, it is.


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