Tech Industry

Value of goods in flux on the Net

Dynamic pricing models, in which the same product or service may be offered at different prices depending on circumstances, are becoming more common.

The DNA of business is changing.

Time was when transactions--buying a plane ticket, booking a hotel room, renting a car--took place at fixed price points. Now dynamic pricing models, in which the same product or service may be offered at different prices depending on circumstances, are common.

Deals used to take place in specific locations: a downtown store, a shopping mall, an office building. Now they can occur simultaneously in the real world and in cyberspace. More than anything else, time appears to be moving faster. Thanks to technological innovation, business models are evolving more rapidly than ever.

Vikas Kapoor, president of Walker Digital, a self-described "integrated business solution invention and development company," and Glen T. Meakem, CEO and co-founder of FreeMarkets, which conducts online business-to-business auctions, know their way around this new terrain. Both recently discussed these dimensions of change and the future of Internet-driven businesses with a group of Wharton faculty as part of the Wharton Emerging Technologies Management Research Program.

Walker Digital, founded by Jay Walker, who heads Priceline.com, says that its mission is to use the tools of the digital age to create business systems that unlock extraordinary value. "We like to say we invent the future or that we reinvent the future," Kapoor says.

Walker Digital is the marketing and commercialization vehicle where business concepts are developed. Ultimately, these ideas are given value through joint ventures, licensing agreements or carve-outs. Walker Digital has created some two dozen companies and has 400 patent applications and more than 3,000 ideas under consideration.

Kapoor noted that Walker Digital focuses on how information technology can improve and change consumer experiences. He used the invention of the postal network as an analogy: Its creation led to direct marketing and bill payment presentment in the mailbox. Those developments, in turn, gave birth to the credit card industry--in addition to junk mail. "What we ultimately remember is how these developments changed the customer's life," Kapoor says.

Walker Digital's best-known brainchild, of course, is Priceline. The company's value proposition was based on the fundamental concept of the downward-sloping demand curve, in which prices vary based on demand. Airlines faced about 500,000 empty seats every day. Walker Digital looked at the problem and the potential efficiency gains of shoppers naming their own prices for airline tickets and eventually extended the model to include hotel rooms and rental cars.

Though the company rapidly became well-known, at least in the United States, it has lately fallen upon difficult times. For example, in the first week of October it announced that it had decided to close down WebHouse Club, an affiliate that offers a gasoline and grocery service.

Despite Priceline's setbacks, Kapoor is gung-ho about future innovations. He talked about a not-too-distant future in which vending machines will dispense music in addition to soda and, with the addition of a digital camera, let a grandmother in Brazil video-mail her grandson in the United States.

Kapoor believes that dynamic pricing systems need not apply just to airline tickets and hotel rooms. Imagine a fast-food chain that applies the practice to burgers, french fries and more. A Web-enabled group of restaurants could use dynamic pricing systems that allow cashiers to reprice slow-moving items likely to spoil. The register, acting as a node on a vast network, could spread the word of specials or buying trends in real time. In both cases, the customer gets better prices, and the transaction experience improves.

Kapoor clarifies that Walker Digital's focus is not on emerging technology per se. "Technology, in the long run, will be commoditized," Kapoor says. "The information layer will be the differentiating factor." There's no telling what the channel of delivery might be in a few years. It could be a personal digital assistant, a phone, a TV set or even a refrigerator. For Kapoor, the customer experience is what counts.

Another new model
Much like Walker Digital, FreeMarkets is pioneering its own revolution with real-time online auctions for clients in industries such as consumer products, utilities and pharmaceuticals. Online business-to-business auctions are a growing segment of commerce models enabled by the Internet platform and are responsible for a fundamental change in the way companies buy and sell.

FreeMarkets operates in supplier markets such as industrial parts, raw materials and other commodities. On Oct. 10, for example, the company announced an alliance with FMC, which makes chemicals and machinery for agriculture and industry. FMC will use FreeMarkets' technology to buy goods and services around the world.

The Pittsburgh-based company raised $172 million in its initial public offering last December. It has created online auctions for products and services that have drawn together 5,000 participants and have amounted to over $7.6 billion in real market volume. Glenn Meakem credits the company's success to its strong foundation in basic business processes. FreeMarkets' marketplace includes proprietary online auction technology, access to a global database of suppliers and supplier research, call center support to buyers and suppliers in more than 30 languages, and standardized marketplace rules.

When asked about non-price factors that may influence buying decisions, Meakem notes that the technology allows bidders to factor in non-price factors. For example, in bidding for coal, companies are willing to pay more for high-BTU coal than low-BTU coal. The program transforms bids into benchmarks so that buyers and sellers can see the relative prices based on the energy output of the coal.

However, relationships still matter--even for the founder of FreeMarkets. Meakem was quick to point out that holding business-to-business auctions for services is challenging. The main reason is that it is often difficult to specify needs in advance. "If you are looking for a doctor, you probably don't have a specification in advance," Meakam says. "Your need evolves over time." He also admits that he would not care to leave his relationship with his attorney up to an auction.

Like Priceline, FreeMarkets pins its hopes on the Internet's "new economics," where information asymmetries are reduced, if not eliminated, and competition is driven first by price. But Meakem believes that companies like FreeMarkets may be a bit ahead of the curve. "We have incredibly fast technology," he said, "but the culture is not evolving as fast. You can do multiparameter auctions, but getting buyers to do this is not easy."

Cultural evolution simply doesn't happen overnight. Technological innovation is far ahead of social and economic changes, which results in delays in widespread usage, as the closure of Priceline's WebHouse Club clearly shows. Another huge constraint, according to Kapoor, is the ability to attract talent. As information becomes a lever of strategic advantage and knowledge workers become assets, companies' relationships with their employees must change.

Peter Drucker once wrote that knowledge workers should be turned "from subordinates into fellow executives, and from employees, however well paid, into partners." If Walker Digital and FreeMarkets want to sustain their business operations and turn them into long-term success stories, they will have to do just that.

 
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