BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
NEWS: ANALYSIS & COMMENTARY

A Revolution in Pricing? Not Quite
With the Internet, alternative systems are doable--just not desirable most of the time

Priceline.com flipped pricing on its head when it launched in 1998. Usually, businesses post prices, then lower them if no one's willing to buy. At Priceline.com Inc. ( PCLN), it was buyers who posted the prices they would pay--then raised them if no one was willing to sell.

Economists were gleeful. It was like detecting a new subatomic particle--a pricing model that had been theorized to exist but was never before observed. The early successes of Priceline, as well as online auctioneers such as eBay Inc. ( EBAY)and other dot-coms with alternative pricing systems, convinced many experts that conventional seller-posted prices were relics of the Industrial Age. ''We've suddenly made the interaction cost so cheap, there's no pragmatic reason not to have competitive bidding on everything,'' Stuart I. Feldman, director of IBM Corp.'s Institute for Advanced Commerce in Hawthorne, N.Y., said in a 1998 BUSINESS WEEK story.

NICHE APPEAL. Not so fast, folks. Although technology and venture capital have produced dozens of alternatives to seller-posted prices, most have flopped and none has moved beyond a narrow niche. For most products, and most consumers, a system of prices posted by sellers is still perceived as more convenient and fair. Says Robert L. Phillips, chief technology officer of Atlanta-based Talus Solutions Inc., which makes pricing software: ''It's going to be very difficult to build a business plan around a pricing model alone.''

Why did so many entrepreneurs and investors overestimate the popularity of alternative pricing schemes? Partly because they confused what's technologically possible with what buyers and sellers actually want. Auctions, for example, are suited for one-of-a-kind items whose value is uncertain, such as a painting that's worth nothing to most people but a lot to some idiosyncratic collector. The brilliance of eBay is that it opened auctions to a much broader public and lowered transaction costs so it became feasible to auction even low-priced items. But economists say that auctions have no advantage for mass merchandise because there's nothing idiosyncratic about the demand for it--it's just easier to slap on a price tag.

What's more, companies don't want to sell all their stuff to bargain hunters. That's why customers who buy via Priceline can't choose their airline or what time of day they'll fly. The airlines fill seats by appealing to price-sensitive customers who otherwise would not fly at all--without having to lower prices for their regular customers. To get airlines or other companies to participate, Priceline must keep its system deliberately inconvenient--which naturally limits its potential market. ''I see Priceline as a variation on coupons,'' says Hal R. Varian, an economist at the University of California at Berkeley.

There's still innovation in pricing. But it's focused on how to set posted prices. Companies are getting better at using instant feedback from the marketplace. Deborah Vollmer Dahlke, CEO of Zilliant Inc. of Austin, Tex., a Net pricing management company, says the number of price changes in desktop computers is going up 20% a year. Plus, companies are figuring out how to segment their customers by willingness to pay, as the airlines have long done. One trick: Publish a high list price, but send out coupons to price-sensitive customers who otherwise wouldn't buy. IBM's Feldman says maneuvers like that fit his loose definition of auctioning.

If this stuff doesn't sound revolutionary, that's the point. The revolution--alternative pricing--didn't live up to its press. Last spring, Priceline founder Jay S. Walker said: ''There have only been five pricing systems in the history of the world. This is the sixth pricing system. This one will become the preferred pricing system.'' Of course, Priceline's stock is down 98% from its peak. Maybe our ancestors weren't clueless about business after all.

By Peter Coy in New York, with Pamela L. Moore in Greenwich, Conn.

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