The Cutting Edge in Auctions


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HBR 2000 sidebar explaining the state-of-the-art in online auctioning.

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The Cutting Edge in Auctions

  1. 1. has eroded in recent years, largely as a result of focusing too much TRACKING CACHET: How much of the overall category was selling on the superpremium end and at a premium over the price of value brands in 1997 versus 1988? letting the main brands drift ten ward the private label. Unilever, 100% for example, failed to capitalize on the cachet of its superpremium Five Brothers brand by under- 80% investing in Ragu, which for 70% Soup some time had been a premium 60% 60% Yogurt product. If you lose the focus on building cachet for the entire cat- 50% Italian Sauce egory, you can expect your earn- 40% 40% Coffee ings to take a fall as weU. 25% Facial Tissues 20% Vijay Vishwanath and David Harding are directors of Bain & Company in Boston. 0% - 1988 1997 Reprint F00202 best practice The Cutting Edge in Auctions No, it's not eBay or FreeMarkets. It's not even on the Net. by Eric van Heck Until recently, auctions were a relatively exotic way to buy and sell goods. The Web has changed that. Electronic auctions have popped up like crocuses in early spring - several hundred now operate on- line. And yet the place to see state-of-the- art auctions is not on the Web but rather at one of a dozen or so auction halts in Holland, where nearly 60% of the world's cut flowers are sold each year. Because flowers are highly perishable, Sellers of time-sensitive goods on the Web should look the Dutch flower auctions are built for at the Dutch flower auctions as a model. speed. Every day, millions of flowers 60,000 transactions. Most of the flowers The key to the process is a method of arrive at Amsterdam's Schiphol airport. will then be rushed back to the airport selling goods, known as a "Dutch aurtion," They are then quickly transported to for immediate export. Thus, over a 24- that dates back to the 1870s. Unlike the nearby auction centers, the largest of hour period, a dozen roses can be shipped more common English auction, in which which covers the equivalent of about 100 to an auction center by a grower, pur- bidders push the price up from below, the soccer fields and can host up to 2,500 buy- chased by a wholesaler, delivered to a re- Dutch method starts with a high price set ers. By day's end, more than 34 million tailer, and end up in the hands of a New by the auctioneer. The price then drops flowers (and 3 million potted plants) will Yorker in desperate need of an anniver- until a buyer signals that he will take the have been purchased in the course of sary gift. goods. No actual bidding is involved. 18 HARVARD BUSINESS REVIEW ?Vlarch-April 2000
  2. 2. FORETHOUGHT At the Dutch flower auctions, the focal auction houses implemented their own price than they would have offered in point in each hall is one of three clocks buying-at-a-distance facilities in 1996. competitive hidding. that tell not the time but the price of a lot The on-line huyers, currently about 150 Recognizing those advantages, a few of flowers or other plants on display. The of the largest wholesalers, enjoy the ad- e-husinesses have adopted the Dutch clock hands tick downward until a buyer vantage of being able to get a better sense method. At, for exam- stops them by pushing a button in front of overall pricing and supply by partic- ple, a manufacturer that needs to ship a of his seat, indicating that he will pur- ipating in several auctions product from, say, Rotterdam chase part or all of the lot. Each transac- at once. But they are limited Dutch auctions to Chicago can use a Dutch auc- tion takes only ahout four seconds, while to huying common flowers tion to lease container space on the flowers go rapidly through the hall on that can he confidently judged tend to generate an oceangoing vessel. Like flow- large carts propelled by an underground from afar. The on-line auctions higher prices ers, container space is perish- chain. Once purchased, the flower lots are aren't suited to the purchase than traditional able - it disappears as soon as slapped with bar codes, identifying the of new, expensive hybrids - methods. the ship casts off. And because huyers and the prices, and delivered to orchids, for example - where the space is a commodity, buy- the various buyers' shipping areas. getting precisely the right color demands ers can lease it without requiring in-depth Not all the action takes place in the a physical inspection. information. As other companies launch halls. In 1995, one of the major importers Most auctions on the Web today use time-sensitive auctions on the Web, they established an electronic auction system the English method. But the Dutch too would he well advised to look to the that allows wholesalers to buy flowers on- method offers advantages, as the flower Dutch flower auctions as a possible model. line from remote sites. Participating huy- auctions reveal. For one thing, the Dutch ers connect their office PCs to the auction method is much faster. When a large Eric van Heck is an associate professor of clock via high-speed phone lines. To judge quantity of easily evaluated goods must business telecommunications at Erasmus the goods on offer, they rely on high- he sold quickly, it is ideal. Second, the University's School of Management in quality digital images and strict quality Dutch method tends to generate higher Rotterdam, the Netherlands. control by the auctioneers. As a reaction prices. To avoid losing a particular lot, buy- to this electronic system, the traditional ers will often stop the clock at a higher Reprint FooaO3 GENERAL MANAGEMENT AND SPECiALiZED PROGRAMS LEADERSHIP PROGRAMS Gateway to Business Management Strategies for E-Commerce May 21-26, 2000 May 7-10,2000 November 5-10,2000 September 24-27,2000 Tuck Executive Program Modeiing for Decision Making July 30-August 24,20O0 April 30-May 3, 2000 Global Leadership 2020 Marketing: Creating Customer Value A Consortium Program (or July 23-28, 2000 Global Companies in 3 modules Strategies for E-Business: beginning October 1,2000 Transforming the Suppiy Chain A Consortium Program in 3 modules beginning September 17,2000 Strategic Brand Management October 29-November 1,2000 "Ttie greatest limitation to growth is the availability of For further information, please contact: talented global leaders." Office of Executive Education The Tuck School of Business at Dartmouth Vijay Govindarajan Phone: 603-646-2839 Fax: 603-646-1773 Faculty Director tuck.exec.ed ©dartmouth .edu Global Leadership 2020 Program www.tuck.cfartmouth.eclu