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Getting a bulk rate online
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July 8, 1999: 8:12 a.m. ET
Internet purchasing networks yield lower prices for consumers
By Staff Writer Shelly K. Schwartz
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NEW YORK (CNNfn) - Lindsay Walsh is a penny-pincher and proud of it.
The marketing manager for CNET, Inc., an Internet content provider in San Francisco, spent weeks pricing the latest generation Palm Pilot -- the Palm V -- at retail outlets throughout the region before taking her search to Accompany.com.
"I had done some research and I knew you could get them cheaper on the Web than by just going to CompUSA (CPU) or any other retailer," Walsh said.
Accompany.com, Walsh discovered, bundles together individual orders for goods and services and sends them on to the supplier, who fills them at volume discounts. The larger the order, the lower the price.
"I have to admit, it was sort of fun watching the price drop [on Accompany.com's Web site]," she said. "It was sort of like gambling. I definitely got caught up in the moment.
Walsh waited to lock in her purchase order on Accompany's Web site until the price for the Palm V dropped to $400 per unit. By the time the purchasing window closed, enough buyers had climbed on board to drive the price down another $50-$100 off the lowest price she'd seen at the stores.
"It's this frenzied mentality," Walsh acknowledged. "I was calling all my friends and saying, 'Don't you want to buy?'"
That's just the sort of enthusiasm online volume purchasers are hoping to cash in on.
"These sites are starting to gain some notice and I think it's potentially the next wave of the future," said Steve Jones, professor of communications at the University of Illinois at Chicago and founder of the Association of Internet Researchers. "They are combining the more traditional retail Web model with a kind of community-based model where they bring people together to make volume purchases."
Analysts tracking the industry, however, say these relative newcomers to the e-commerce space have their work cut out for them.
"What I think will make or break them is whether they can reach critical mass fast enough," said Sue Rothberg, a senior analyst with Gomez Advisors covering the online auction market. "Are enough people going to come to the table to make this work? Critical mass will be key."
If customers feel cheated out of a bargain, she said, you can bet the farm they won't come back.
Blazing the trail
The two largest -- and so far only existing - volume purchasers are Accompany and Mercata. The two operate on different business models, but both offer consumers the same benefits -- discount prices through bulk purchasing networks.
Accompany.com, launched late last year, delivers discounts to consumers by partnering with Web site communities nationwide, such as Small Office and Administaff. Consumers who surf those sites, or go directly to the Accompany Web site, see a timed "cycles in progress" ticker indicating which items are for sale.
If they're interested, they can click on an item for a detailed description and photo. There's also information on how much longer the buy cycle will be open and how far the price has dropped so far.
At that point, customers can click on a button to lock in their purchase at the stated price. If it drops lower before the buy cycle ends, they're in luck. Accompany gives them the lowest price.
Accompany then takes each order received on its own Web site and those of its partners, bundles them together and places the bulk order directly with the supplier, with whom the company has negotiated volume discounts.
"It's a group buying experience that leverages the eBay effect," said Accompany President and Chief Executive Jim Rose. "Once people buy things they generate a lot of traffic. They tend to keep coming back and that's a lot of additional page views for advertising purposes."
Rose said the advantage to the community partners is that the transaction is invisible to the consumer. Customers ordering from Small Office.com, for example, never click off of that Web site, allowing Small Office.com to maintain traffic and create the impression that it's offering the discounts itself.
Accompany.com charges suppliers between 2 percent and 8 percent commission on each product sold using their network. The community partners get a cut of that commission.
"We take our service and private brand it to their environment, so as orders come in we run a large network underneath and we take orders from all our partners," Rose said. "It's all transparent to the user."
For the consumer, the service is free. Depending on the product purchased and the volume of orders received, Rose said discounts can range from 5 percent to 40 percent off regular retail prices.
The company sells everything from computers and camcorders to insurance products and sporting goods.
Mercata
So far, Accompany.com has just one competitor in the volume purchasing market, but it's a well-financed operation. Mercata is the brainchild of Microsoft (MSFT) co-founder Paul Allen. His investment company, Vulcan Ventures, is the sole investor.
"The reason we started this company is because Vulcan Ventures and Paul Allen asked us to build a new and rapidly growing e-commerce company based on a fundamentally new business model," said Tom Van Horn, Mercata's president and chief executive officer.
The company, launched in May, differs from Accompany in that it does not partner with Web site communities. Instead, it acts as the direct intermediary between large masses of consumers and the manufacturer. Consumers looking for bargains and volume discounts make their buys directly on Mercata's Web site.
"We are a retailer, like Wal-Mart or the Gap, in that we actually sell the products ourselves," Van Horn said. "We have direct relationships with the manufacturers and the advantage is that we negotiate the deepest discounts possible."
Mercata -- which sells electronics, home and kitchen appliances, tools, sporting goods, law and garden products and specialty gift items - has negotiated volume discounts with more than 150 manufacturers.
As with Accompany, Mercata's prices drop as more buyers climb on board.
"The bigger the group, the lower the price will be," Van Horn said.
The company posts photos and descriptions of the items for sale on its Web site. Those products are sold through so-called PowerBuys, which are limited-time buying opportunities.
While Accompany charges suppliers a commission for each sale made, Van Horn said Mercata makes its money "the old-fashioned way."
"We charge a slim mark-up or margin on top of our products, like Wal-Mart (WMT) would do," he said. "Our margin targets are lower than most retailers though because our costs are much lower."
While some mass merchandisers charge gross margins (or mark-ups) of 12 percent to 20 percent, Van Horn said Mercata's mark-ups are held to the "high single digit or low double digit range."
He noted discounts to consumers who participate in the PowerBuys vary based on the product sold and the number of customers who buy, but in some cases he said, customers can knock off up to 60 percent of retail prices.
"The discounts can be enormous," he said.
Although Van Horn won't release sales growth figures, he said business so far is "well ahead of the projections we had for ourselves in terms of revenue, order numbers and traffic."
The product categories, he added, are expected to grow as customer requests are added.
"We get requests all the time from consumers and they want us to sell everything from catnip to high-end automobiles," Van Horn said.
"One women e-mailed us on our second day in business and noticed we had a relationship with Cuisinart, but their ice cream maker wasn't on our list of PowerBuys," he said. "We had the item available and put it up on a PowerBuy."
She and a group of her friends purchased the item the next morning and together helped drive the price down from the "high $50s" to $48.
"You find that people are excited about driving the price down, even $10, because they feel empowered," Van Horn said.
Ultimately, Mercata hopes to sell a wider range of products using a range of media outlets, including cable TV. 
The future
For now, Accompany and Mercata have little competition, but Jones of the University of Illinois said that won't last long.
"I see these sites springing up more and more," he predicted. "What we are really learning about e-commerce is that this is a real marketplace and not just in the traditional economic sense of the word, but in a much more social sense."
He added: "It's like what you find in countries outside of the U.S., in bazaars in Turkey, for example. Everything's negotiable."
Rothberg said it's still too early to predict the ultimate fate of volume purchasing Web sites. But she said they are targeting roughly the same customers as uBid, Onsale and other business-to-consumer online auction sites.
Consumers who buy from those sites generally like the security that comes with dealing directly with a company - rather than another consumer.
According to industry data, the number of users registered with business-to-consumer auction sites is expected to grow a staggering 500 percent this year from 1998.
Some 4.5 million people are expected to purchase an item through an online auction by year's end. And those who are comfortable placing orders through auction sites, spend an average of $60 a month online.
"If Mercata and Accompany really take off, uBid and Onsale will be the ones that really feel the impact," Rothberg said.
Consumer-to-consumer sites, like the wildly popular eBay, which target a different group of bargain seekers, won't be affected at all, she said.
In the end, Mercata and Accompany will have to win over customers with deep discount pricing and quality merchandise. They'll have to keep them coming back with continually changing hot products.
"Their selection of merchandise has to be top shelf," Rothberg said. "That's what it's all about -- repeat business." 
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