Buy.com Thinks You're Worth More Than Margins|
By News Staff
(February 14, 1999)
Your eyeballs on advertising may be worth more than just a free PC (see related story). Buy.com thinks it can sell you what you want below cost and make it up on advertising.
It's a gutsy move. Buy.com's president, Scott Blum, says that he's got a different model of e-commerce economics which will allow him to forego margins and sell products below cost. The earnings for the company, he says, will come from the advertising he can sell because of all of the people who will come to his site.
There are many skeptics. Even though Buy.com posted $111 million in sales in 1998 (beating Compaq's record for the largest revenues in its first year) and expects to reach $700 million this year, sales without margins do not equate to earnings. Nevertheless, Buy.com has been backed with more than $60 million from investors led by Japan's SoftBank, and former Apple CEO John Sculley is on the Board of Directors.
Blum's idea is to offer Internet shoppers the lowest prices they can get on a wide range of products including electronics, books, videos, games and music. Buy.com sends out hundreds of automated search agents to review the prices on other e-commerce sites and then uses the information to set prices. To keep competitors from blocking his agents, Buy.com uses dial-up modems and other ISPs to cloak its searches.
The pricing is certainly aggressive. For a 3Com Palm Pilot organizer, for example, we found prices of $369.00 on 3Com's site, $302.97 at CompUSA online, $267.57 at CDW, and $218.95 at Buy.com, over $150 off of the suggested list price.
But like most Internet startups, Buy.com has yet to make any money. "Maybe for big-ticket items it might work," says a venture capital analyst, "but would you really abandon Amazon.com for Buy.com to save 50 cents on a book?" Another analyst comments, "this is cool until someone else says 'we can do that, too.' If Buy.com is 30% cheaper than everyone else because they're not taking any margin, they'll get a lot of traffic and eyeballs to sell. But if their model works, then lots of companies will do it, and there will be a lot of competition for the advertising dollars and the eyeballs."
Although it may not last, though, it does provide opportunities for the online shopper. Take advantage of it while you can, and remember that when you're shopping for price, always check for competing deals. You never know when someone else will try to go a little lower, even if it is below cost.
Buy.com isn't just causing problems for its competitors -- it's suppliers are under pressure about the low cost.
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