Online Reverse Auctions are Brand Killers

Brandweek, Dec 4, 2000 by Jacques Chevron

Many prophets of the Internet have predicted the demise of the brand, arguing that brands cannot survive because of the all-objective way the Internet allows for comparison of product attributes. And it is true that anyone wishing to buy a product can now almost instantly find a plethora of willing sellers, all conveniently listed on one's computer screen. In theory, the only remaining task for the buyer is to compare products on the basis of price and possibly service and delivery.

But, to the prophets' surprise, that prediction seems to have gone the way of so many other predictions involving high tech, like that of the "paperless office." Brands are alive and well and living on the Internet. Why is that? One of the key reasons for the healthy status of brands can be related to the way a brand is supposed to work. Brands were born from the needs created by the packaged goods industry When a housewife goes on a trip to the grocery store, she may be faced with 100 purchase decisions, each involving a relatively small amount of money. If she were to ponder each of those decisions, studying labels and comparing prices, any trip to the supermarket would take all day Our housewife therefore comes to the store armed with a series of acceptable choices for each of the products she plans to buy Those choices may be based on past experience with one or more products, familiarity with or recognition of some brand names, and a perception of values that are attached to those brands.

To avoid having to make time-consuming decisions painstakingly in the store, she is willing pay a small premium for those products that have a brand she trusts. That is what branding is all about. A brand is but predigested sales information to facilitate a purchase decision. The more decisions one has to make, the stronger the effect of branding. Herbert Simon, the 1978 Nobel Prize winner in economics, once said, "What information consumes is rather obvious: it consumes the attention of its recipients. Hence, a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it." To me, this statement is one of the best justifications given for the power of branding.

It also explains the strength of branding in the face of the Internet. The Internet provides lots of information. It can drown you in information, And, because we do not like to drown, brands become our attention management devices, our lifesavers, or at least our time savers when we shop. What is true when shopping in a department store becomes even truer when shopping on the Internet.

But branded industrial products face a different challenge. For one thing, transactions in the business-to-business world are fewer in number while at the same time larger in their amount. So, while the industrial buyer may also be subject to a large amount of information, he may not feel the need to take the branding decision shortcut. Furthermore, many industrial products are standardized and/or immediately comparable based on their specifications. Industrial buyers may be more sensitive to small pricing differences and may be less inclined to accept even a small price premium for the branded product. As a result, while the branding effect also exists in the B-to-B world, its importance is somewhat reduced.

The Internet offers other dangers to the industrial brand, Consider the problem of reverse auctions. A reverse auction is one in which the buyer rather than the seller is in control of the auction process. It goes like this: the company which desires to purchase, for example, 1,000 tons of calcium chloride will call for bids on a specialized Web site like www.chemconnect.com. The buyer can provide additional information such as the desired product specifications, where and when the product should be delivered, a target purchase price, payment conditions, etc. The identity of the buyer remains hidden from the sellers until the transaction is completed. The buyer knows which companies are competing for his business. In that context a company with a strong brand may still have a small advantage, particularly if the brand is associated with values such as reliability or customer service.

Some reverse auctioneers, like chem-etrade.com, for one, also hide the identity of the seller until the very end of the process. In this case the brand will not interact with the transaction until it is complete. The brand is thus dissociated from its product, which becomes a mere commodity. In this process, the brand becomes meaningless and comes out weakened for not being able to command its usual premium price.

This subject came up during a recent conference that I chaired on "Branding in the Chemical Industry". Participants wondered how they could be involved in reverse auctions without weakening their brands.

To me, the answer is very clear: Brands should stay away from anonymous reverse auctions. A product should never be dissociated from its brand so as not to become a commodity and reveal the pricing premium that it associates with its brand. Participation in an anonymous reverse auction places the brand at its lowest common product denominator: price.