Secondary Markets

While I might not like the Groupon model all that much, there’s one common practice that I despise without reservation, and that’s no-value-add secondary markets on new consumer products where supply can’t meet demand. The particular manifestation of this that bugs me is as follows:

This happens with many product launches; the most pronounced recent example I can think of was the Nintendo Wii, which had significantly higher-than-new prices on eBay for an extended duration. The practice harms consumers in a number of ways:

• It reduces the availability of the item through legitimate channels, and increases the difficulty of buying the item through those channels. One random sampling of a lineup during the Wii craziness indicated that half of them were just there to resell the item. The survey probably wasn’t accurate and I don’t think the problem was quite that acute, but it did mean that if the resellers were willing to line up starting at 4am to get at a new shipment of the item, you had to be too – or your odds of getting the item were 0%.
• It’s incredibly inefficient. Instead of being able to check stock online and even purchase for in-store pickup, you get to deal with a bunch of sellers through a variety of channels (eBay, craigslist, kijiji, etc), each of whom has exactly one item, and who’d back out of a deal with you 10 minutes before meeting if they got a higher offer.
• It’s unsafe. Not only is the buyers desperation a great way to lure an otherwise cautious consumer into a scam, you’ve got to meet a stranger somewhere carrying (in this case) $4,000 of cash – or pay and trust that they’ll ship something. Perhaps that’s an acceptable risk to save money, but in this case, you’re paying more.
• It may void or at least complicate getting warranty service on an item, especially if it was bought on one end of the country at a local store and then shipped to you.
• It’s worse for the retailer, especially online because pre-ordering is effortless. Speculators can buy an item, and if the price on eBay goes above retail, they sell it there and make a profit. If it doesn’t, they return it at no cost.
• It’s even worse for the product manufacturer. Sure, they sold out their shipment, but this would have happened anyways. But now, instead of delighted customers who bought into the product at launch, they have frustrated customers who don’t understand why so few were available. And sometimes, especially in the case of gifts for a birthday or Christmas, the consumer will buy a competing product instead.

There’s nothing here to like – it’s bad for the consumer, the retailer, and the product manufacturer alike. The secondary reseller is the only beneficiary of the practice, and they only benefit by creating scarcity and inconvenience for others.

Sports & concert fans have had to deal with scalpers for quite some time, though there, measures have generally been taken to prevent the practice (including making the practice illegal in some places, or requiring ID in others). With products, it’s harder; you can’t forbid people from selling property that they legally own.  Is there anything product companies can do? Sure:

• Price the product via auction until supply catches up with demand. The product is still more expensive to the consumer this way, but the benefits at least accrue to the product maker – and the issues of risk and inconvenience are address.  By definition, no intentional reseller will participate, because they could only pay a price at or above what the remaining long-term buyers are willing to pay.
• Same as the above, but with a dutch auction on each batch. This reduces the price to consumers, and is probably the way to go, except you’ve got to do this in batches which might be tricky (with a straight up auction, each time an item rolls off the factory line, you could send it to the current highest bidder).
• Yet another auction variation, in which the gap between the normal selling price of an item and the price paid by a consumer is donated to charity. This ensures the manufacturer has no incentive to create scarcity, and early adopters can feel good knowing that the premium they were willing to pay is doing some good in the world.
• Fans first. Let past fans of the brand have access a day before (or have higher priority pre-orders) than the general public. This is easiest when it’s easy to prove your allegiance to the brand (e.g. bring in your D700 to pick up your D800, provide your Xbox gamertag when ordering the next Xbox, etc).
• Price higher, with published, gradual, frequent price reductions. Consumers can decide whether to pay $3,300 now, or $3,200 next month.

Many products seem to get priced and sold as if we still live in an old retail world, where you need to post one price for everyone and stick with it for 6 months. The reality in the Internet age is that things can be much more fluid – and secondary market resellers are essentially taking advantage of this. Instead, the product makers themselves should recognize what’s going on, and build a product launch model that’s designed for the time we live in.

Consumers can help too, of course. If nobody ever paid more than retail on principle, this practice would vanish. Sadly, I don’t think this is likely to happen.

And yes – I’m still waiting for my D800 pre-order to ship, as you can imagine from this post :).