InformationWeek.com

Welcome Guest. | Log In| Register | Membership Benefits

March 6, 2000

Pricing Shakeout
The Internet and E-business are reshaping IT purchasing

Illustration by Catherine Parr

Related links:

Pricing Software Helps E-Businesses Grow Profits (2/14/00)

And from our sister publications:

Electronic Buyer's News Fabless suppliers face delays, price hikes (2/7/00)

InternetWeek Dynamic Pricing Meets The Web (2/14/00)

TechWeb Computer Prices Jump In Inflation Report (1/14/00)

TechEncyclopedia

Need a definition of a technology term? Look it up here:

Send Us Your Feedback

he new economy, forged by the Internet and E-business, is not only changing the face of IT planning and strategy, it's also overhauling pricing models for nearly every category of IT products and services. Vendors, eager to be seen as flexible in a constantly changing business environment, are offering IT managers more choices than ever in how to pay for technology.

The major forces behind much of the new IT pricing are the rapid growth of buying and selling over the Internet, the emergence of application service providers, and the growing number of small and midsize companies whose IT needs must be met. These and other trends have afforded IT managers more flexible pricing options-such as buying IT products online, renting applications, determining pricing based on the expected cost savings from the technology, and basing the price of products on usage.

The most dramatic change may be purchasing IT products online, either directly from vendors through extranets or from vendors or third parties via electronic marketplaces, trading hubs, and auction sites such as Beyond.com and NECX.com. In its fourth quarter ended Feb. 10, Dell Computer saw half its revenue come from orders taken over Dell.com, where orders averaged $40 million a day, up from $14 million in the same period a year ago. Networking vendor Cisco Systems sells nearly 80% of its products through its Cisco MarketPlace portal-almost $30 million worth every day. This trend will only increase, analysts say, as vendors encourage customers to buy products electronically because doing so saves vendors money by reducing sales and processing costs. Fortunately for buyers, those savings are often passed on to them in the form of discounts.

The percentage of InformationWeek 500 companies that used the Web last year to buy technology rose from the previous year in every IT product category, including PCs, notebook computers, Web browsers, antivirus software, operating systems, client and server applications, and development tools, according to an InformationWeek study (see chart below).

"Companies going from brick-and-mortar to E-businesses are changing commerce and pricing rules, and this applies to IT vendors," says Ruben Melendez, president and CEO of Glomark Corp., a Columbus, Ohio, firm that advises companies on how to get the best returns on their IT investments. "Many IT products and services are delivered, ordered, and supported through Web technologies, reducing total cost of ownership, which creates more price-competitive situations."

Snap-on Inc. saved about $1 million last year by buying Dell PCs over the computer company's extranet, rather than going through third-party distribution channels, says Alan Biland, VP and CIO at the Kenosha, Wis., tools manufacturer. Snap-on buys all its PCs over the Internet, Biland says, and it's also purchasing its office supplies through Office Depot's extranet.

IT buyers are also posting more requests for proposals on their Web sites and using electronic distribution for their RFPs, which generates more responses than the paper-based process. Melendez says this leads to more competitive pricing among IT vendors and better deals for users. Even though E-marketplaces and trading hubs normally charge fees based on the value of a transaction, buyers can save as much as 40% off retail prices. And it will become even more of a buyers' market as more products are offered on the sites.

These practices, in turn, will put pressure on IT suppliers to lower prices, says Eric Kintz, project manager of the E-commerce practice at management-consulting firm Roland Berger & Partners. "More and more commodity IT products and services such as PCs, mobile phones, and telecommunications contracts will be purchased through business-to-business marketplaces on the Internet," says Kintz. "These marketplaces will bring more suppliers and more price transparency."

According to the latest figures from Forrester Research, online business-to-business sales of computing and electronic products totaled about $50 billion last year and will rise to $395 billion by 2003. "Several years ago, buying on the Internet was a novelty," says Bruce Temkin, research director of E-marketplaces at Forrester. "Now, many companies are buying and selling online, and in two years it will be the way business is done."

chart IT executives agree. "We'll get to the point where if you don't buy electronically, you'll be penalized with some kind of surcharge," says Robert Reeder, VP of information and communication services at Alaska Airlines Inc., which buys networking products from Cisco over the Internet and expects to expand its online buying.

Despite the lure of buying IT products online, IT managers must exercise caution. Furr's Supermarkets Inc. in Albuquerque, N.M., limits its online buying of PCs and software to discount warehouses operated on the Internet by CDW Computer Centers Inc. and Micro Warehouse Inc. "We limit it to companies we're familiar with, because I don't know enough about it to look on the Web and recognize an illegal site from a legal one," says John Granger, VP of IS.

Whatever the approach to buying IT, one thing is clear: Customer requirements and new ways of delivering products electronically are leading to dramatic changes in pricing models.

continued...page 2, 3, 4, 5