Trading Desk - Demand Aggregation Part II

By Khali Henderson

Posted: 07/2001

Trading Desk

Demand Aggregation Part II
This Time It’s Real Time
By Khali Henderson

Aggregating demand for telephony services is nothing new. It has been a common practice among municipalities and affinity buying groups for years. It was the basis for a rash of upstarts who, back in the late 1980s, lumped disparate customers under AT&T’s software-defined network tariffs–with the all-important multilocation billing feature-that were meant for single multioffice customers. Aggregation demand is still the underpinning of most agent agreements and resale tariffs, which reflect volume-buying discounts.

What is new is how demand aggregation is being done over the Internet–in real time.

The forum for this advanced form of demand aggregation on the web is the digital marketplace or exchange. “All marketplaces, by definition, provide a basic level of aggregation simply by bringing buyers and sellers to the same place,” say executives at MobShop (www.mobshop.com) in their white paper on the subject. “Yet transactions continue to take place on a one-to-one basis. Some market makers provide manual aggregation services or long-term pricing discounts. But this should not be confused with real-time demand aggregation.”

Real-time demand aggregation, they write, takes the work out of group formation by coordinating and aggregating orders from multiple buyers in real time around immediate spot purchasing or long-term contract needs.

Sound good? Theoretically, it is. Practically, it has been met with mixed results.

MobShop, for example, closed its consumer demand-aggregation portal earlier this year. Its closest competitor, Mercata, shut down in January. OnlineChoice.com (www.onlinechoice.com) took its last orders in April. Germany-based LetsBuyIt (www.letsbuyit.com) was snatched from the jaws of death by an investor and a major restructuring over the past few months.

Admittedly, these defunct efforts were not aggregating demand for telephony services alone, but they represent the viability of the practice generally–at least for the consumer market. A telecom executive with experience working with several consumer-focused, demand-aggregation portals told PHONE+ off the record that, “None of them work. Not one of them.”

Analyst Bob Parker, vice president and service director for

e-commerce strategies at AMR Research Inc. (www.amrresearch.com) notes that these sites never generated the level of activity needed to be successful. In the case of Mercata, he says, even heavy promotion couldn’t draw the buyers in.

Chris McKeown, founder and CEO at bundled utility services reseller ServiSense Inc. (www.servisense.com), says that in his company’s experience as a vendor listed with OnlineChoice.com, clients were delivered–as many as 200 to 300 per week–but it was not as a result of true demand aggregation. “Outwardly, you [the consumer] joined a pool and they brought you savings. In reality, people signed up for 5 percent off their phone service and they turned them over to us,” he says, noting that there was no dynamic pricing model at work, since that is ServiSense’s standard offer.

McKeown also notes that although OnlineChoice.com was a web-based venture, it delivered customers the old-fashioned way, by hustling. “OnlineChoice was behind the scenes actively e-mailing, direct mailing, telephoning and soliciting,” he says. “They even had people going door to door.”

Parker says that while the consumer model for real-time demand aggregation appears to be doomed, there is hope for aggregated purchasing for businesses and large organizations where common buying practices are more likely. MobShop has reinvented itself with this target in mind; it is leveraging its platform for potential buying groups found in the federal government and industry-specific business-to-business marketplaces.

For the record, real-time demand aggregation is not by definition a group request for quotation or auction wherein suppliers are bidding against one another for the consolidated buy. While some vendors and intermediaries offer this functionality as part of demand-aggregation services, one vendor says it is a model that is inherently flawed.

“Every time you mention group purchasing, people assume

co-op,” says Greg Mesaros, founder and CEO of eWinWin (www.ewinwin.com). “You get a group of buyers together to go after the suppliers [to lower their prices]. Mesaros notes that this strategy has been unsuccessful and, in some cases, downright lethal for early buyer-centric digital marketplaces.

“The way that we always sell demand aggregation–even back in 1999 when we started–is that the value of demand aggregation is when you give the power to the supplier and enable that supplier to group buyers pre-production,” Mesaros explains. “When you look at it from that point of view, it sheds light on the fact that there are operational efficiencies that you want to tap into with this model.”

eWinWin goes one step further in empowering the supplier by typically eliminating the intermediary altogether and selling its technology directly to the supplier as a private, supplier-sponsored marketplace.

McKeown sees merit in using the demand aggregation as the fiduciary provider, noting that the intermediary’s “bounty” business model does not lend itself to stability. “If you are not at the end of the recurring revenue stream, you become sort of held hostage to whatever your daily sales happen to be to survive,” he says.

ServiSense is considering implementing demand aggregation on its own; McKeown tried unsuccessfully to buy a demand-aggregation provider and says he is still looking into other acquisitions.

ServiSense may have a challenger for the pioneering role. eWinWin is negotiating the final terms of a deal to implement real-time demand aggregation for a prominent telecom carrier. In this scenario, the carrier would license a “deal room” on a hosted basis from eWinWin. The carrier, then, sets the price curve and the profile of appropriate buyers allowed into the deal room to view the price curve for the service offered. The buyers can be directed to the deal room by the carrier’s direct sales group or through other affinity relationships. One possible outcome is that all buyers with a certain minimum usage volume that sign up within two weeks will receive the group rate for the next year.

“[Another] idea they are considering is that if you sign an extended contract, you automatically get into the buying group,” Mesaros says. “As more companies are added, the price per unit goes down.”

Unlike auctions or RFPs that involve price negotiation, this model gives the carrier price protection, he says.

“The carrier puts out the price curve,” Mesaros says. “If the consumption pattern only goes one-third of the way down the curve, that’s what the customer pays. It’s not offer, counter-offer; it doesn’t work that way. There is no negotiation.”

In fact, the group purchasing does not have to hinge on price at all. The latest version of MobShop Seller, released in late May, allows suppliers to create and manage unique group purchasing offers in which value increases as more orders are placed. For example, dynamic offers may be created to improve warranty terms, include product extras or add other features as more orders are placed. This allows suppliers to protect margins and compete on factors other than price.

This kind of flexibility–along with limited time offers and predetermined pricing curves–may be in order for telephony services. Says McKeown: “What happens when 5,000 people get a 4.7-cent long distance rate, and then [the group] grows to 10,000 people? With demand aggregation, shouldn’t it become less than 4.7 cents? The reality is there is not a phone company out there that is going to sell any quality network and provide support services and make that thin a margin.”