What Goes Around Comes Around

From appliances to medical equipment, from aircraft to golf clubs, the Internet is giving consumers unprecedented access to a growing number of used products. Whether your market is consumer or business-to-business, the emergence of efficient electronic resale markets will fundamentally change the perspective and behavior of your customers.

Outlook Journal, January 2000

Is there any Internet-driven development that isn't being fully exploited for its eCommerce potential?

As a matter of fact, there is. Very few managers are focusing on the one development that ultimately could have the biggest impact on their businesses. The new reality is that whatever product you sell, at whatever price, your customers can now easily find a perfectly serviceable version for a fraction of your offering price. The only difference is that this steeply discounted product is used.

Take a simple example. In the market for a new coffeemaker? One of the more popular models being sold today is the 10-cup "Aromaster" by Braun, a division of Gillette. It retails for more than $70 in many stores. In early October 1999 the same model sold on eBay, the online consumer-to-consumer auction site, for $16.13—with assurances from the seller that it had been used "less than four times." Six other Braun coffeemakers, all pre-owned, sold on eBay within the same month (along with five Black & Deckers, 14 Bunns, 22 Krups and about 200 others).

Think about it: In the absence of easy access to an electronic resale market, would all these people simply have haunted flea markets for a year to get a good coffeemaker? Or is it more likely that eBay just diverted what would have been new-product buyers into a resale market—at the expense of Braun, Black & Decker, Krups et al?

Not inspired by small appliances? Here's a business-to-business example. GE Medical Systems makes "CAT" scanners and other medical equipment to sell to hospitals and doctors' offices, some with price tags in the millions. But in an era of healthcare cost containment, the market for refurbished equipment is taking off: The price of a used device can be as much as 75 percent less than the price of a new one. Neoforma.com, an online healthcare marketplace that opened for business in 1996 featuring a used medical equipment auction, already is generating 100,000 hits per week from 120 countries.

These are not isolated examples. In industry after industry, the Internet is granting end consumers unprecedented access to resale markets for all kinds of goods. Besides the catchall sites like eBay, there are specialty sites like Recompute for personal computers and GolfClubTrader.com for . . . you guessed it. And MyNextBoat.com offers many alternatives to buying a new Chris-Craft.

In the business-to-business arena, telecommunications equipment constitutes a surprisingly big resale market, as do set-top boxes for cable companies. Hundreds of other resale markets focus on goods from restaurant equipment to machine tools. Even robots can hope for a life after retirement, thanks to Robotic Technology Resale.

With new resale markets opening daily on the Internet and software companies now specializing in off-the-shelf market software (like turnkey online auction maker OpenSite), it's only a matter of time until resale markets are introduced or significantly enhanced in every industry. The lesson should be painfully clear: If you concede these resale markets to others, you will be leaving money—and likely a significant amount of it—on the table.

A Step Ahead
So if you're Braun or Chris-Craft or practically any established producer, will the resalers eat your lunch? Not necessarily. Companies that are attuned to these markets and willing to think creatively still have two ways to prevail: They can beat the new competition, or they can join them.
 

Consider the success of a traditional company like Royal Doulton in this light. As a producer of, among other things, ceramic figurines in limited-edition quantities, it's in the business of creating "collectibles" for which there will clearly be a secondary market.

But does a company like this worry about those markets and their potential to divert new-product buyers to used goods? Not in the slightest. The company depends on these markets because they demonstrate the brand's ability to retain or appreciate in value—which justifies the company's premium pricing at original sale. Where would luxury-auto makers Mercedes-Benz and Lexus be without resale markets to show their cars' worth?

The computer industry beats its resale markets in a different way. If you're like most people, you don't have the absolute state-of-the-art computer sitting on your desk at the moment. (To claim that you do, you would have to have bought it in the last 20 minutes.) Personal computer sales remain strong, despite the existence of myriad resale markets, because the industry innovates so rapidly.

Another way to beat your product's resale market is simply to keep tabs on it and learn from it. The very visibility of these new electronic markets makes them a rich source of information that can fuel the innovation that keeps the company ahead of the resalers. It's easy to imagine how a company like Gymboree—which sells popular children's clothing—could find valuable patterns in the 100,000-plus units of its garments being sold used online every year (not to mention its competitors').

Wider Margins
But for many companies, just monitoring secondary markets from the sidelines is not the best strategy going forward. They need to jump in and become active participants.

Studying how established resale markets have progressed is a good way to anticipate how new ones will emerge and what strategies will prevail. In particular, Accenture research points to three basic areas sellers should be targeting for active participation: reselling, refurbishing and retaining value. These areas reflect the stages in the extended life of a good that trades actively on resale markets.

Reselling the Goods. For some companies, it makes sense to take the plunge and create (alone or in partnership with other players) the resale markets their products will move through. These sellers recognize that a new sale occurs once, but a commission on the sale of used products is the next best thing to an annuity.

This, of course, is what the automotive industry figured out long ago. The used car market is one of those resale markets that didn't need the World Wide Web; it's easy to aggregate enough buyers and sellers on a local basis to have the secondary market work smoothly. In fact, today the used vehicle market dwarfs the new vehicle market in annual sales volume—and beats its profit margins.

How have the automakers capitalized on this situation? First by taking trade-ins—but more profitably, by pushing leasing, an alternative made possible by resale markets.

At least one computer maker has ventured into resale territory. Dell Computer recently established a used-computer auction site, accessible from its home page, to make it easier for people to unload that sorry sack of chips they have sitting on their desks now.

The obvious goal is to get buyers into the market for a new PC that much faster. Dell isn't deterred by the fact that some shoppers coming to the site intending to buy a new computer will be tempted to buy a used one instead. In addition, they have added an online refurbished products outlet to their Web site, where returned and slightly used products are reconditioned and sold at discount. Clearly, Dell is one manufacturer that understands the importance of engaging customers at every possible point of sale.

Quality Control
One major concern for any seller looking to organize a resale market is that consumers demand some assurance of quality control. Dell has addressed this by extending the warranty on its refurbished products to three years—the same length as on its new products.

Certification (la the "certified pre-owned" status conferred by auto dealers) becomes critical the more a product changes hands. Just as the tamper-proof odometer greatly improved the credibility of the used car trade, similar safeguards will need to be developed for other products. An example is the low-cost embedded processors that currently are placed on some shipping containers to sense whether a sensitive piece of cargo has been dropped or roughly handled.

It's not hard to imagine embedded, secure monitoring of products, from machine tools to refrigerators, to guarantee the level of wear and tear (was that coffeemaker really used "less than four times"?). It's also important to consider whether certification in your business must be performed by a third party to be regarded as trustworthy by customers. Short of creating full-scale resale markets, sellers can gain many of the same advantages simply by adding a trade-in option and having the processes in place to move the used goods back upstream. Once a company creates such "reverse logistics" capabilities, it can process the trade-ins that limp back two years after the sale just as easily as it processes the merchandise returned after two weeks because of buyer's remorse.

Refurbishing the Goods. A second major opportunity area for companies hoping to capitalize on resale markets is to enter the refurbishing business. The strategy has a number of things in its favor, not the least of which is that it's "green"—that is, environmentally friendly—which makes it one of those invaluable ways of doing well by doing good. (Currently only 17 percent of the durable goods sold in the United States are recycled.)

At the same time, sales of refurbished products can often earn higher margins than sales of new ones. Particularly for companies that have had to provide post-sale support and maintenance anyway, the new liquidity offered by online resale markets makes getting into the refurbishing business a clear moneymaker.

One lesson all companies that both create and refurbish products learn fast is the value of redesigning for longevity. It isn't simply a quality and durability issue; it involves anticipating how upgrades might be easily incorporated in a reworked unit.

Retaining Value. Finally, sellers can embrace resale markets by targeting the opportunities that arise from extending the use of the product. For instance, increased involvement in the total life of a product means more frequent customer interaction and a stronger basis for relationship-based selling. Who is better positioned than a company that buys used goods to know when a customer is in play?

Investing more heavily in branding is another strategy for retaining value in a world full of resale markets. The premium on branded merchandise—and the difficulty of selling unbranded goods—has always been great. But in online resale markets, where options are plentiful and future product performance uncertain, the preference for branded goods is amplified.

Every seller in today's economy should think hard about these three opportunity areas, and learn how to boost revenues and enhance profitability through reselling, refurbishing and retaining value.

Larry Bossidy, the legendary leader of Allied Signal, has a favorite exercise. He recently told Fortune magazine that he puts this question to his management team: "Who else out there is making money on our product—and do they deserve to?" The enormous, Internet-enabled growth of resale markets means that a lot of people are out there making money on your product. Should you be seeing a bigger piece of that action? Already it's clear that the emergence of efficient resale markets is changing the perspective and behavior of your customers dramatically. Ready accessibility to resale markets is leading to more rapid information gathering and decision making. And most of all, it's putting total cost of ownership (purchase price minus resale value) at the forefront of purchase decisions. It's hardly a stretch to claim that resale markets will fundamentally change the way companies sell to customers, the areas in which they generate the most profits and the strategies they must use to successfully manage the value and brand of their products

There are even signs that coffeemaker manufacturers are getting into the act. A recent Sunday newspaper insert proclaimed in 40-point type: "Bring in your old coffeemaker and take $10 off any Krups coffee or espresso maker of $75 or more!" It's an excellent tactic to get past buyers to upgrade faster.

So at least one manufacturer's management is coming around to resale markets as fast as its products have.

About the authors
Paul Nunes, a Boston-based senior manager in the Accenture Strategy group, is a research fellow at the Accenture Institute for Strategic Change. His work focuses on new and shifting roles for channel intermediaries, electronic markets, new IT-enabled business models and the challenges eCommerce presents to traditional organizations.

Julia Kirby is an Outlook senior contributing editor and a researcher and writer at the Accenture Institute for Strategic Change. A 16-year veteran of the consulting profession, Ms. Kirby has written extensively on the strategic aspects of eCommerce and the emerging area of attention management. She is based in Boston.

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