Onsale.com Shifts Gears To Sell PCs At Cost

On Tuesday, Internet retailer and auctioneer Onsale, Inc. announced a major shift in its e-commerce strategy. In addition to selling excess computers and accessories through its popular auction site, the company will now also sell new PC equipment virtually at cost, meaning at a margin just $5 to $10 (US$) above the wholesale price that the company paid to its own suppliers.

The move signals opportunity for price-conscious PC shoppers, and may cause increased price competition. But there’s more to the story.

ixing its margin at just a few dollars per item, Onsale will need to generate profits through other means, such as advertising. The strategy seems a bit ironic though, given that so many content sites have had trouble selling ad space and are now turning to selling products through e-commerce instead.

Volume traffic and volume sales will be the name of the game. In fact, the disclosure letter to customers on the Onsale Web site indicates that, “The amounts invoiced by the Company’s vendors do not include any volume discount which may be granted from time to time by the company’s vendors.” This implies that the company can increase profits over time, as the volume of sales increases.

Financial Results

Onsale unveiled its new strategy the same day as announcing estimated financial results of $59 million for the fourth quarter ending December 31. The company indicates that it had to pay its own suppliers higher prices than anticipated in order to meet customer demand during a busy fourth quarter. Sales were good, but the profitability wasn’t there — hence the need for a new approach.

Total revenues for the quarter are expected to show a slight improvement over the previous quarter, at approximately $59 million. However, strong growth in sporting goods and consumer electronics, which now collectively represent nearly one quarter of the company’s sales, were offset by a decline in computer product revenue due to seasonally limited availability of goods during the holiday season.

Onsale’s president and CEO Jerry Kaplan explained that, “Availability of excess and refurbished goods — the mainstay of our online auctions — typically run counter to the normal selling cycles, particularly in computer products.” Thus, to eliminate reliance on such a seasonal market, the company came up with the plan to expand Onsale.com to include Onsale atCost, in addition to its exising Onsale atAuction.

The company anticipates that incremental revenue attributable to the new atCost business could reach as much as $100 million in calendar 1999. However, it will entail some unpredictable cannibalization of the existing online auction business. While Onsale atCost offers gross margins that may be lower than margins in the atAuction business, the company expects only an incremental increase in related operating expenses. In addition, the company plans to invest in a significant launch and promotional campaign throughout 1999.

Volume’s On the Rise

“We have nearly one million registrants for our auctions, most of whom are buying for their offices or businesses, but our customer research indicates that we are getting only five to ten percent of their capital expenditures,” said Mr. Kaplan. “Onsale atCost is an opportunity to leverage our customer base and online retail auction leadership into this new and complementary business.”

At the close of the fourth quarter, Onsale had 971,000 people registered to bid, an 18% increase from the previous quarter. During the quarter, 355,000 orders were placed compared to 350,000 in the previous quarter. Repeat customers accounted for 77% of the orders, unchanged from the previous quarter. In addition, the company averaged 1.2 million daily page views, and traffic averaged 139,000 unique visitors a day, a 22% increase over the previous quarter.

How atCost Works

Customers can now see a detailed breakdown of the wholesale cost and other charges before they buy, to make more informed purchasing decisions.

Customers visit Onsale’s atCost Web site to locate the product they want to purchase. They then request a real-time inventory check and detailed pro-forma invoice which lists invoiced cost, Onsale’s processing fee ($10 or less per item), payment processing charges (currently 2.4%) and shipping fees. After the purchase is confirmed, the order is transmitted electronically directly to a supplier for shipment. In most cases, the product will ship on the same day it’s ordered.

Onsale’s online Customer Service Center lets customers see detailed status of their orders, 24-hours a day, seven days a week. Customers can find out when their credit card is charged, when the order is transmitted to the warehouse, when the product is shipped, and when the product arrives at its final destination.

Onsale atCost features 35,000 computer-related products at Onsale’s invoiced amount, plus any credit charges, shipping and handling fees. Onsale has engaged PricewaterhouseCoopers LLP to attest to Onsale’s wholesale pricing policy, including a signed letter posted online.

Onsale atCost complements Onsale atAuction, a large retail auction site that specializes in selling excess merchandise and services including personal computers, consumer electronics, sports and fitness equipment, and vacation packages. Both Onsale atCost and Onsale atAuction are located on the World Wide Web at www.onsale.com. Company headquarters are in Menlo Park, California.