The Rise and Fall of Online Prices

How economic cycles shaped e-commerce—and why a downturn is nothing to fear.

by Dennis L. Prince
- Feb 02, 2010

If you're relatively new to online selling—be it on eBay or within an online store of your own creation—you might be preoccupied with concerns of your business' longevity during extended economic downturns. At these times, the pressure is on sellers to offer goods at much lower prices than before, causing some to fear this will permanently reduce their per-sale profit potential.

Take heart, though, because this is the sort of cycle that has run its course more than once in the online marketplace. While there's no denying that prices will recede at times like this, more experienced sellers know that recovery is often just around the corner. See how this online market was originally established, how it enjoyed unheralded success, and how the players have "come of age," so to speak, to weather bad times.

Remembering the 'good old days'

Those earliest online pioneers—they who were selling between 1996 and 1998—were gleefully astounded at the prices being paid for their goods. A then-fledgling online bazaar known as eBay was a veritable gold mine of opportunity, largely founded upon the collectibles and vintage-goods commodities. Buyers were abuzz with the excitement of bidding for rare goods and other curiosities, spending freely during a time of economic abundance.

The fact that goods could be found and purchased without global boundaries, and with just a click of a computer mouse, was enough to coax "newbies" to get online for the first time, with the sole intention to shop. The novelty of shopping online—coupled with the fact that previously elusive items were springing out of closets, attics and local shops, and onto the global online market—fed the overnight success of online merchandising. As if intoxicated by the allure of the online treasure trove, buyers feverishly, and often capriciously, paid above-market prices for the goods they found. Sellers savvy enough to jump onto this gravy train early were delighted to see their profits soar like never before.

The few sellers that staked an early claim in the arena were greeted by an outpouring of eager shoppers

A digital divide?

If the potential for reaping prices well over market value was so easy to tap, why didn't the market become immediately flooded with a sea of competing sellers and their competing goods during the earliest days? A look back reveals that buyers far outnumbered sellers, largely because online selling was something of a task to be tamed.

With very few of today's selling tools available to pioneering merchants, it was an arduous learning experience for sellers, many of whom were sitting down to a computer for the first time. As a result, the few computer-literate sellers that staked an early claim in the arena were greeted by an outpouring of eager shoppers. Since the pool of capable online sellers was much smaller, the sales prices of items rose in response to unprecedented buyer demand.

A current of events creates the cycle of economic ebbs and flows

At the end of the 1990s, the dot-com bust came along and fortunes literally vanished overnight. A shiver ran through the economy as many realized how quickly riches could evaporate when Wall Street flinched in a bearish manner.

Many who bought wildly, whether they were fat-cat investors or simply responding to the former economic glow, took pause and reeled in their spending. The bust was fast and furious. Yet those who were still left standing resumed spending, albeit more cautiously.

As the year 1999 flipped by on the calendar, though, a feared "Y2K bug" also sent many into a panic, afraid all their wealth would disappear when computers clocked over from "999" to "000." When the new millennium arrived without much of a hiccup, consumers breathed easy and began to spend again.

Then, along came Sept. 11, and the world shuddered as it pondered its vulnerability to those not interested in economic endeavors of any sort. Spending tightened again in response but relaxed within the subsequent year. A string of banking improprieties would arrive several years later and the wallet-tightening cycle would return.

As you can see, there is a pattern to all of this.

Are prices sinking below true item-worth, or merely settling back to reasonable market value?

Whose market is it anyway?

The result of a maturing online market is a change in the way goods are sought and sold. As you have seen, when more sellers can enter the online marketplace, more goods become available and it becomes a buyers' market. With competition building and once-rare goods becoming not so rare anymore, prices also drop in response to the increased supply. And, along the way, buyers have become savvy in locating goods, with many enlightened consumers resisting the impulse to "buy now at any price." They know there will be more—sometimes better—goods to choose from, today and tomorrow.

This "market correction," then, begs the question: Are prices falling too much? Put differently, are prices sinking to levels below true item-worth, or are they merely settling back to reasonable market value?

Yes, many items go undervalued during a stingy economy, especially when buyers re-evaluate their discretionary spending. Even so, buyers do still actively purchase nonessential goods during these times and sellers who have responded to the buyers' sensitivity to item prices (as well as being more attentive to item quality and customer service) seem to be faring reasonably well, nonetheless.

A fork in the road

And now sellers are at a crossroads of sorts: Are they prepared to sell their items at these readjusted prices, or will they stubbornly (or greedily) hold out for the inflated prices of yesterday—perhaps in hopes of another similar online surge? That is a question that can only be answered by each seller as they explore their own needs and motivations to sell goods online.

While there is no evidence to suggest the online market is in any danger of imminent extinction (look at how many cycles it has already endured), it's clear that the salad days of the mid-1990s are well behind us. And whether there's another boom just around the corner, undeterred sellers have recognized that it'll take good old-fashioned work and creative marketing to keep the business in the black—just as its always has.

About the Author

Dennis L. Prince has been analyzing and advocating the e-commerce sector since 1996. He has published more than 12 books on the subject, including How to Sell Anything on eBay…and Make a Fortune, second edition (McGraw-Hill, 2006) and How to Make Money with MySpace (McGraw-Hill, 2008). His insight is actively sought within online, magazine, television and radio venues.

Opinions expressed here may not be shared by Auctiva Corp. and/or its principals.

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