“The truth is that markdowns are getting out of hand.  Imagine a world with no more markdowns.  That is the world that BUYSTAND is creating.” – Ted Kraus, Founder & COO, Buystand.com

A lofty claim right? We’d definitely agree, but after sitting down and chatting with Kraus, an avid snowboarder and number whiz with a deep tech and financial background, this bold claim began to build merit as he explained his new company, BUYSTAND, which uses a unique take on the business model made famous by Priceline.

Kraus and his team of ten employees are currently beta testing their new etail platform, buystand.com, which partners with brands and retailers for inventory and lets shoppers name their own price on it. Using a proprietary system and algorithm  BUYSTAND automates matching a buyer’s willingness to pay with sellers’ willingness to sell in a pairing Kraus thinks will crush drastic markdowns and make the action sports demand curve fluid.

While it’s not live to the general public just yet, BUYSTAND appears to be a force to be reckoned with in the retail landscape. The site has already amassed $250 million in product in its inventory from brands and retailers, who can join for free, and has raised an undisclosed amount of funding from venture capital firms.

We caught up with Kraus to learn more about the model’s specifics including matching buyers and sellers, avoiding gaming the system, and his vision for the death of drastic discounting.

Tell me a bit more about where the idea came from and your background. 

I grew up in Memphis where it is relatively flat, but traveled quite a bit for mountain biking, kayaking, and snowboarding.  When I was a kid, I was kind of a fanatic about outdoor products.  I used to make lists of all the components I wanted for my next bike build and snowboard kit but could never buy, now it’s game on…

I've been in venture capital and technology commercialization for the last five years, first at Tech Coast Angels in Southern California and now at 8 Rivers Capital in Durham, NC.  I'm a Principal at 8 Rivers and lead investments in web tech so I get to see many startups—some good and some bad.  Most are apps that don't really solve a big problem.  BUYSTAND does.

The story behind BUYSTAND is one we can all relate to. I was with my girlfriend.  She wanted me to buy her something and I couldn't understand why it was priced so high, so told her I would take a picture of it and try to find it on eBay or Amazon or Craigslist at a better price.  We went home, I did the obligatory online searching, and couldn't find what she wanted anywhere for a price I was comfortable with.

The next day I was at my office and had the eureka moment—why can't I just create a buy-limit order on the products that I want, send that order out to all the sellers that have the specific item, and find out if any of them want to sell it to me at my price?  If a platform existed where consumers "willingness-to-pay" was matched with retailers and brands "willingness-to-sell", what would the implications be?  Would it solve a significant problem?  What would the platform look like to consumers?  To retailers and brands?

Focusing BUYSTAND on the active lifestyle/action sports industry was a no brainer.  We have a great team, a wonderful product, and are building lasting relationships with retailers and brands in the industry that we love.

Buystand Founder & CEO Ted Kraus

Buystand Founder & COO Ted Kraus

Any new business needs to solve a problem to be effective. According to the Department of Commerce, over $40 billion of inventory was sold below MSRP in 2011. How does Buystand seek to alleviate that problem?

By definition, seller-driven pricing is flawed because it is based on assumptions and sales forecasts from a previous time interval.  BUYSTAND is buyer-driven which enables real-time demand aggregation and profit optimization.  That means no more advertised markdowns to clear inventory.  This is great for retailers because it leads to higher margins and faster inventory turn.  This is great for brands because it eliminates brand equity dilution.

Is most of the gear you’ll be selling carryover or in-season? How do MSRPs come into play?

It depends.  In some cases we are selling in-line product, but the model works really well for both in-line and carryover product.  We have brand partners who love BUYSTAND because it helps them maintain their brand equity.  With buyer-driven pricing, there is no need to advertise markdowns to move product.  No advertised markdown equals no brand equity dilution.  We only list the MSRP as the sell-side asking price.  If there is an issue with MAP terms or dealer contracts, we work with the brand/manufacturer to help them solve the issue.

Buystand functions similar to a commodities market using an Electronic Communications Network (ECN) – can you explain this model a bit more?

In the financial services market, an ECN is a computer system that facilitates trading of financial products outside of stock exchanges.  Until now, stocks and currencies have only been traded on ECN's.

BUYSTAND serves as an ECN by enabling anonymity and efficiency gains that traditional seller-driven pricing, comparison-shopping and deal aggregation platforms simply cannot deliver.  The retailer or brand price is an "ask" and the consumer price is a "bid".  If they overlap, there is a market.  If not, we let the consumer know and they can choose to increase their "bid" price.  Retailers can change their "ask" price at any time.

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Consumers can put up to three prices in that are accepted later using a proprietary model you’re calling “333.” How does this work and keep them from gaming the system and sharing the lowest possible prices over social networks?

It doesn't make any difference if a consumer shares an accepted offer on any social network.  Our EDGE Pricing Technology treats every offer uniquely. We count an additional virtual accepted offer to help prevent gaming of the system by minimizing the effect of outlying prices.  If two or more offers come into the system at the same price on the same item, both will not necessarily be accepted or rejected.  It depends on several variables including time, remaining inventory in BUYSTAND, remaining inventory by retailer or brand, etc.  333 is our flagging mechanism.  333 means that consumers get three offers on any one product.  The offer status, either accepted or rejected, is released three times per day at 8 a.m., 4 p.m. and 12 a.m.

You guys are using a proprietary algorithm called EDGE Pricing. Explain how that works and helps retailers and brands get the highest value for their gear on the demand curve versus losing out on any incremental pricing between MSRP and sale prices?

EDGE Pricing is a platform that automatically matches a "bid" with an "ask" in a dynamically changing market.  It helps queue up offers, based on price, time, etc.  When we started thinking about how to develop EDGE Pricing, we focused on two intertwined problems.  We needed a way to eliminate seller-driven discrete reduction in pricing and simultaneously provide equitable order distribution between multiple retailers carrying duplicate products.

Current market economics result in lost profits due to the inability to capture the true demand curve.  We simply allow consumers to express their willingness-to-pay, and in turn, build a "true" buyer-driven demand curve.  In the event that multiple retailers accept the same offer, we use an algorithm to distribute orders equitably between them.

CEO Joe Davy and Founder/COO Ted Kraus

It would obviously take a long time for dealers to manually accept and reject offers, how does EDGE allow Buystand to automatically calculate the decision?

Accepting and rejecting offers works in a fully automated fashion based on rules set by retailers and brands.

Every consumer has a unique "willingness-to-pay" price and every retailer has a unique "willingness-to-sell" price.  With that, we assume that an acceptable offer for both the consumer and the retailer would be the converging point between the price spread.  From this convergence, we establish a baseline demand curve of offers from consumers, build out real-time demand streaming, establish a responsive acceptable offer floor and lay the foundations for equitable order distribution.

This process is totally seamless for the consumer and integrates easily into existing inventory management systems.  Other than a little bit of initial set up time for the retailer or brand, the whole process is automatic.  One of our philosophies is "let technology do the hard work".

You guys already have $250 million in inventory committed across the Buystand system. How much of that is in the action sports realm? What is the goal?

We are focused entirely on the action sports, active lifestyle and outdoor recreation market.  If we tried to sell every consumer product, you might see a snowboard next to a microwave or a tent next to a vacuum cleaner.  We love the industry we are in and want to help make it function in a more efficient and more profitable way for all stakeholders.  Our goal is to keep pushing forward and bring on as many retail and brand partners as possible.

We want to partner with all brands to help them protect their brand equity, and all retailers to help them achieve higher margins and faster inventory turn.  Anonymity and discretion are important factors.  I can tell you that we have large and small brands as well as large and small retailers on board.

How do sales work between brands and retailers? If people are bidding on gear that both a brand and retailer has, who wins that sale? 

This is a great question and exactly why we developed EDGE Pricing.  Brands and retailers are treated as equals.  "Who wins the sale" depends on a set of variables that go into our algorithm.

You guys don’t physically house any inventory. How do shipping logistics and costs work?

We don't hold inventory, so we monitor retailer performance really close to make sure we have the best service in the world.  Shipping is always free and customers have two weeks to return products no matter who the retailer is.  The customer only deals with us so they never have to wonder whom to call if there is a problem.

Who pays for shipping?

Shipping costs are taken into account by the partner and applied to their respective willingness-to-sell “ask” price. For example, if a partner sets their “ask” for a given item at $100, that price includes shipping. Conversely, if a person makes an offer on a given item, that “bid” price is their willingness-to-pay price for that exact item delivered to their door.

How do you keep shops that overbought on a particular item from selling it at ridiculously low prices that undermine price sensitivity for other suppliers in the system? 

In a traditional seller-driven economics model, this would be an issue.  The retailer in question would advertise a lower price than everyone else and potentially move more product than the competition.  This means there are market inefficiencies.   That is why there is such a big opportunity for BUYSTAND to succeed.  EDGE Pricing automatically regulates skewed sell-side rules by establishing values around variables other than price.  Some of these variables include how long a given SKU from a specific retailer has been available on BUYSTAND, how many of the same item are available from any one retailer and how many offers any one retailer is "winning."  These variables stabilize the system and make it fair for all stakeholders.

What were the toughest questions and functionalities you wrestled with in creating this?

We spent a lot of time on EDGE Pricing.  Without a properly functioning dynamic pricing algorithm, this model would be very difficult to automate.  Seller-driven market inefficiencies are obvious and destroying brand equity and profit margins.  Someone needed to step up and build a new model.  We did that.

What would you say to shops and brands that see this as just another way the internet is undermining sales and making retail a race to the bottom?

Retailers and brands are our friends.  We love them and want them to succeed!  When people buy stuff on BUYSTAND, retailers make more money, not less.  Because of the way the EDGE algorithm works, BUYSTAND gives the small guys a chance at actually winning against some of the massive conglomerates dominating this space, which is good for all of us.

Flash sales are undermining brand equity.  Show rooming and comparison-shopping are killing sales, decreasing margins and impacting inventory turn.  BUYSTAND is completely different and actually prevents the "race to the bottom" because there are no more markdowns.

You guys get some amazing analytics from people’s willingness to pay, almost like a “consumer goods ticker” to borrow your term. What metrics do you foresee being able to provide brands and retailers with? Will this be an additional paid service in the future?

BUYSTAND analytics can help make better manufacturing and supply chain decisions, monitor brand perception and allow for price sensitivity testing that has traditionally been cost prohibitive. The data we gather will help us build out features for both buyers and sellers in the future.

Anything I missed?

If you are a retailer or brand and you are interested in learning more about EDGE Pricing or partnership opportunities, please send an email to [email protected].

Ted can be reached directly at [email protected] or @tedkraus.