ComputerLink articles by Brian Pitre

The Business of Internet Auctions

Auction sites are the darlings of the Internet lately; as demonstrated by the wildly successful initial public offering of eBay last November. Auctions can be fun and provide new and used products – often at significant savings. This new branch of e-commerce exemplifies and optimizes the frictionless free-market system offered by the Internet.

New Market
Although auctions can be fun they are also the epitome of the free market system and are creating new markets for closeout or overstocked products, collectibles, and memorabilia. Sites like eBay are called auctions, but are really the largest garage sales in the country.

Auction sites have also created a new market for the trade in collectibles and memorabilia. What a great place for buyers and sellers to meet and exchange goods in a way that has never been so convenient. It’s the new version of the taking goods to the town square - but you never have to leave your desk.

New Pricing
In this new market, consumers set the prices paid for goods rather than merchants. The net breeds a new group of educated consumers who are product savvy and are now in control of pricing.

Another revolutionary feature is the Reverse Auction presented by Priceline, where a consumer says, "I’m willing to pay this price," and the supplier decides whether or not it’s enough to deliver the product or service.

On the net, new industrial auctions are launching for many types of products. Many times the merchants are not disclosed—only the products, which can include closeouts and overstocked items. This method limits the impact on traditional distribution channels.

The Bid
After bidding on the auction sites for a while, it becomes apparent that only the last 30 minutes count. Often, bidding patterns demonstrate that only the last few minutes are critical to success. This creates an artificial price barrier if the bidder has to be online at 2:00 AM Pacific time to win a bid. The result is similar to the tactics of airlines that require a stay overnight on Saturday in return for discounted fares. There is no cost difference to the airline—it just creates an artificial price barrier and detours buying convenience for the business traveler.

Because of this last-minute run-up problem, new solutions are already being developed. One such remedy is the thirty-minute quick auction by First Auction. Another solution is using a custom application that will place your bid only in the last few minutes of the auction of your choice—a nice technological solution to a brand new Internet auction problem.

New Business Opportunity
EBay has the largest flea market with specific success in collectibles and memorabilia: "One person’s trash is another’s treasure." They advertise 900,000 products offered in over 1,000 categories.

Unlike some other sites, eBay offers the ability for anyone to sell products. New business opportunities are sprouting up for both full and part-time Internet sales. Some dealers of antiques and collectibles are, in fact, making a living using eBay as their sole storefront. Even offers of instructions and marketing advice are becoming successful products at eBay.

Getting Involved
The cost of getting involved is extremely low. Both eBay and City Auction have approximately the same fees. The insertion fee runs $.25 to $2.00 depending on the price of the item to be sold. Sites also charge a percentage of the ultimate sale price, called Final Value fee, which is normally 1.25% to 5% of the sale. Sites charge additional fees for options such as Bold, a listing in the Category Featured Auction, or the main Featured Auction site for additional exposure. Despite these charges, which are certainly reasonable, the costs of selling are decreasing significantly. In fact, Internet portal powerhouse Yahoo offers its new auction services for free.

The Transaction
When buying or selling high-priced item with strangers, whom do you trust? What if you never receive what the seller promised? What if the buyer never pays? In these instances, you need a trusted third party to mediate and provide independent escrow services. These services let you receive and inspect what you buy before sending your payment to the seller. I-Escrow buyers typically pay 5%. When using these services, buyers must make a decision to either approve or decline the sale within the agreed inspection period stated in the transaction agreement (normally 2 business days). Otherwise, the service automatically sends the buyer’s payment to the seller after the inspection period lapses.

Website Operators: Start Your Own Auction
You can create your own auction site by using products such as Open Site Auction (www.opensite.com). Why would you want your own auction? The reasons include the ability to create return traffic to your own Web site. Or you can create an entirely new category for your vertical market or dispose of excess inventory and closeouts on a regular basis.

Several key ingredients go into building a successful auction site. First, you must discern the market you want to address. Next, choose the right technological implementation—either an existing service or your own Internet server. Finally, you must develop the proper site advertising and promotion.

Internet consulting services and marketing agencies can be invaluable in creating auction sites and other E-commerce services for your customers. If your business is not specifically Internet oriented, you may want to enlist the aid of professionals to design and market your Internet sales operation. Be sure to check the E-commerce track record of anyone you entrust with this mission-critical piece of business. With the right resources, an E-auction could significantly increase your sales and get your business into the new frontiers of commerce.