Online auctions are sales transactions involving competitive bidding that are conducted over the Internet. Whether the sales take place between individuals, between consumers and merchants, or between businesses, online auctions have enjoyed a rapid increase in popularity. The value of goods and services traded through consumer online auctions more than doubled from $3 billion in 1999 to $6.4 billion in 2000, according to a Jupiter Research study quoted by Joelle Tessler in the Knight-Ridder/Tribune Business News. In fact, some business analysts claim that online auctions—by giving both buyers and sellers access to a vast global marketplace—have created a whole new way of doing business. "Online auctions are a method of commerce that did not really exist several years ago and couldn't exist offline on the scale it does online," Jeff Jordan of the leading Internet auction site eBay told Tessler.
As of 2000, the majority of traffic at online auctions consisted of transactions between individuals on hosted sites like eBay. The consumer online auction process has been described as being similar to a garage sale, with commonly offered items including collectibles, antiques, toys, clothing, and event tickets. Online auctions appeal to individuals who enjoy the competitive bidding process and like to feel as if they are getting a bargain. Most Web sites that host auctions allow buyers and sellers to negotiate payment methods and shipping details. Costs are usually limited to a small percentage of the final sales price.
Although individuals comprise the majority of current online auction participants, the future growth of the industry is expected to be driven by business-toconsumer and business-to-business auctions. Online auctions offer potential benefits to all types of businesses. "Many companies wonder when and why they should use online auctions as part of their business trading strategy," Lori Mitchell wrote in Info World. "The short answer is, if you sell goods and services or if you purchase items to run your business, online auctions can work for you…. Companies of practically any size and within any industry can benefit from them."
Internet analysts note that online retailers who incorporate auctions into their sales activities tend to see a higher level of repeat visits, more frequent purchases, and increased promotional opportunities compared to other online retailers. Auctions also offer advantages for those businesses interested in selling to or buying from other businesses. Some businesses choose to host closed or private auctions for their existing business contacts. But online auction companies may be able to assist companies in enlarging the audience for auctions by analyzing the bidding patterns of previous auctions to identify potential new customers.
BENEFITS OF ONLINE AUCTIONS
Online auctions offer small businesses a number of potential benefits with very few risks. After all, participating in online auctions does not prevent businesses from continuing to use traditional sales methods. In addition, companies can avoid financial losses on sale items by setting the minimum bid price high enough to cover costs. Among the few potential drawbacks are that buyers are not able to personally view and evaluate items before making a purchase, which raises the possibility of fraud. It can also be difficult to integrate online auction technology with the business's procurement systems. Finally, companies that decide to host auctions on their own Web sites may need to hire additional information technology staff.
Whether a small business participates in online auctions on a hosted site or sets up its own auction Web site, buying and selling items online offers a number of potential benefits. As Steffano Korper and Juanita Ellis noted in The E-Commerce Book, online auctions can help businesses reduce their distribution costs. Items to be sold online can be stored in one location until they are ready for shipping. This reduces the time and money spent packaging items for distribution to intermediaries, such as retail stores, and also helps eliminate the problems of damaged and missing goods.
Another major benefit of online auctions, according to Korper and Ellis, is that they enable small businesses to reduce their levels of surplus inventory, along with associated inventory carrying costs. Many businesses encounter problems disposing of seasonal, discontinued, or damaged goods. They either keep such items in inventory indefinitely, or end up marking down the prices until the items are sold at a loss. Online auctions provide a method for businesses to sell surplus inventory, often at a profit, and eliminate the expense of storing older merchandise.
Online auctions hold two other potential benefits for small businesses, as well. First, buying and selling over the Internet can help expand the global reach of a small business, opening international markets that would have been impossible to reach via normal marketing channels. Second, auctions can help new businesses—or those offering new products—to establish market prices based on supply and demand. Small businesses can use online auctions to gauge interest in their products and find out what customers are willing to pay. Furthermore, companies can collect such information quickly and informally, rather than investing in time-consuming and expensive market research.
HOSTED VERSUS IN-HOUSE AUCTION SITES
Small businesses interested in participating in online auctions have two basic choices about how to proceed. The first option is to join an existing online marketplace on a hosted auction site. A hosted site is usually a good choice for small to medium-sized companies that are interested in auctioning only occasionally. In contrast to creating a dedicated auction site, going through a host tends to give companies faster implementation and fewer start-up costs. In addition, this option requires little in the way of additional information technology staff to oversee the auctions. In general, buying and selling items through a hosted site is relatively simple. It only requires individuals and companies to have a Web browser and a digital image of any items they wish to sell. Fees are generally low, consisting of a small percentage of the sale price once a transaction is completed.
The second option for businesses looking to become involved in online auctions is to create a dedicated company auction site on the Internet. A dedicated site is the best approach for a larger company that plans to auction regularly and has adequate information technology staff to design and operate the site. Creating a site internally allows the company to exert greater control over the auctions and to integrate them into the overall marketing plan. The main drawback to this approach is that designing and maintaining an inhouse site can be expensive. In fact, Mitchell reported that implementing an in-house auction site can cost upwards of $100,000.
A wide variety of software packages are available to help companies that wish to hold their own online auctions. Some of the leading auction software vendors include Microsoft, Netmerchants, Open Site Technologies, and IBM. According to Korper and Ellis, Netmerchants' Auctioneer package is easy to install and administer. With options such as chat rooms, e-mail functions, and a built-in search engine, it is particularly appropriate for small businesses that plan to engage in consumer auctions. Open Site Technologies offers three auction software packages for businesses seeking different levels of complexity. One is a complete package for entry-level auctioning, one is designed for merchants who wish to build auction capabilities into an existing Web site, and the third provides a completely integrated solution for businesses that plan to emphasize auctions. "Auction software is starting to mature, making it far easier to manage the complicated transactional nature of these activities," Mitchell stated. "Business-to-business auctions are no longer solely the domain of the Fortune 500. With planning, any company can use auctioning to add to the bottom line cost-effectively and without headaches."
TYPES OF AUCTIONS
Whatever level of involvement a small business chooses, it is important to understand the various types of online auctions available. The most common type of auction is known as an open cry auction. In this type of auction, bidding typically begins low—either at zero or at a previously specified minimum bid—and proceeds upward quickly by increments. All potential buyers are usually made aware of the current bid and receive an equal chance to increase it. Open cry auctions tend to work best when buyers feel comfortable valuing the merchandise quickly.
Another type of auction is a sealed bid auction. In this case, the potential buyers receive no information about other bidders, including the amount bid. An example of a sealed bid auction is when a company takes bids from a number of vendors before awarding a contract. This type of auction is useful when potential buyers are unable to prepare bids quickly, or when the seller does not want bidders to have information about each other.
A Dutch auction basically works backward. Items are initially offered at a high price, and the price is gradually reduced until a bidder offers to buy at that price. The first person to bid is allowed to purchase the sale item. This type of auction is useful when a business is selling a few expensive items with high demand. In a second price auction, each potential buyer bids the most he or she is willing to pay for the item. Then the current bid amount is gradually adjusted downward until all the items have been sold. This type of auction generally works well when bidding is slow and the auction takes place over an extended time period.
In a forward auction, multiple buyers compete to buy things from an individual seller through a bidding process. In a reverse auction, however, one buyer requests a certain good or service from a number of sellers. The sellers then bid for the right to make the sale. Reverse auctions are expected to play a growing role in business-to-business transactions on the Internet, particularly for large, one-time purchases, such as a fleet of automobiles.
SETTING UP AN ONLINE AUCTION
Setting up an online auction requires a small business to make a number of choices in order to establish the rules and conditions under which the bidding will take place. Hosted auction sites usually offer sellers some options, while auction software packages vary greatly in the number of options they provide. Either way, small businesses should have input into the basic parameters of the auction process. For example, a typical online auction requires the registration of both buyers and sellers and the collection of sale items, along with digital images and descriptions. The seller may be able to establish the start date and end date of the auction, as well as determine which auction method to use. It is also important to select preferred payment methods and establish a process for delivering items to customers.
A small business involved in an online auction may also have input into various settings that control the way the auction works. According to Korper and Ellis, auction settings are incorporated into most software packages and can be adjusted through most host sites. Sellers can thus specify the minimum bid, or the lowest acceptable starting price for a particular item; the bid increment, or the minimum amount by which a new bid must exceed the previous bid; the minimum current bid, or the lowest acceptable bid at any point in time, given the minimum bid and bid increment settings; the reserve price, or lowest price the seller will accept for the item; and the start and end date, which define the period when bids are accepted. It is also often possible to set the type of auction (open call or sealed bid, for example), and the process for resolving ties. The seller should always establish the settings prior to the beginning of the auction and never change them once the bidding process has begun.