Under the hammer

Online auctions can be a great way to create a loyal customer base and increase the liquidity of your inventory

Online auctions can be a great way to create a loyal customer base and increase the liquidity of your inventory

One of the most attractive qualities of the Web is its dynamism. Prices can change dramatically, depending on public opinion, and, until the commercial internet came into existence, it was difficult to reflect these changes in stores. It was also difficult for companies to unload excess inventory. Now, with the advent of online auctions, pricing models have become incredibly dynamic - your product is worth as much as people are willing to pay for it, and its value could change on a day-to-day basis.

There are three main categories of online auctions. The first, business-to-business (B2B), is garnering the most attention, thanks to the interest in B2B e-commerce. The second, business-to-consumer (B2C), is of most interest to retailers that want new channels in which to market their products.

Finally, we have the consumer-to-consumer auction, made famous by companies like eBay. These represent the most challenging business problems because they are most open to abuse.

Consumers will try to sell anything online; eBay has experienced everything from a girl trying to sell her virginity to someone trying to sell human kidneys. Managing this, and ensuring that people do not infiltrate site security or abuse privacy policies, is a full-time job.

Having said that, building consumer-to-consumer auctions is probably the easiest task from a technical perspective, because the products are fairly easy to understand and describe. Moving into a B2B model can present many challenges. Niche vertical markets often have products that need to be described in great detail for business customers, and so custom catalogue modules must sometimes be built. Take the post-accident auto industry, for example, where insurers auction off cars to the highest bidder. The vehicles must be described in detail to the satisfaction of customers, who often buy them in job lots.

Most current auction solutions are packaged, meaning they are provided as bundled solutions that can be customised. Two examples of such products are AuctionMagic from Unipower Systems and the Dynamic Commerce suite from Siebel (having bought its original vendor, OpenSite).

Alternatively, why not opt for an outsourced solution? Instil.com, for example, enables you to create a click-and-build solution with its AuctionServe and AuctionServe Express products aimed at small to medium-sized enterprises that do not have the resources to build and manage an auction in-house.

One of the advantages of an online auction is that the Web's interactive and collaborative nature enables you to play around with new features, for example, bidding robots that take a maximum bid from a customer and then bid up automatically as the highest bid increases. This enables customers to bid in an auction without having to sit online all day. It is similar to a sealed bid model in the physical world, where people hand their highest bid to the seller in a sealed envelope.

You can also make innovations in the structure of the auction. Some companies are experimenting with Dutch auctions, where the price comes down at set intervals and customers make a bid when the price appeals to them.

Another idea is collaborative, or bulk, buying, where groups of customers come together to offer money for a certain item, reducing the price as more join the group. E-commerce sites such as letsbuyit.com are pioneering this model.

An auction can be a great way of reaching your customer base on a regular basis by offering them a constant flow of deals. Doing this can increase their loyalty and provide you with a 'sticky' site that they'll keep coming back to, and that can be used as a portal into other products and services. It is also an excellent way to make your inventory more fluid and free yourself from cash-flow problems.

So, get your virtual hammers ready!

Show Me The Money

The most important consideration for any company looking to conduct an auction is how to make money out of it. If you are selling your own products, then this is not a problem - you are simply changing your own pricing model. But if you are running a consumer-to-consumer auction, the options are greater.

According to a report issued last year by market research company Forrester Research, the consumer-to-consumer auction market is set to grow exponentially, generating $19bn (£13bn) in revenues by 2003.

Currently, 70% of non-business-to-business auctioneers make their cash by taking a cut of every sale. Other sources of revenue include advertising (27%), product revenue from B2C sales (23%), and buyer fees (3%).

Of the non-B2B sites interviewed, only 12% of those launched after 1998 were investing heavily in minimising fraud. Nearly half, however, were spending huge sums on adding features to their sites.

This was last published in January 2001

Read more on IT for small and medium-sized enterprises (SME)

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