subject: The Decrease In Penny Auction Success Due To Over-competition [print this page] If you haven't heard of the craze created by penny auction websites, you might live under a rock. Auctions have becoming increasing popular over the last few years, as an exciting way to buy valuable products online for a fraction of the cost in stores.
On top of that, it can done from the comfort of your home, at any time of day or night. For this reason, more and more online penny auction websites began to pop up, until the market has become saturated.
This has created an unintentional decline in the success of these websites, and their bidders, in turn. On websites which offer these auctions, flat-screen televisions, laptops, iPads, and other products sell for a fraction of their retail price.
However, there's a catch: bidders pay a few pennies each time they bid, and each bid delays the ending time of an auction by a few seconds. The first player in penny auctions, Munich-based Entertainment Shopping, racked up torrid profits after it was founded in 2005, according to investors and entrepreneurs who studied the private company's performance.
Copycat operations popped up around the world. Now traffic on penny auction sites is declining, and companies are searching for a business model that works.
Entertainment Shopping has more than one hundred and fifty rivals, with a variety of different styles and products. A few are backed by venture capital.
Atomico, the investment firm of Skype founders Janus Friis and Niklas Zennstrom, invested $6 million last month in a London-based startup called Madbids. Google Chief Executive Officer Eric Schmidt's venture firm, Tomorrow Ventures, also recently put an undisclosed amount into Oohilove, a penny auction site specializing in women's luxury items, such as handbags.
The audience for this combination of shopping and gambling has not grown with the field, and the sites have driven up the price of advertising keywords on Google such as "cheap iPad." Buying key words on search sites is the primary way the auction sites advertise products for sale.
However, website traffic declined sixty two percent between January and July, according to Web tracking firm Compete. One major player is down fifty percent and yet another is down thirty seven percent during the same period.
There was no other business out there generating these types of profits, and that drove competition, when it first began. A lot of entrepreneurs were unprepared for how difficult a business this has become. Another major website's traffic has declined steadily since the start of the year, partly because it stopped advertising.
Some customers decided that bidding on penny auction sites didn't make good financial sense. Bidders might spend a total of fifteen hundred dollars so that one of them could win a one thousand dollar laptop for fifty dollars.
The sites found that many customers left unhappy after paying for bids but losing auctions. Last year many of the auction sites announced that losing bidders could "bid to buy," or apply the amount they spent bidding on an item to buying it at the retail price.
That destroyed the companies' profit margins. These companies went from minting money to making no money off the people who bid to buy, and then losing money on the person who won.
The swing was massive, and the business became unsustainable. Some of the larger sites are rolling back the rule changes.
Another major company, based in San Francisco, no longer offers a "buy it now" feature for popular items like iPads, citing inventory constraints. Yet another now lets shoppers apply money they spent on losing bids toward only twenty five percent of the price of outright purchases; before spring, users could apply the money toward one hundred percent.
As you can see, the decline in business due to over competition has caused a rebound effect that is driving away more and more potential customers from a venture that was originally very enticing in the shopping world. The only thing that will bring these businesses back up in the economy is if some of the lesser websites bow out of the race.
If the span lessens, the revenue will increase, and will in turn make the shopping and bidding experience better for everyone. Who knows what will happen in the next few years, but perhaps as our economy begins to react to the stimulus plan, we will see these websites begin to make their comeback.
