It’s not a secret that in a penny auction bidders pay non-returnable fees to place growing penny bids. The last one becomes the winner, and the bidder purchases the lot at the final price, which, in many cases, is distinctly lower than the consumer price.
Penny auctions have been popular for decades; even the bad reputation of controversial examples cannot affect their popularity. That’s why every year, especially during deep economic recessions, penny auctions spring up like mushrooms after the rain. Before we discuss how to start a penny auction site, let’s cover the basics.
The first penny auction precursor dates back to 1931, Nebraska, the US. An American family of farmers can’t redeem a bank loan for the house and puts it up for auction. No doubt, bankers anticipate an immense profit from the deal. On the day of the auction a crowd of friends-farmers comes and frightens other participants to make petty bids. Finally, the bank gets only $5.35 and has to accept this payment as a loan. Since then, the popularity of the penny auction has spread all over Nebraska and later the world.
The predecessor of the modern online penny auction is German-based company Swoopo, founded in 2005; its US website started in 2008. By November 2010, in America, about 125 online penny auctions were under the control of the web traffic monitoring company Compete.com. The number of unique monthly visitors reached 25.1% of eBay’s total but declined sharply ever after.
Now penny auctions get back in line and occupy firm positions among all alternative trading options. Customers can win a lot and buy it at an attractive price. But how to make money on penny auctions in this case?
In March 1971, in the Journal of Conflict Resolution, Martin Shubik, an American economist and Professor Emeritus of Mathematical Institutional Economics at Yale University, published the article The Dollar Auction Game: A Paradox in Non-cooperative Behavior and Escalation. Here, Professor Shubik explained why the promoter of the dollar game usually dominates its participants.
To cut a long story short, an auctioneer auctions off a dollar. Both the highest (A) and the second highest (B) bidders need to pay in the end, but only one of them wins a dollar. The auction starts. Bidders increase by 5 cents. The willingness to win one dollar for a few cents drives participants to raise the stakes. The critical zone comes when A bids 50 cents, whereas B has to decide whether to scale up to 55 cents. Reaching this point, the cumulative amount of bids exceeds one dollar, and it is the auctioneer who wins.
Furthermore, the auction doesn’t end. Another critical zone is when a bid is about to surpass the amount of one dollar. A bids one dollar, to pay nothing in case of a win, while B goes $1.05 to at least minimize losses and lose 5 cents instead of 95. The terminal point can never come, and often Professor Shubik sold one dollar for $3 or $5.
This game shows how rational behaviour leads to irrational consequences. Yet, the question is why do bidders participate in the first place? Primarily, it is fun that drives them. When bids reach one dollar point, however, it becomes about outgaming the opponent. That’s how penny auctions secure profit. Bidding begins at the lowest and advances bit by bit. The unwillingness to lose the money from their bids spurs partakers’ desire to go on.
Today, penny auctions stir up debate as many equate them with gambling. Even more so, in some countries, penny auctions have the same status as gambling and thus are prohibited. In any case, the penny auction is a complex system. Its development requires advanced technical expertise, rarely shown by non-specialized IT companies or individual developers. Building such a system also demands a substantial experience in operating auctions.
As the potential entrepreneur of a penny auction, you might be asking how to set up a penny auction website so that it could survive in the ocean of look-alike websites and remain a success. Here’s what to do:
Go for a jurisdiction with an open road for penny auctions. There are countries that ban the auctions with paid bids of any model. That’s why you need to be especially careful and pragmatic when deciding on the country of your business.
You must be sure that your software is proven, fast, stable and customizable. More importantly, your provider company should be reliable and provide the licence to their product with regular updates to keep your project cutting-edge and let you outwin competitors.
Introduce various add-ons and think how to make processes convenient for buyers. For example, there are several options as to the money you collect from the bidders who didn’t win. One of them is to automatically send it back to the customer’s internal balances so that they could use it in newcoming auctions. Also, you can modify features, like time, bidding steps, user notifications and whatnot.
Elaborate on a reasonable marketing strategy for every stage of your project. You should promote your auction even before you launch it. Social networks suit best to get your target audience. Apart from that, SEO/AdWords is an effective traffic method; other tactics to use are CPA, blogging, social promotion, etc.
Make sure that your business is fair. Dishonest entrepreneurs always lose, sooner or later. Follow the number-one examples in the field and copy the best working ways to attract and retain your customers. Remember that customer care is crucial to the prosperity of your auction.
Think about the kind of goods to sell. Quality products on demand will put the crown of a penny auction on you. The variety of commodities depends on the region and your target audience. The most popular and well-sold products are electronic devices.
Plan what means of delivery to use because convenient sending methods stimulate customers to purchase more goods. Here is a tip: do not stock up all the lots. You can collaborate with dropshippers who can handle the stock for you. Alternatively, you can purchase products daily, which will prevent you from the excess leaveout.
Keep in touch with your customers; don’t leave them without attention. Every customer step involves unobtrusive backup and help. Add a page on How Do Penny Auctions work and supplement it with tooltips for ambiguous places on your website. Integrate a live chat or forum where users can share their concerns, issues and successful purchases.
According to statistics, each year thousands of people spend over $3 billion in penny auctions. This market is growing and stays open for new operators to take their share. Currently, there is no leader in the market. Major companies control around 5% of the turnover, meaning there is a good chance of revenue by running an auction.