Online Auctions

Related Terms: Internet Payment Systems

Online auctions are sales transactions that result from a competitive bidding process conducted over the Internet. Whether the sales take place between individuals, between consumers and merchants, or between businesses, online auctions have enjoyed rapid growth with the spread of Internet access. The value of goods and services traded through online auctions is not tracked but is estimated to have grown rapidly in the last five years, from under $10 billion in 2000 to well over three times that figure in 2005. According to an Entrepreneur magazine article about online auction marketplace leader eBay, sales through that company's online auction space alone accounted for more than $32 billion in 2004.

The consumer online auction process has been described as being similar to a garage sale, with commonly offered items including collectibles, antiques, toys, clothing, art, cars, tickets, electronics, and even real estate. 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. Auction-related costs are usually limited to a small percentage of the final sales price.

Auctions have been a means of economic transaction for centuries. By moving onto the Internet, auctions have become accessible to a much larger number of participants, increasing the size of the marketplace dramatically. Although transactions between individuals are an important driver of the online auction market, the business-to-consumer and business-to-business portions of the market are growing rapidly. Online auctions offer potential benefits to all types of businesses. For example, since 2000 the firm SalvageSales has been helping insurance companies and their clients sell damaged shipments of commercial and industrial goods. In the past these salvage sale operations would have been handled locally, but the online auction option offered by SalvageSales has increased the size of the marketplace that can be easily reached in salvage sales. The same increase in market size is being seen across the board for both used and new products. Another example of an online auction-based business is Cashco 1000, Inc., a business started by a stay-at-home mother who wanted to try something she could manage from home while raising her children. Founder and owner, Angle Cash expected her business to sell $500,000 worth of home-decorations on eBay in 2005.

"Many companies wonder when and why they should use online auctions as part of their business trading strategy," Lori Mitchell wrote in InfoWorld. "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.

EBAY

By far the largest online auction host is eBay, a company founded in 1995 and through which an estimated 95 percent of all online auctions took place in 2005. Other online auctioneers include such companies as Amazon; Liquidity Services, Inc.; Overstock.com; uBid; and Yahoo to name just a few. But by far the largest online auction space belongs to eBay.

Small businesses may use eBay to boost sales in a number of ways. "Whether you're starting a brand-new business or just looking for ways to grow an existing operation, you can do it on eBay." This statement of introduction appears on an Entrepreneur.com Web site dedicated to providing guidance to those interested in setting up an eBay business. The site offers step-by-step guidelines for establishing an eBay account and creating a successful eBay vendor profile. The popularity and growth of eBay businesses can be seen clearly through a quick review of recently published books. There are more than 35 books that have been published since 2001 that deal specifically, in one form or another, with doing business through eBay. Many businesses have been formed based exclusively on the sale of products through eBay auctions and/or direct eBay sales and many others have taken existing retail businesses and expanded them by using eBay as a supplemental sales venue.

Starting Out

Becoming familiar with the eBay way of doing business is an important first step in becoming involved in online auctions. Browsing the www.ebay.com site, watching auctions, taking the virtual tours offered on the site, are all ways to become familiar with the overall eBay experience. No registration is required to browse the site.

In order to buy on eBay one must be registered. The key element in registering on eBay, for which there is no fee, is the selection of a User ID. Jim Griffith, author of The Official eBay Bible, advises new users to take care in selecting a User ID since it will be the official "handle" for all eBay transactions by that person or the organization he or she represents. It is crucial that a small company picks a User ID that is well suited to the company, conveys some meaning, and does not include the name eBay for reasons of trademark protection.

Selling on eBay requires a seller's account, and a PayPal account. Setting up a seller's account is a simple process very similar to the registration process, and includes providing eBay with sufficient information to verify one's identity and preferred method of paying seller fees. The seller fees are nominal and vary by category of item being sold. A PayPal account is necessary because it is the most popular online payment method used by eBay buyers. The PayPal system is owned by eBay and there is no charge to open the account. The account is either used as a deposit account into which the account holder deposits and withdraws cash as necessary or it is linked to a credit card that may be debited or credited as needed. The seller on eBay may choose to accept payments by any method he or she prefers but PayPal is the most commonly used method on eBay and therefore, the simplest account through which to manage eBay transactions.

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