Getting a piece of the auction

Aug 01, 1999 9:30 PM  By

Once the province of the upper crust, auctions have gone mainstream thanks to the Internet. And catalogers are taking full advantage of the concept to rid themselves of discontinued, returned, and refurbished merchandise. Marketers as diverse as CompUSA, Ross-Simons, and Hello Direct are auctioning off products already, or are planning to, either on their own Websites or through third-party auctioneers such as eBay, Yahoo!, and Amazon.com.

And why not? In the first half of 1999 alone, 15% of all consumer e-commerce spending – $1.42 billion, more than from books and music – was on items bought via auctions, according to Concord, MA-based research firm Gomez Advisors. And according to new media research firm Jupiter Communications, over the next four years, consumers will spend $7 billion via online auctions.

Jupiter also predicts that online auction purchasers in the U.S. will grow from 1.2 million in 1998 to 6.5 million in 2002. While that number will represent only 11% of the total online shopping population in 2002, research shows that auction purchasers tend to buy more frequently than other consumers.

“Auctions provide a sense of urgency to buy today, since desired products are available for limited periods at limited quantities,” says S. Jerrold Kaplan, president/CEO of $207.8 million online auctioneer and computer marketer Onsale. “Prices change as customers compete against each other to `win,’ not just to buy quality merchandise at discount prices.”

For online catalogers, auctions can drive repeat business, boost average order sizes, and increase visibility. But above all, they are an efficient way to unload excess inventory. “Not only can we move discontinued merchandise such as jewelry and china, but auctions might work for limited edition or exclusive items as well,” says Peter Howard, vice president of marketing for jewelry, tabletop, and home decor cataloger/ retailer Ross-Simons.

The $205 million Ross-Simons will begin auctioning off discontinued jewelry on eBay this fall as a test. If the test works, the Cranston, RI-based company may create an auction on its own Website. “The Internet lends itself to the auction format,” Howard says. “It’s a further chance to involve our customer in the interactive sense.”

Some might wonder if the omnipresence of auctions is “training” shoppers to delay purchases until the items they want are put up for bid, much as frequent sales at department stores trained consumers to hold out for price cuts before purchasing. But most catalogers don’t see that as the case.

Fixed prices and online auctions “can co-exist. It doesn’t have to be one or the other,” says Dennis Waldera, vice president of direct marketing at telephony products cataloger/manufacturer Hello Direct. “There will always be a segment of consumers who will shop for the lowest price, and auctions feed into that. But there will also always be a segment that defines unique service and product as valuable and puts less emphasis on price.” San Jose, CA-based Hello Direct experimented auctioning off products with a third-party auction house and is considering adding the feature to its own Website later this year.

“And who knows?” adds Ross-Simons’s Howard. “We may get more for the item at an auction than we would have originally priced it.”

Mixing it up

If you want to auction off your overstocks, you can either place the items for sale with a third-party auction Website or create your own online auction.

Online auction houses such as eBay and Amazon.com charge listing or insertion fees that vary by the value of the item being auctioned. Fees typically range from $0.25 for an item valued at up to $10, to $2 for items worth more than $50. Boldface text and special listing placements cost extra. For example, both eBay and Amazon charge $99.95 for a listing on the main auction page; to have items listed in a specific product category auction such as jewelry or computers runs about $14.95.

Once you’ve sold your merchandise, these third-party auctioneers charge a final transaction fee or commission based on the amount of the auction’s winning bid. A typical commission is 5% for items that sold for up to $25; 2.5% for merchandise that sold for between $25.01 to $1,000; and 1.25% for items that went for more than $1,000.

In exchange for the fees, you get your merchandise in front of millions of shoppers, many of whom might never have heard of your company. Amazon.com, for instance, has more than 10 million customers; eBay boasts 2 million auction bidders; and Onsale has 971,000 registered members. Placing an item on one of these sites is in effect buying an ad that’s certain to reach buyers interested in your merchandise.

The third-party sites also do much of the work for you – monitoring the auctions and rating participants to try to avoid fraudulent bidding. They also provide suggestions on how to position or describe the product to boost its perceived value.

On the other hand, by creating your own online auction, you maintain control over your brand image, and your company won’t get lost in the crowd of other companies auctioning off their products on a third-party site.What’s more, you don’t have to pay placement fees or commissions.

Selecting software to do it yourself

That’s not to say creating your own site doesn’t entail any up-front costs. For one thing, you need the software to set up and manage the auction. Research firm Forrester Research found that 95% of e-commerce sites with auctions created their own software technology. But vendors including Microsoft and IBM are adding auction modules to existing e-commerce software programs. And a host of software providers sell online auction products.

Packages from manufacturers such as OpenSite Technologies and Moai Technologies range in price from $5,000 to $95,000; some software vendors charge an additional 20% of the license fee for technical support and maintenance. The most complete software packages include auction monitoring, an electronic storefront, banner ads, database integration, and dynamic page generation.

At the very least, when choosing an auction software program, you should look for functions such as bidder registration, real-time interaction between bidder and seller, background credit verification, e-mail notification, and integration with order processing systems. You also want some sort of database management function that maintains the products auctioned, the auction format, the site configuration, the e-mail specifications, and the names of the bidders and winners.

Like many other i.merchants, Cameraworld.com (formerly Camera World Co.), a photography, digital imaging, and electronics equipment cataloger/retailer, tested the auction concept via a third-party site before investing in its own auction software. In late March, the $80 million marketer began auctioning off refurbished, discontinued, and returned merchandise with Amazon.com. It quickly realized, however, that it would be better off setting up an auction feature on its own Website, which it did in early May.

“We found that the Amazon bidders were either browsers or not very serious about buying cameras, and most often canceled the order before completion,” says Cameraworld.com president/CEO Alessandro Mina. “With the auction on our Website, everyone who wins actually buys.”

The average number of daily visitors to Cameraworld.com jumped 20% once the marketer introduced the feature. But for all the hype surrounding online auctions, you’re not likely to see sales soar solely by adding an online auction. For instance, Cameraworld.com’s auctions so far account for less than 0.5% of its overall sales.

Unlike live auctions in the physical world, which usually take place in an afternoon, online auctions can take as long as two weeks. The extended time frame not only allows time for interest to build but also gives bidders time to research, bid, and rebid before the auction closes. But if you want to u nload inventory quickly or have small quantities of a certain product, you may want to consider a two- or three-day auction, which is the choice of computer marketer CompUSA. “The short time frame is a very efficient way to dispose of clearance merchandise,” says spokeswoman Suzanne Shelton. An even shorter time frame is the “flash auction,” which stays open for only an hour. The Sharper Image, for example, runs five one-hour auctions every Saturday, selling only proprietary products. Such speedy auctions create excitement and give bidders the feeling that they’re participating in a traditional live auction.

Two different forms of auctions are popular online. More common is the English auction, where competing bids increase within a given time frame. This auction format can be used to unload merchandise at the highest possible price point.

An alternative is the Dutch auction, where the cataloger sets the price high and then progressively lowers it until someone makes a bid. The Dutch auction format can be useful when you want to price-test. For example, you may want to run five auctions of the same product at different prices. The price at which the auctions close can suggest how much the public is willing to pay for that product.