The Penny Auction Business Dilemma: Letter from BidRail.com

frustrationPenny Auction Watch member sent us this e-mail from the recently shut-down penny auction site BidRail.com.

It’s very insightful and judging from my own experiences watching penny auctions come and go for the past 4+ years I think there are quite a few other past penny auction business owners who share a very similar story.

Collusive bidding practices have become the norm by a small group of penny auction bidders. Collusion is nothing more than stealing.  The sites that have lasted as long as they have are backed with funding and have been able to build sustainable and scalable penny auctions.

What would you do to make penny auctions sustainable for both bidder and owner? 

Join us in the Penny Auction Watch Forum to help us answer this question!

Here’s the letter from BidRail:

“Dear BidRail Customer, It is with great sadness and devastation that we have to announce the closing of our site.   When we first opened our site, we had great visions and beliefs of being the best most exciting penny auction site out there.  We offered so much to our customers and as you know we made many changes and improvements along the way to make our customers experience that much better.  All of which we thought would help take BidRail to the next level and to find much success.

However, due to the bidding practices of the penny auction industry, it has become almost impossible for any site to sustain itself and succeed.  More than 1/2 of the bidders out there refuse to bid against their so called “friends”. In addition, many of the bidders subscribe to the “tagging” approach which means they will not bid on an item unless they get the first bid in.

Well we along with many other defunct penny auction sites are prime examples as to why this approach will NEVER work in this industry.  It is not a coincidence that.. the majority of penny auction sites have gone out of business.  By definition, the word auction means competitive bidding against one another (no matter who they are) on items that the bidder is interested in winning.

Our advice to all those bidders out there, if you have any interest in keeping this industry alive you need to start bidding like a normal person would bid on an auction they are trying to win.  Otherwise we will be awfully surprised if any sites make it other than the couple of large ones out there right now.   We never in our dreams imagined that this is what the penny auction would turn out to be. We have devoted our lives to BidRail for the past three years. We always put 100% of our efforts into running a great website. When the funds started to run low, retirement funds were cashed in and are now exhausted.  Despite having to pay severe penalties and taxes for early withdrawal from the 401k’s and IRA’s, it was worth it to cash out in order to be able to keep the site going and mail out as many items as possible.

We are now out of options. Every single revenue dollar was put right back into the company to purchase merchandise to send out to customers and to pay for overhead.  The bottom line is we never made a single dime on this business which has been detrimental to us given the time commitment over the past two years.  Instead we lost quite a bit of money.  We have done everything in our power to try and secure a bank loan and/or find an investor but unfortunately this was to no avail.

Banks are not willing to work with penny auction sites as they deem them as high risk.  So in the end we had to fund this entire project with our own money.  We were able to sustain this for the past two years as best as we can even trying to introduce new features to draw in more business.  We offered more than any other site out there.  We featured our bonus board, grand prizes, doubling of auctions and until recently we were giving $.60 per bid towards the Buy It Now option even though a vast majority of the bids were being sold well below that price.

When we introduced our new reserve auctions, we set probably the lowest reserve prices on the market and we allowed customers to win as many items as they wanted with no limits.  All of this has contributed to the downfall of BidRail because of the fact that the offset was supposed to be from the sale of bids.   But when a large group of our customers refuse to bid against one another to the point where we rarely had multiple bidders on an auction, this offset never happened.  The sites that are successful have multiple bidders on every auction some auctions with 10 or more bidders but that never happened on BidRail.

In addition, we ran into many other unexpected hurdles along the way including trying to advertise in the most expensive advertising market in the country.  We did tv commercials, radio commercials all in the NY metropolitan area but with our small marketing budget this did not bring nearly as many bidders as we had hoped and expected.

Other hurdles encountered included shipping costs as well as paying full retail for our merchandise.  When we first opened the site we mailed our gift cards out just using a stamp.  We found many customers complaining that they never received their items and therefore we were forced to change to Priority Mail with tracking which became an incredibly high expense for us.

Additionally we were never able to secure a way of getting gift cards and items at less than retail value.  In order to run a successful retail business, it is necessary to find products at wholesale prices.  As we wanted to guarantee 100% that our customers received the exact item they had won (or one of comparable value) we had to purchase everything at full retail cost as we could not find an online gift card site that we could trust.  We knew that the items we were sending our customers were completely valid and legitimate.  Again this was unfortunately another issue that made it difficult for the site to sustain itself.

As the majority of our customers know, we were always in communication with our customers and treated them with the utmost respect. Please also do not forget that most of you have received hundreds of items and packages from us over the years so we are not just some fly by night site like so many others who took customers money only to run off and never send an item out or to be heard from again.  We sent thousands of packages out and most people made out quite well on our site.  Our main goal was to always put the customer first and to create a fun and fair environment for everyone to enjoy.  We were at least able to provide this for longer than most of the penny auction sites around.  We are devastated over the end result.  We had high hopes for BidRail and we cannot tell you how sorry we are that we unable to live up to them.

If by some chance, anyone out there is interested in investing in BidRail we would love to hear from you.  In addition, if anyone out there is interested in purchasing the site, script and/or name we would love to hear from you as well.  We will exhaust all avenues we can before closing down.  We could have done the cowardly thing as alot of the defunct sites have done and just taken off without an explanation.  But our relationship with our customers is important to us and we thought it was best to do the right thing and be honest and upfront about our most unfortunate situation.  We are terribly sorry that it has come to this but we see no other choice at this time but to close down.  We will truly miss BidRail.  It had become a part of us and we are so sad to see it go.  Sincerely, The BidRail Team”

What did you think of this letter?

I’ve seen this very thing happen to a number of sites. Unfortunately BidRail is right, when a small group of bidders ban together by “claiming” auctions and “befriend” other bidders… How do bidders even become friends and are able to discuss auctions in private? Via social networks. Bidders are using their bidding usernames on Facebook and contacting other bidders that way. Some have been said to threaten opponents.

The bidder who sent us this told me, ” They used to send many many wins together but charged for each one so they made out on shipping costs (happybidday does that too). ”

It’s a sad day when another penny auction site shuts down.

What was your experience with BidRail.com? If you bid there please let us know what your experiences were with this site, as you are invited to do with all penny auctions in our forum. Join, it’s free! 

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5 comments… add one
  • Destro1 November 18, 2013, 1:54 pm

    I was with BidRail from the start. Over time, they changed many things, including online communications, and adding the bonus board that gave away bids like crazy. In addition, for months, before the end, they sold bid backs at a discount, everyday.They can’t blame us, the bidders. hiding behind collusion as the cause. When an auction site has many bidders, a small group of colluders shouldn’t really affect the site. What is always overlooked is the power bidders, that intelligent bidders learn to avoid, and the bidders that purposely cheat by doing charge backs. No body plays on penny auction sites to lose money, neither the owner nor the bidder. BidRail should be held accountable for what they did. I offered to exchange my wins for Amazon money, many times, and at a lost to me, but they never responded to the offers.

    Reply
    • holisihlos December 8, 2013, 8:47 pm

      You are completely wrong. I was one of the players and can openly declare that Bidrail was and remains one of the best honest auction website. Customer Service without any doubts was GREAT !!! … STOP lying and spreading wrong information

      Reply
  • realcemetery November 21, 2013, 10:58 pm

    I was with Bidrail from the beginning and for a while it was a great site. The penny auction site is a hard model to sustain, and Bidrail cannot place blame on bidders for their lack of foresight. Destro1 makes a valid point, that intelligent bidders learn to avoid the “powerbidders”. After all, who wants to go up against someone who willingly would pay over a thousand dollars to secure a $100 gift card just to make a point? It’s the job of the penny auction site to bring in new business routinely to combat the people that collude, the people that choose to avoid confrontations with those individuals with deep pockets and other areas of concern.

    As mentioned above, Bidrail always and I mean always was behind with shipping. It’s true that for a time the communication/customer service was great but I don’t recall any of my items being received in less than three weeks. They waited and waited, charging $3-$4 to ship for each individual gift card, upwards of $10 for other auction items and then you’d receive one package with all won items from a given month. Talk about deceptive practice, how do you justify making customers wait a month for won items, paying over $100 combined shipping for one package that easily cost 90% less to ship?

    Don’t get me wrong, I loved the site initially. As soon as I saw the daily sale prices, the reserve auctions I assumed the site was hard up for cash so I slowly pulled away. Glad I did. Another one bites the dust.

    Reply
  • AnotherPerson December 20, 2013, 2:40 pm

    Hello. I’m one of the IT persons formally with a penny auction site that has since closed it’s doors. We never used bots or ripped any of our customers off. In fact, we ran a contest for an xbox 360 prior to our official opening. The winner cashed it in for amazon credits and never posted that he’d gotten it, but he was sure to keep in touch with IT on a daily basis to ensure he was still in the winning. Nice customer.

    The issues that Bidrail suffered from which caused their eventual closure happened on our site too. The majority of bidders will not bid against their friends and this kills startup sites.

    The collusion and tagging even tho most of you don’t want to admit it, basically allows you to rape new startup sites and that’s exactly what many of these bidders set out to do.

    How you can say that the site itself is responsible and should have taken better care to prevent this situation is beyond me. How do you prevent something that the majority of you are proudly and knowingly doing? You want something for as close to free as you can get it, and startup sites are easy pickings for the known tactics.

    We were virgin to this during our beta testing stages. All of our users bid against each other, as long as we gave them free credits. When we opened for real tho, that all stopped. Somebody would bid once and basically tag an item on our site and that was that.

    Some of our customers who seemed to like us alot during beta testing, immediately accused us of running bots when we opened for real and they had to buy bidpacks. They’d tag something and somebody would rarely bid against them. As the person wasn’t using a “known nick”, they assumed we had bots bidding against them.

    For the most part, when we opened for real and came out of beta testing, the bidders (our loyal userbase or so we thought) would tag items and that was that. We took steps to block powerbidders by usernames to prevent this; that forced people to use new nicks and us be accused of running Bots. We never ran bots on our system.

    startup bidding sites don’t really have a chance. The pool is infested with sharks. You pillage rape and plunder and blame the site. There’s next to nothing the site administration or IT staff can do to make this better. Power bidders will intimidate others, they’ll use their status to lie about your site and kill you that way when they’re done pillaging your resources. Bidrail ran longer than we did, but in the end, the rogue bidders killed it too.

    You won’t bid against each other, You won’t bid against so called power bidders, etc. How do you expect a site to function under those conditions? How long do you think a site without a huge userbase can run? The answer is: It can’t. It’ll either shut down, or have to resort to shady activities. We like Bidrail, chose to shutdown.

    On our opening day, we had 20 auctions running. We observed one bid placed on each item and on the first day, each item sold for that single bid. Not one bidder stepped up and fought for it. We did a little research and found various bidders on social media sites chatting it up with their bidding buddies; they’d agree not to bid on so and so, etc. So we took steps to remove specific usernames from being able to signup, to increase the chances of fair play for all. That caused bot running accusations.

    If you’re thinking about running a penny auction site, don’t. Unless you have a huge cash resource to pay for heavy advertising and a constant influx of new users who signup and buy bidpacks, you’re already sunk. When you open, you’re fresh meat. The power bidders will tag you and you’ll go under.

    Sorry if this offends some of you but the truth does have a tendency to do that. The business model cannot sustain itself without competitive users and you guys don’t want to compete with each other.

    Reply
  • AnotherPerson December 20, 2013, 10:40 pm

    Slight correction to my previous post. We gave away a ps3 during our beta testing with a contest, not an xbox 360. Sorry for the error.

    Reply

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