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Penny auction sites hurt by gluts of competitors - an article by Bloomberg business o

Started by tobidtowin , Aug 13 2010 05:02 AM

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  • tobidtowin
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Hi everyone, I came across an article on Blommberg Business and like to share it with everyone. Please to have any comments or probably solution for the community benefit and learning. Happy reading


Penny Auction Sites Hurt by Glut of Competitors

Pay-to-bid sites, all the rage last year, are losing traffic, and profits have turned to losses.

Tons of competition is one problem

By Brad Stone

Over the last few years, Silicon Valley has become enamored of a new kind of e-commerce: penny auctions. On websites like Swoopo, BigDeal.com, and Beezid, flat-screen televisions, laptops, iPads, and other products sell for a fraction of their retail price. 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, called Swoopo.com in the U.S. and parts of Europe, has more than 150 rivals, with names like BidCactus and PriceSaver. A few are backed by venture capital. Atomico, the investment firm of Skype founders Janus Friis and Niklas Zennström, invested $6 million last month in a London-based startup called Madbids.com. Google Chief Executive Officer Eric Schmidt's venture firm, Tomorrow Ventures, also recently put an undisclosed amount into oohilove.com, 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. Swoopo's U.S. traffic declined 62 percent between January and July, according to Web tracking firm Compete. Beezid is down 50 percent and
BidCactus is down 37 percent during the same period. "There was no other business out there generating these types of profits, and that drove competition," says Paul Tsyrlin, a co-founder of an Atlanta-based penny auction site called Wavee. "A lot of folks were unprepared for how difficult a business this has become." Wavee's traffic has declined steadily since the start of the year, partly because it stopped
Some customers decided that bidding on penny auction sites didn't make good financial sense. Bidders might spend a total of $1,500 so that one of them could win a $1,000 laptop for $50. The sites found that many customers left unhappy after paying for bids but losing auctions. Last year many of the auction sites, including BidCactus, Swoopo, Bigdeal, and Oklahoma City-based Quibids, 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," says Tsyrlin. "The swing was massive, and the business became unsustainable."
Some of the larger sites are rolling back the rule changes. BigDeal, based in San Francisco, no longer offers a "buy it now" feature for popular items like iPads, citing inventory constraints. Swoopo now lets shoppers apply money they spent on losing bids toward only 25 percent of the price of outright purchases; before spring, users could apply the money toward 100 percent. Swoopo's chief executive, Frank Han, declined to comment.

Stone is a reporter for Bloomberg Businessweek.

The bottom line:
Startups and their investors rushed to get into the penny auction game. Now competition and unhappy customers are hurting profits.


  • op19
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I think the elimination of the Buy It option on Swoopo is why US traffic has declined 62%. And I find it hard to believe that, without the Buy It option, these sites are not anything but gambling sites and therefore illegal. It's not "entertainment shopping" if there's no "shopping". I've spent $700 on a $169 item and still not won the item.


  • Glendragon
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I only discovered Penny Auctions a few weeks ago and I think this article highlights some interesting problems that both site owners and participants face. One of the first thoughts that popped into my head is "How can anyone possibly make money running one of these sites unless they're blatantly ripping people off?" After experiencing a bit of it myself, I think there are two reasons the whole thing works: Some people lose more money than others based on a combination of luck and strategy; and people are willing to pay for a bit of fun and control while they gamble for things they actually want.

Personally, I love the fact that there are new sites popping up all the time. The site I started with sold a laptop for $0.70 two days ago just because there aren't enough people bidding. Sure, not all the auctions close that way, and they will eventually end up with as much traffic as the other companies, but finding these sites and getting in before they're too busy is an adventure in itself.

Then there is the issue of having too many users. If there are hundreds of people bidding on the same item, how can you ever have any guarantee of winning anything? When I hear about someone spending thousands for an item only worth hundreds, I know that site is going to face tough times in the future. If participants can't win anything, they will stop playing. The site needs more auctions, more categories of auction, or more restrictions on bidders. Many of these sites just keep coasting on their past success and wonder why they lose market share. The answer is simple: once they pass an optimum profit ratio, Penny Auctions are no longer fun or profitable enough for the average player. This creates an opportunity for new sites to arise and copy what everyone else has done before them. I think this article really identified the major issue, which is scalability: Penny Auctions make a loss when they're small, generate profit when they reach a certain size, then start to struggle when they get too big because they can't keep their users happy.

Thanks for sharing the article, it was an interesting read!


  • AKQJforme
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These sites only know how to advertise online (except beezid) and that space is becoming more and more saturated. Marketing and advertising is key...and from what I've seen they all suck at it. Especially the small little sites that pop up all the time and expect to build a successful site from one or two banner ads and posting on PAW.

You can sometimes hit a glass ceiling with online advertising and I'm afraid Swoopo may have hit it or they dont know how to resurrect it.


  • Glendragon
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You're absolutely right! The idea of using newspapers, direct mail, and sponsoring local events seems to be completely missing from their advertising strategy. I'd never even heard of a penny auction until someone told me about it. Apparently they've been around for years. Everyone I've told hasn't heard of them either. Strange how they seem to be so viciously competitive online but completely neglect traditional marketing methods.


  • TadaClurl
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