Do you know why penny auctions fail? And fail miserably, they do.
The following is a PAW Penny Auction Owner Insights article written by Chris, the owner of the 2+ year old designer handbag niche penny auction PennyPurses.com.
Have you ever wanted to start a penny auction website? Maybe you went to Quibids, Beezid, or one of the other successful businesses out there and you lost some money but you gained an appreciation for the potential to make money. You probably did some quick math, 2000 x $.60 = $1200 for a $500 Ipad. That means they made $700 right? WRONG.
I talk to new site owners all the time. I even did the same thing when I started my site. My advantage was I stated in 2009 when there were not a huge number of sites out there. I picked up a good domain, had the capital, and the rest is history. The story that no one knows or that no one thinks about is advertising.
How did you hear about the penny auction site you visited? Probably an advertisement. Its not abnormal for a penny auction site to spend $2-$10 for one CLICK. That means to get one person just to go the the site. So lets do some math.
$2 / Click
Now lets say that only 1 out of 20 people who go the the site purchase a bid pack.
$40 / Per Purchase. That means a site may spend $40 to sell one bid pack.
Now lets assume that each person buys 100 bids for $60. Lets take out the $40 in advertising, we are left with $20. Now go back and do the math. 2000 bids x $.20 = $400 for a $500 Ipad. $100 loss.
I am sure right now you are thinking well they may buy more bids, or they may buy until they win. You are right. And this is where sites start to make a profit.
Wait, what about “Word of Mouth”? My site is going to LOSE money first so everyone will tell their friends.
WRONG. When you lose money you lose money.
You actually encourage any half decent bidder to tell NO ONE so they can win. I have had many of phone calls with our winners who say, “Ill tell my friends once I win a few more items”.
What about free advertising? Good luck. The forums will bring you a few bidders. Most of these bidders have a reputation and before long you will be screaming, POWER BIDDERS ARE RUINING MY SITE.” Do a quick search for Power Bidders and see what you find here.
You can just add reserves so you don’t lose money, right? No, if you are going to charge a fee to bid on an auction, you must allow the user to be able to win the auction. Otherwise, what was the money for? In my opinion reserve penny auction sites are just gambling disguised as a Penny Auction.
So I am sure you are asking, why am I writing this? Maybe you are thinking I do not want more competition in Penny auctions. Of course I do not want more competition. The purpose of me writing this is to tell ANYONE considering starting a penny auction website to do research and seek advice.
If you want advice, start with someone who is not going to profit off you.
If you contact someone selling software for advice on starting a business, they are going to sell you software, not give you advice.
If you ask people in the forum they are going to steal items from your site, not give you advice.
Most businesses will fail. Your will certainly fail if you dive in with preparing.
Also, there are thousands of sites. Buy one, don’t build one. Let someone else do the hard work. Find one with a great name. You can’t slap Bids on a name and expect it to be awesome. Sure Quibids did it. They also had a ton of capital and a solid business plan.
Have questions, email me.
Chris can be contacted via chris[at]pennypurses[.]com.
Thanks for your insights Chris, you’re right!
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