Let us take a step back … in my eagerness to discuss the strategies on winning in a Penny Auctions I ignored the most important question, what is a Penny Auction?
Penny auction is not a ‘reverse auction’!! And if it is not that then what is it? Is it an auction?
Let me start with talking about different auction styles and highlight the difference before we dig more about Penny auction.
Reverse auction vs. Traditional auction
In traditional auctions you have one seller and many buyers. Buyers compete against each other and raise the bid price and hence generate high value for the seller.
Reverse auction you have one buyer and many sellers. Buyer quotes the maximum price he is ready to pay and then sellers compete against each other bringing down the price of product and hence generate value for buyer. Example priceline.com
Penny auction is a concept which is an evolution of traditional auction. Here both seller and buyers take risk and compete. Seller start the sale of process at a price mostly zero. So in the start the risk is for seller to sell the product at a loss. Buyers take risk by subsidising the cost of product they may not win in the end.
Every time a buyer places a bid on the product, the price of the product goes up by 1 unit (penny or cent) and for that they pay certain price to the seller. Each bid has a cost akin to an admission fee to participate in the auction.
Once the proceeds from the bid costs goes beyond the cost price of the product seller starts making profit. At this point sellers still can make large bargains as they still can win the product by placing a bid in the end.
Example:
Product – Laptop computer
RRP – £1000
Each bid costs £1
Auction starts at 0 pounds
Retailer profit depends on following equation =>
Participation bids*Participation bid + auction price of product = Cost of product
If X is number of bids then we can write the above equation as
- x*£1+x/100=1000
- 101x=1000*100
- x=990 bids
Seller will need 990 bids to make money
Buyer on the other hand has to buy the product below £1000 to make it worth while buying in a penny auction
X*£1+X/100<1000
Buyer and seller have same equation but with only difference being buyer has to bid less than 990 times.
Considering that their will be multiple buyers the buy side risk is shared by multiple users and buyers end up with.
But if it is so simple then why is called "eBay's (more) evil twin"?
Too make this model work there should be enough buyers and they should be drawn into competition to bid on the product. To make it interesting any company offering this auction has to create an auction cycle which is short enough and creates a sense of urgency.
This model cannot work with slow cycles as auctions will go for very long time and it becomes boring and time waste for participants. The urgency draws in people who may end-up spending a lot and hence its name the “Evil twin”
In my opinion it is another form of auction which uses a form of economic model where buyer and seller both share risk and can reap rewards if participate in a responsible and planned manner. Every market where one is looking for high returns will face risk, be it penny auction, stock market or even bond markets.
I have no intention of equating stock market to negligent size penny auction market, but believe me this market will be flooded with companies with similar or variants of this concept. And we will see few IPO's in this sector too.
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