The Penny Auction Business Model

Penny auction sites are in the business of selling bids, not products. This one sentence, in a nutshell, explains what your job is as a penny auction site owner. Sell bids.

Users buy bids to use in the auctions offered at penny auction sites and that is the primary way that penny auction sites generate revenue. If you are interested in starting a penny bidding site or if you are interested in how the business works from the penny auction site owners perspective then this page should shed a little light on some things to think about before jumping in feet first into this deceptively difficult business to operate.

Pay Per Bid Business Model – Bidding Fee Auction

The business model of penny auctions is based loosely on the dollar auction theory introduced by economics professor, Martin Shubik which essentially is a game where two or more people agree to auction off a dollar to the highest bidder with the catch that the losing bidder has to pay as well (and does not get the item).

In this auction, bidding would naturally progress to $0.99c where the value of the prize is still more than the auction price but at this point, to save a $0.98c loss, the 2nd place bidder goes ahead and bids $1.00 to break even. At this point the bidder who was at $0.99 can minimize his loss to $0.01 by bidding again at $1.01. This cycle continues with both players wanting to minimize their losses. It has been said that a single dollar auction has gone for over $200 before!

Penny auctions work a little bit differently in the fact that they use a pay per bid model, or bidding fee auction. Since the business of penny auctions is selling bids, penny auction sites want to get bidders to buy bids and bid against one another to use those bids trying to win items that the site puts up for auction. In this model, all bidders pay money regardless of win or loss each time they bid and bidders are moved to keep bidding in order to win the auction and have the chance to purchase the item for the closed auction price.

Important Qualities Needed To Run A Penny Auction Site as a Business

I am not going to list out all of the things needed to run a business but try and focus on many of the unique challenges faced by penny auction sites in order to be successful in this challenging new market that is still early in it’s infancy.

Killer Customer Support – You better have a great support team that is knowledgeable and empowered to resolve problems quickly, fairly and efficiently. I think virtually everyone who has ever bid on a penny auction site has contacted support at one point or another. Your support team also has to know that they are generally dealing with people who are pissed off about something and demanding their lost money back. It is important to have a support team that can handle your volume of support and provides quality solutions.

Be Able To Buy Well (really well) – Buying at the best deals possible is essential to keeping your overhead down. You have to be able to buy the products you are auctioning off at the price points you need in order to get the absolute lowest prices possible from within the channel. Having reseller accounts at TechData, Ingram Micro, TigerDirect and volume discounts is essential. I imagine that not being able to buy products at a nice discount is one of the reason that it is somewhat difficult to find a penny auction site with gold and silver up for auction on a regular basis.

Marketing Plan – As the penny auction site business is evolving, owners are realizing that sponsoring posts on the popular penny auction forums or buying a listing at a popular penny coupon is not getting you the kind of traffic you really need. Your site may get a lot of new players but many of them are already established power bidders who do not have to build a reputation on your site in order to start winning incredible deals. You get the power bidders and the related community members who already know about said power bidders and not to bid against them on your site. Suffice to say, you need web marketing and sites that get traffic in the penny auction niche to list your site but you need a plan to attract users from different niches. If you notice, many popular penny auctions are advertising on football games, sports shows, adult cartoons like on cartoon network late at night, and other shows focused towards the 25-45 male demographic. You will also need a fantastic customer acquisition and retention plan because the majority of bidders are not going to win incredible deals but are going to lose money. You need a way to keep these bidders content and get them back to bidding on auctions.

Secure, Fast and Reliable WebHosting – Penny auction sites are a 100% online business in terms of selling your products. If your website is down you can not sell bids and users can not spend their bids. Your site needs to be fast and reliable as well. Penny auctions are a game and one strategy of playing that game is being the last second bidder so you have to have a fully functioning bidding engine that responds to those last millisecond bids. It also does not do well for a penny auction sites reputation if the website is down or if users can not access the site often. Invest in a quality web host.

Awesome Bidding Script or Bidding Engine – Along with your lightning fast website, you need a fully functional, responsive, engaging and useful script or bidding engine that users use to bid. There are a lot of penny auction scripts out there but there are still many challenges to be overcome to get a really quality penny auction script you can be proud of.

Processing – Moving That Money – The processing game is one that current penny auction site owners are learning about themselves right now if they did not know about this before. In a nut shell, it takes a company like paypal or some other company to get in between the movement of secure purchases over the internet. Paypal has recently stopped accepting penny auction site transactions at many of the bidding sites already. There are plenty of payment processors available but there is a cost involved of being able to quickly be able to accept a wide variety of payments that your customers demand. The processing needs to work seamlessly with your site as well because when people purchase bids they want those bids right away, not in 10 minutes.

Order Fulfillment – Being able to quickly process and fulfill orders. Bidders expect items to be shipped out usually within 48 hours of them completing the purchase of the auction with delivery usually within a week for ground shipping. You need to be able to manage all of the orders and make sure each and every one is accounted for, shipped and the customer updated of the process along the way.

Statistical Gurus – You need to be able to crunch the numbers and run many different scenarios when deciding intricate details of how your penny auction site will function, how you will price items if you have a buy it now feature, ways to calculate your average bid prices and a ton of other simulations and reporting tools so you can analyze your auctions closely and dissect what is and is not working.

Useful Penny Auction Site Owner Resources

PennyBurners forum – has a business section for penny auction site owners where you can openly discuss the latest industry issues, challenges and news and ask questions with a business point of view.

Warning – Penny Auction Business Model Not Sustainable – Research paper by Zhongmin Wang & Minbo Xu focusing on sophistication in bidding in penny auctions.

Penny Auction Affiliate Programs – If you want to make money in the penny auction niche then the fastest way to do so is to become a penny auction affiliate and promote your favorite penny auction site. Most of the legit penny auction sites offer affiliate programs and will pay you a commission for sending new purchasing users to their site. This website uses affiliate income to help us create the best list of penny auction sites online and if you can build a website you can promote most of the penny auction sites. As an affiliate you earn a commission whenever one of your visitors clicks on your links, visits a penny auction site for the first time, registers and makes a minimum purchase. Not all penny auction sites offer affiliate deals but the commissions you can earn and offers that are available can be found on an upcoming piece of content for this site and a quick penny auction affiliate deal overview can be found on our sister site.

Higher Risk Merchant Account – As mentioned earlier, processing is a major part of the penny auction business puzzle and you are going to need a reliable high risk merchant account.