THE BLOG
03/11/2013 04:12 pm ET | Updated May 11, 2013

Online Auctions Become More Competitive

Online auctions were supposed to change the way people shop. Technology enabled dynamic pricing would create an efficient way for demand to meet supply by reducing transaction costs (such as setting up a physical auction site) while increasing the pool of potential bidders. Sounds logical but the irony of economics is the assumption that humans act in a rational manner.

Founded in 1995, eBay is regarded as the first and most dominant mass online auction site. But even for eBay, online auctions declined steadily for the past 10 years. A recent Stanford University paper, "Sales Mechanisms in Online Markets: What Happened to Internet Auctions?" analyzes the decline of auction share from January 2003 to January 2011. During that time, eBay's revenue from daily listings activity declined from more than 90 percent of total revenue to less than 50 percent. As a percentage of all listings the fall off of auction listings was even more dramatic, falling from nearly 95 percent of all listings to less than 30 percent. This reflected the overall industry trend of online fixed pricing commerce growing rapidly and online auctions declining.

Flash Sales

The dominance of fixed or posted pricing became more pronounced with the advent of "flash sales sites." The top U.S. flash sales merchants, including Gilt Groupe, Rue La La and HauteLook generated more than $2 billion in 2012 sales and total retail e-commerce reached $186.2 billion in the United States in 2012. These sites offer more transparency and predictability. As a member of the site you were informed when a sale would occur, what was on sale and how long the sale would last. The transparency of the pricing is crucial because the clearance price for the luxury label items is why you buy from these sites. I have used flash sites as both a member making purchases and as a vendor selling product.

So what's next?

E-commerce and the online auctions industry is very fragmented. The industry research firm IBISWorld reports that small companies make up over 75 percent of the market. The two largest players (Amazon.com and eBay) are expected to account for about 11.4 percent of industry revenue in 2012, with no other company holding more than 5 percent market share. So the barriers to entry are low but this also makes achieving scale more difficult.

A twist to competitive bidding

I was told by a friend to try out a new auction site called Bizulu. (I co-own a women's apparel brand called 51inc and we listed several pieces on Bizulu) What sets Bizulu apart is their use of "gamification" in their auctions. Gamification is the use of game mechanics and game design techniques in non-game contexts. I had not realized how pervasive gamification is. According to Gartner by 2014 70 percent of Global 2000 organizations will have at least one "gamified" application.

They do this in two ways:

1. Their flash sales only last five minutes
2. There is an element of strategy or gamesmanship as one bidder can "blitz" another bidder

When I interviewed Brendan Smith, the founder, he told me that he and his coworkers observed more than 800 auctions over a five month period and they noticed that 80 percent of the "action" occurred in the last 5-10 minutes. Also, a five-minute auction allows time constrained people to participate and see the result. I imagine that's as close as one can get to immediate gratification participating in an auction. Bidders have to be 'present' the full five minutes which reduces sniping (the practice of placing winning bids at the last second).

The "blitz" is an amount that can be used to reduce the amount of a competing bid. A bidder is given 5 percent of your bid to use as a blitz. For example if I bid $100, I would then have $5 worth of blitzes available, if I increased the bid by $50 I would have an additional $2.50 to "blitz" a competitor.

The auction feels like you are playing a hand of poker with elements of strategy without the exploitative practices of pay-per-bid auctions.

Clearly social gaming is influencing not only consumer behaviour but increasingly purchasing. What sites like Bizulu show is that an engaging and entertaining auction process is nearly as important as the auction's winning bid.