Penny Auction Sites: From fab fad to flop?

penniesWhen Penny Auction sites came on the online shopping market some nine years ago, something changed in the way buyers approached deals for good. The concept was clear, the reward, tempting. Get high-quality items at a tenth of their cost with the added bonus of entertainment along the way. However, these past years have seen a deep transformation in these Penny Auction sites.

Business Galore

The initial concept of bidding cents for costly items caught on pretty well and pioneer sites like German Entertainment Shopping, BidCactus, PriceSaver or Madbids managed to make huge profits out of the bidding model. Having many of them been backed up by venture capitals, these first sites new something key in the market: primacy rules. Also, it was not so much as they were the first, but also, because they had marketing strategies that managed to attract both users and advertisers.

Back then, shopping bidding sites presented themselves as the business venture of the future. What happened then? Somewhere along the way something must have gone really wrong because in the past few years, there has been an avalanche of penny auction sites that have filed for bankruptcy. But, how is it that an apparently healthy business not only loses popularity, but gets swiped altogether?

Is it really a Fair Deal?

The key to the whole issue of Penny Auction Sites collapse may lie in the fact that what was cool at first became commonplace. There are three major causes that may have led to the downfall of the system.

Users got Smart: Shopping based on bidding was initially a great catch: users could buy valuable items worth hundreds of dollars with just a few pennies. The first challenge took place when these users did their math, only to find that they were spending thousands of dollars to buy bids, only to lose. Not only that, the plot had thickened as bids’ prices soared. Why did sites increase the cost of bidding? Mainly due to advertising costs, bids got more and more expensive.

All of the sudden, what had stricken users as “the deal of a lifetime” became an unsound business practice. And so the sites collapsed before everybody’s very eyes. This is when hundreds of penny auction sites members fled in search of cheaper means of entertainment or else, filed for lawsuit or starting slandering the sites online. Either way, the business looked bad.

Scam Alert: A percentage of disillusioned clients realized they had spent a fortune trying to win items they could have bought from any regular shopping site, in excellent conditions. That is, brand-new and risk-free. This led many to wonder whether they might have been tricked in bidding for an item no one was meant to win in the first place. This, plus rumors of ill-doings, like robotic bidding, automatic ghost bidders who appeared on the site as winning all the time started the scam alert which spread all over the country. Even when some penny auction sites tried to desperately clean their slates and rehabilitate their reputations by looking for endorsements, safety seals and third-party audits, reputation would dwindle hopelessly.

Bad Business: Finally, and as a natural consequence of all previous events, penny auction sties ceased to be a profitable line of business. But how can the business venture of the future crash overnight? Technically speaking, the downfall did not actually take place overnight. In fact, it is rooted in desperate measures taken in order to get sites back to their former glory. In an attempt to keep the sites’ good names intact, and restore consumer trust, penny auction sites implemented the “buy now” alternative back in 2009. The measure was aimed at giving participants the chance to “recycle” their lost bids and cash them somehow by actually purchasing the items they had not been able to win through the game. This way everybody would be happy. The plan looked good in draft, but functionality would reveal otherwise, resulting in the plan’s decline. But again, what went wrong?

Company profit margins were destroyed and went from generous to non-existent. As you see, all those bids that had previously meant earning, had to be refunded through the purchases and on top of that, some people still managed to win. Winners then, represented huge losses for penny auction sites and that is how they killed the goose of the golden eggs.

Customer Override

The Penny Auction Sites case can be referred to as one of the few businesses in which external factors are responsible for the flop. Those factors could be listed in this order:

Supply and Demand: Many would claim that the very moment the market became flooded with dozens of similar sites by the minute, penny auction sites had the countdown clock ticking for them as far as continuity was concerned. So many different sites popped up offering seemingly great deals on all kinds of costly products, so much so, that the older, well- established sites became more and more devalued by the minute. Soon enough, the game had opened up to such a large extent, that everybody in the penny auction business was making a pittance. With hundreds of dissatisfied customers turning away from penny auctions, they were no longer profitable.

Customer Behavior: When all those initial faithful penny auction sites clients got shrewd and began to realize that bidding to shop was very unsound financial advice, many pulled out altogether. The process was pretty much like this; at first they switched sites in the hope that they would get lucky somewhere else, secondly, they started studying and training in order to get the best deal from penny auction sites, and finally, pulled out altogether. It should come as no surprise that customer preference makes a kind of business adapt, it should be current practice.

In conclusion, penny auction sites have come a short way since their initial launch. However, so much has happened in such a short time span that it could well compare to a summer affair. If rekindling is possible, remains to be seen.