воскресенье, 14 августа 2022 г.

55 Business Model Patterns. #4 Auction

 


Auctioning means selling a product or service to the highest bidder. The final price is achieved when a particular end time of the auction is reached or when no higher offers are received. This allows the company to sell at the highest price acceptable to the customer. The customer benefits from the opportunity to influence the price of a product.


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Auction based business models

Auction based business models have been recorded as early as 500 B.C. They are mostly used for unique items that are not frequently traded, and therefore don't have a well established market value. Some typical uses of the model are within antiques, real estate, collectibles, spectrum auctions (i.e. communication networks) and the sales of businesses. However, several examples of auctions based business models for frequently traded, new and used items exists (e.g. eBay, Amazon).

The basic form of an auction is where several potential buyers repeatedly bid and are aware of each other's previous bids, with the item sold to the highest bidder. The variations on the basic auction form are many, including number of sellers and buyers, limits on bid prices, time limits, open or sealed bids, open or secret reserve price, and rules for determining winning bidder and sale price. The auction broker often charges the buyer or seller a listing fee and/or commission based on the value of the transaction.

In a forward auction (demand) a number of buyers bid for an item being sold (e.g. eBay)

In a reverse auction (supply) a number of sellers offer an item that a buyer requests (e.g. Amazon)


In a double auction (exchange) a number of buyers bid to buy goods from a number of sellers (e.g. NASDAQ)


Open ascending price auction
("English Auction")
Participants bid openly against each other with each subsequent bid higher than the previous bid, and the winner pays his/her bid.

Open descending price auction
("Dutch Auction")
The open descending price auction begins with a high asking price which is lowered until someone is willing to accept the auctioneer's price.

First price sealed-bid auction
("Closed English Auction" or "Yankee Auction")
All participants submit their sealed bids, one per participant, and when the bidding period is over all the bids are opened and the highest bidder pays his/her bid.

Second price sealed-bid auction
("Vickrey Auction")
All participants submit their sealed bids, one per participant, and when the bidding period is over the high bidder wins and pays the second-highest bid for the good.

Sequential second price auction
("Japanese Auction")
Once the bidding starts, no new bidders are allowed to enter the auction and participants must bid at each level to stay in the auction or drop out.

Auctions selling at very low prices
Some auctions based business models are selling items at very low prices, where the price has limited resemblance to the actual worth of the lot being auctioned such as the Unique bid auctions where the winner is the bidder with the highest or lowest unique bid. The business models behind these auctions (or sometimes lotteries) are:
* Bidders paying for each bid they place
* Bidders paying for participation in auction event
* Sponsored by companies using the auction as advertising
* Sponsored by companies using data such as registered emails
SHARETHIS

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Auction Model

  1. In an auction model, sellers offer products in an online auction and buyers bid on what they want to buy. The buyer with the highest bid wins the product. Auction sites make their money by taking a percentage of the selling price. The largest auction site is eBay. This model usually works best for sellers who have an inventory that fluctuates, and when the seller does not need to sell at a set price in order to make a profit. This model is also not as useful for selling services, although there are some sites which auction freelance work services, such as translation and web design.

Auction Advantages And Disadvantages

  1. For the seller, the main advantage of an auction site is that it attracts a huge number of visitors. Most auction sites also provide a large number of services and tools for attracting customers, and there is also almost no startup cost involved. The main disadvantage is that you cannot plan your income because you cannot know what a product will sell for. The amount of fees you pay for extra services, such as including photos, can also mount up, decreasing the amount you earn from each sale.

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Auction Business Model – How Does It Work? Exposed!

Auction’s business model is based on participatory pricing: in other words, the price of a product is not determined by the seller alone, but buyers actively influence the final price of the goods or services. Find a price begins with a potential buyer bidding a certain amount based on their willingness to pay. When the auction ends, the customer who placed the highest bid is obligated to purchase the product or service.

How Does Auction Business Model Work?

From the buyer’s point of view, the main advantage is that they never have to spend more than they can afford or are willing to pay (what?).

The advantage to the seller is that products can be distributed more efficiently in the marketplace (why?). This feature is particularly valuable for very rare or heterogeneous products for which there are no reference prices or for which demand is difficult to determine.

To ensure that sellers are not forced to sell their products below a threshold that is acceptable to them, it has become common in some cases to set a reservation price (why?), and the selling price for a particular item or service is set only after the auction is completed.

The origins of the Auction Business Model

Auctions are ancient business models. Around 500 BC in ancient Babylon, women were auctioned off to their future husbands. Today, auctions have become popular due to the development of auction houses. One of the oldest and most historic auction houses is Sotheby’s, founded in London in 1744 by bookseller Samuel Baker.

The very first auction of the company was conducted by Baker himself on March 11, 1744, to sell several hundred valuable books at a profit. From then on, the business quickly expanded to include the auctioning of medals, coins and prints.

The Internet opened a new era for this business model. The Internet makes it possible for auctions to take place without spatial limitations, so they are now accessible to a much larger audience than before. One of the pioneers in this field is the online auction site eBay, through which private individuals and companies around the world sell a wide range of goods and services.

Sellers set up a page on the site with a description of the product they want to auction, and interested buyers then bid for the product. Since its founding in 1995, eBay has hosted around two billion auctions, making it by far the largest auction house in the world.

The Innovators of Auction Business Model

In addition to eBay, the auction pattern has been applied to business models in other innovative ways in recent years: WineBid, based in Napa, California, is an online wine auction site where both individuals and wine merchants can auction their wines to connoisseurs around the world.

The seller sets a reservation price per bottle to prevent the wine from being auctioned for less than it is worth. Since its inception in 1996, WineBid has grown very successfully and now has more than 60,000 registered users, making it the largest auction site of its kind.

Other examples of business model innovation based on the auction pattern build on the concept of “reverse” auctions, also known as procurement auctions. The reverse auction is a variation of the traditional auction in which suppliers bid for a contract rather than buyers bidding for a product.

Priceline, founded in 1997, is a well-known and highly successful reverse auction company that focuses on travel-related services. In this model, the customer specifies their preferences for a particular itinerary (flight, hotel, rental car, etc.) and can also specify the maximum price they are willing to pay for the trip.

Based on this offer, Priceline searches its partners within the network for offers that meet the customer’s specifications. By submitting an offer, the customer agrees to purchase the corresponding offer proposed by Priceline. Despite some risk to the customer, Priceline’s business model is a thriving one: in 2011, the company employed 3,400 people and had global revenues of $4.4 billion.

The auction business model has also been used to broker intellectual property deals. Ocean Tomo, a division of ICAP Patent Brokerage since 2009, brings together buyers and sellers for the sale of patents and other intellectual property assets through private brokerage platforms and live auctions.

With hundreds of transactions and over $150 million in revenue, Ocean Tomo is the world leader in the difficult business of patent trading. The company itself has had its ups and downs and the auction principle is very difficult to apply due to information asymmetry: The potential buyer does not know what he is buying, since a patent is always a bundle of legal claims combined with the know-how of the patent application.

But in most cases, the buyer sees nothing more than the patent document. For this principle to work successfully, new ways of patent trading have to be developed. Currently, such know-how-intensive products with a high proportion of non-codifiable information are still difficult to auction.

Another company that has successfully applied the auction business model is MyHammer. The company was founded in 2005 and specialises in reverse auctions for craftsmen and corresponding service contracts. As with Priceline, MyHammer’s customers specify the type of services they need, which can range from small repairs to moves to entire construction projects.

The auction business model has enabled MyHammer to become one of the leading marketplaces for tradesmen and service contracts within just a few years. It is estimated that contracts worth over 100 million euros have been auctioned on MyHammer.

When and How to Apply Auction

The appeal and potential of the auction pattern lies in its flexibility and the many ways it can be implemented. You can either offer your own products or create a marketplace for sellers and buyers that is available for all types of products (think eBay) or targeted at niche products.

The auction business model is highly scalable and can serve millions of users around the clock. These users inevitably benefit from the network effect this scenario creates. The pattern works well when an auction creates more transparency for standardised products such as C-parts or raw materials. An auction is also suitable for selling highly specialised products, provided the auction site attracts enough visitors.

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