Online Auctions Law and Legal Definition

Online auctions are sales transactions that result from a competitive bidding process conducted over the Internet. Whether the sales take place between individuals, between consumers and merchants, or between businesses, online auctions have enjoyed rapid growth with the spread of Internet access. The value of goods and services traded through online auctions is not tracked but is estimated to have grown rapidly in the last five years, from under $10 billion in 2000 to well over three times that figure in 2005. According to an Entrepreneur magazine article about online auction marketplace leader eBay, sales through that company's online auction space alone accounted for more than $32 billion in 2004.

The consumer online auction process has been described as being similar to a garage sale, with commonly offered items including collectibles, antiques, toys, clothing, art, cars, tickets, electronics, and even real estate. Online auctions appeal to individuals who enjoy the competitive bidding process and like to feel as if they are getting a bargain. Most Web sites that host auctions allow buyers and sellers to negotiate payment methods and shipping details. Auction-related costs are usually limited to a small percentage of the final sales price.

Auctions have been a means of economic transaction for centuries. By moving onto the Internet, auctions have become accessible to a much larger number of participants, increasing the size of the marketplace dramatically. Although transactions between individuals are an important driver of the online auction market, the business-to-consumer and business-to-business portions of the market are growing rapidly. Online auctions offer potential benefits to all types of businesses. For example, since 2000 the firm SalvageSales has been helping insurance companies and their clients sell damaged shipments of commercial and industrial goods. In the past these salvage sale operations would have been handled locally, but the online auction option offered by SalvageSales has increased the size of the marketplace that can be easily reached in salvage sales. The same increase in market size is being seen across the board for both used and new products. Another example of an online auction-based business is Cashco 1000, Inc., a business started by a stay-at-home mother who wanted to try something she could manage from home while raising her children. Founder and owner, Angle Cash expected her business to sell $500,000 worth of home-decorations on eBay in 2005.

"Many companies wonder when and why they should use online auctions as part of their business trading strategy," Lori Mitchell wrote in InfoWorld. "The short answer is, if you sell goods and services or if you purchase items to run your business, online auctions can work for you…. Companies of practically any size and within any industry can benefit from them."

Internet analysts note that online retailers who incorporate auctions into their sales activities tend to see a higher level of repeat visits, more frequent purchases, and increased promotional opportunities compared to other online retailers. Auctions also offer advantages for those businesses interested in selling to or buying from other businesses. Some businesses choose to host closed or private auctions for their existing business contacts. But online auction companies may be able to assist companies in enlarging the audience for auctions by analyzing the bidding patterns of previous auctions to identify potential new customers.

EBAY

By far the largest online auction host is eBay, a company founded in 1995 and through which an estimated 95 percent of all online auctions took place in 2005. Other online auctioneers include such companies as Amazon; Liquidity Services, Inc.; Overstock.com; uBid; and Yahoo to name just a few. But by far the largest online auction space belongs to eBay.

Small businesses may use eBay to boost sales in a number of ways. "Whether you're starting a brand-new business or just looking for ways to grow an existing operation, you can do it on eBay." This statement of introduction appears on an Entrepreneur.com Web site dedicated to providing guidance to those interested in setting up an eBay business. The site offers step-by-step guidelines for establishing an eBay account and creating a successful eBay vendor profile. The popularity and growth of eBay businesses can be seen clearly through a quick review of recently published books. There are more than 35 books that have been published since 2001 that deal specifically, in one form or another, with doing business through eBay. Many businesses have been formed based exclusively on the sale of products through eBay auctions and/or direct eBay sales and many others have taken existing retail businesses and expanded them by using eBay as a supplemental sales venue.

Starting Out

Becoming familiar with the eBay way of doing business is an important first step in becoming involved in online auctions. Browsing the www.ebay.com site, watching auctions, taking the virtual tours offered on the site, are all ways to become familiar with the overall eBay experience. No registration is required to browse the site.

In order to buy on eBay one must be registered. The key element in registering on eBay, for which there is no fee, is the selection of a User ID. Jim Griffith, author of The Official eBay Bible, advises new users to take care in selecting a User ID since it will be the official "handle" for all eBay transactions by that person or the organization he or she represents. It is crucial that a small company picks a User ID that is well suited to the company, conveys some meaning, and does not include the name eBay for reasons of trademark protection.

Selling on eBay requires a seller's account, and a PayPal account. Setting up a seller's account is a simple process very similar to the registration process, and includes providing eBay with sufficient information to verify one's identity and preferred method of paying seller fees. The seller fees are nominal and vary by category of item being sold. A PayPal account is necessary because it is the most popular online payment method used by eBay buyers. The PayPal system is owned by eBay and there is no charge to open the account. The account is either used as a deposit account into which the account holder deposits and withdraws cash as necessary or it is linked to a credit card that may be debited or credited as needed. The seller on eBay may choose to accept payments by any method he or she prefers but PayPal is the most commonly used method on eBay and therefore, the simplest account through which to manage eBay transactions.

Selling on eBay

Before attempting to sell on eBay it is recommended by most experienced eBay users that a person first try partaking in an auction and/or purchasing something offered on the site. There are many strategies used by buyers and sellers alike to try and get the best possible price. Entire books have been written offering advice on how to maximize the eBay auction experience. In summary, here are eleven areas that need attention when planning to sell through an eBay auction. This list provides a glimpse into the process.

  • Fully use the "About Me" page—The "About Me" page is a free Web page offered to an eBay seller. This is a useful resource that any small business or individual seller should use and keep updated.
  • Shop the competition—It is always a good idea to search for items already listed on eBay before preparing to list new items and set up auctions. A little competitive research will provide a new seller with important information about what category is most commonly used for an item, the price range for other similar objects, and the availability of supply of similar items currently listed.
  • Choose a category—Items up for sale and auction on eBay are listed by category. Having one's items assigned to a category correctly is essential since customers looking for that perfect, customized swing set you have listed will never find it if it is erroneously listed as yard equipment.
  • Write an informative and compelling description—Writing catchy and informative product descriptions is not a simple task. The auction title needs to catch a potential buyer's attention and compel him or her to click on the item. Because eBay's search engine uses the auction title to index items for sale, use this precious title real estate wisely and refrain from using cute words like "wow" or "L@@K!" Include as many terms as possible for the item you wish to sell, since people will refer to things in many ways—pants, jeans, dress slacks, trousers, suit pants, etc … Be as informative as possible in the description. For an additional fee, there are other features that may be added to a listing. eBay offers several options for increasing visibility, like bold-face fonts and highlighting, but these come at a cost and their use should be weighed against the benefit added.
  • Select a format—In addition to the classic auction format, there are other ways to sell on eBay. One can add a "Buy It Now" button to the auction, which permits a potential buyer to skip the auction process and purchase the item for the assigned price. Another option is to use a Dutch-style auction to sell multiple identical items in the same listing. This is popular among small businesses. Formats that tend to work best for some products may not be the optimum formats for others products. For example, a 'Buy it Now" bottom may work best for lower-priced, more impulse-buy items but may not help with higher priced or very unique items.
  • Use photos to advantage—The use of photos in an auction is very important. Bidders do not have the opportunity to look at an item in person, so pictures factor heavily in their decisions about whether or not to bid and if so, how much to bid.
  • Set the price—Setting a price can become complicated depending on the auction format chosen. One way that eBay makes it easy to list and sell is by allowing sellers to set a reserve price: a price below which the seller refuses to sell. Unless the bidding meets or exceeds the reserve, the item will not sell. Reserves make some buyers uncomfortable.
  • Establish the auction length—Seven days is the default length, but there are reasons to select a different length. For example, many sellers want the bidding to conclude on a Sunday, a popular day for eBay bidding activity. Auctions may run for 1, 3, 5, 7, or 10 days.
  • State payment methods acceptable—The seller decides what forms of payment will be acceptable. The more forms of payment accepted, the bigger the potential pool of bidders will be.
  • Determine shipping costs and who will pay—Establishing from the outset who is responsible for shipping costs is the best policy. Most sellers require the buyer to pay for shipping costs, particularly as they are an unknown until the location of the buyer is revealed. Offering free shipping is, of course, one way to get a listing to stand out.
  • Provide quality customer service—This may seem a self-evident recommendation, and, of course, it is sound advice for any business undertaking. When working with eBay, however, one's record of customer service and follow-through becomes a matter for public record. The eBay system has a built in mechanism for monitoring the actions of customers and sellers. It is called feedback and anyone active on eBay is encouraged to send feedback on the person or entity with whom he or she has had a transaction. These feedback comments and ratings are made a part of the recipient's eBay profile and are then used by future potential sellers and buyers in assessing the likely reliability of the trading partner.

EBAY BUSINESS PARTNER PROGRAMS

ProStores

The eBay company provides a large number of software tools to its members, as eBay sellers and buyers are called. Among the more sophisticated of these is called eBay stores. An eBay store is a business and is designed to help a casual eBay seller become a viable business that sells merchandise through eBay on a steady and regular basis. It is recommended that anyone wishing to establish an eBay store first start out by becoming established on the site and getting to know the rhythm of an eBay business before opening a store. Sell at least 50 items a month, have a good source of merchandise, and prepare to be creative when it comes to servicing customers and accumulating a regular client base.

In early 2005, eBay brought to market a new service for businesses with an eBay store presence. It is called ProStores and is a suite of services that integrate with their existing stores. ProStores provide a new eBay business with its own e-commerce-enabled Web site. As Marsha Collier explains in her article "5 eBay Tools You Need to Have," the Web sites used by ProStores work in concert with a company's existing eBay auction activity. "In my eBay classes, I always teach that once you get the hang of eBay selling, you need to open an eBay store. Once you have your eBay store management mastered (and are running a successful enterprise), it's time for you to expand and open your own website. It's the website part that causes many sellers to stumble. eBay sellers aren't usually masters of HTML and the idea of running and setting up a website is a huge, daunting task. ProStores supplies you with practically everything you need to set up a website. If you want help you can always search eBay for ProStores support or website graphics and you'll find people who'll help you make it perfect. You won't find more reasonable website hosting, especially when you consider that it includes a shopping cart and e-commerce specialties. You can jump aboard with ProStores for as little as $6.95 a month."

Affiliates

Online affiliate programs have become very popular among online retailers. These programs are arrangements in which a Web site carries a banner ad for a company in exchange for a small percentage of any sales that result from the referral. One of the most successful affiliate programs on the Web today is the one run by eBay. The success is usually attributed to two factors. The first is the sheer volume of traffic on the eBay site each day. The second is the high commission rates paid by eBay to its affiliates. Melissa Campanelli writes about the program in an article for Entrepreneur, and explains that "depending on monthly activity, affiliates can earn between $10 and $20 for each active registered user sent to eBay." An active registered user is defined by eBay as a user who registers with the company and bids on or buys an item within 30 days of the registration.

The affiliate program can be very lucrative. According to eBay, it has 10,000 such affiliates, the top 50 of whom make more than $1 million in commissions annually. In order to succeed in this program one must have marketing savvy and a Web presence that includes a substantial advertising budget. But for businesses in this position, becoming active in the eBay affiliates program may be a move that would help to leverage the investment already made in an online presence.

ISOLD IT ON EBAY

One final way in which an entrepreneur may be able to build upon the online auction trend in order to start a retail business is by becoming an iSold It franchisee. The iSold It franchise concept is to offer customers an easy and effortless way to sell their items online without ever going online themselves. Customers of an iSold It franchise simply stop by a store to drop off items they wish to sell, and iSold It takes care of the rest. The business provides the following services to its customers for a small set fee and a percentage of the sale price:

  • Professionally photographs each item.
  • Posts the item for sale online.
  • Holds the item in inventory.
  • Answers buyer questions.
  • Packs and ships the item.
  • Collects from the buyer.

Like any franchising opportunity, the iSold It franchise requires a considerable up-front investment but it also comes with a proven business model and all the tools necessary to put that business in place. And the iSold It franchise is all made possible because of the popularity and strength of the robust online auction market.

ONLINE CLASSIFIED ADS

Online auctions have changed the world for retailers and entrepreneurs by giving them a national and international venue from which to sell. But shipping and transportation costs are not an insignificant barrier to the sale of many large items. A move back to geographically centered trading, to the local marketplace, is being accomplished online through the use of online classified ad sites. Two such sites that have shown strong growth during 2004–2005 are Craigslist.org and LiveDeal. These online classified ad sites are another venue through which small businesses may wish to sell products generally, post an ad for a particularly large item, post job openings, or use as a sales outlet for their overstock items.

SEE ALSO Internet Payment Systems

BIBLIOGRAPHY

Campanelli, Melissa. "Sharing the Wealth: Want to get a piece of the eBay pie? Joining its affiliate program can be a good way to do just that." Entrepreneur. February 2005.

Collier, Marsha. "5 eBay Tools You Need to Have." Entrepreneur.com. 20 March 2006.

Conner, Nancy. EBay: The Missing Manual. O'Reilly, August 2005.

Griffith, Jim. The Official eBay Bible. Gotham, June 2003.

Lynn, Jacquelyn, and Chris Penttila. "Getting Started on eBay: Behind every eBay success story is a tale of trial and error. We'll help you skip straight ahead to the success part." Entrepreneur.com Available from http://www.entrepreneur.com/ebay. 1 October 2004.

Mitchell, Lori. "Sold! On Online Auctions." InfoWorld. August 7, 2000.

Nissanoff, Daniel. FutureShop: How the New Auction Culture Will Revolutionize the Way We Buy, Sell, and Get the Things We Really Want. The Penguin Press HC, January 2006.

Pofeldt, Elaine. "The Digital Dump." FSB. May 2006.

Schuman, Evan. "eBay Pushes to Be Everything to Its Sellers." CIO Insight. 26 June 2005.

Tessler, Joelle. "Online Auction Sites Create Vast Global Marketplaces." Knight-Ridder/Tribune Business News. 23 October 2000.

Hillstrom, Northern Lights

updated by Magee, ECDI