Want to start an online auction? Watch this first

Starting an online auction isn’t particularly difficult technically. The difficult part is getting both sellers and buyers to choose you when the established competitor already has the traffic. A cheap auction script and free trading aren’t enough on their own to solve that problem. I know because I’ve both helped build an auction and tried getting a new one going on Amino.

An entrepreneur has written asking whether he should create an auction site as an alternative to QXL. He thinks there are lots of fees and charges for various features. It certainly isn’t the first time someone has sent me that idea. Here are my experiences and thoughts in the summer of 2010.

The fees also pay for access to customers

If you use QXL in Denmark or eBay over here, you may find yourself paying quite a few fees. I actually think that’s fair enough. You get a service and access to lots of potential customers.

But as an entrepreneur, it’s easy to think: I should be able to do that more cheaply. You go online and find auction scripts costing anything from nothing to a few hundred dollars. I remember us buying one for around $500 at one point.

They can do lots of things and are easy to set up. There’s administration, shops with sellers’ own logos and the option to connect payment systems. With translation and customisation, you can fairly quickly have something that looks impressive.

In the video, I use a week’s hard work and 5,000 to 10,000 kroner as an example of a technical startup. That’s a rough estimate from 2010, not a budget for a finished business. It’s precisely the difference between getting the software running and getting the market working that I want you to understand.

A second-hand marketplace and an auction are different things

You might think everyone will simply move from the expensive auction to your free solution. Perhaps you even promise it’ll always be free because you can’t yet imagine costs beyond what you’ve just paid.

But auctions have a particular challenge an ordinary second-hand marketplace doesn’t have.

If I want to sell a bike through classified ads, I can advertise it in several places. When a buyer calls, we agree the sale and I take it down again. That can work across several second-hand marketplaces at once.

But if I put the same bike on two auctions, I can end up with a winner in both places. Then at least one person will be seriously annoyed. I can get bad ratings and a bad reputation.

So in practice, the seller has to choose. Does the bike go on the big established auction or your new one?

I’ve helped build the auction myself

My experience with QXL also comes from my work at Jubii. I helped build the auction with Mark, Henrik and Kasper, and spent around six months working on it with Helene.

Later, it was sold to QXL. In the video, I discuss a deal worth 80 million kroner in shares, which subsequently lost value. I owned 25 per cent and still got enough to buy my house. That’s a side story, but it explains why I’m not just discussing auctions from the outside.

At the time of recording, I see QXL as clearly dominant in Denmark. I also mention the possibility of more competition from Den Blå Avis and eBay. That’s the situation and my expectations in 2010.

Where does the seller get the best price?

Imagine a new auction with five things for sale and a big competitor with lots of items, sellers and buyers. Where would you expect the best price for your bike?

Typically, it’s where there are the most relevant buyers. If you might get 200 kroner at the small auction but could get 2,000 at the big one, a free listing isn’t necessarily a good argument. Those are illustrative amounts, but the problem is real.

That’s why I think an auction is one of the hardest things to start. Not technically, but in marketing terms. Why would people list their items somewhere they expect a worse price?

Amino’s traffic didn’t solve the problem for me

We tried starting Amino Marked as an auction for business-related items ourselves. I thought we had critical mass with around 100,000 visitors. But I didn’t get it going.

I’m not saying it would have been impossible if I’d gone all in. I had lots of other tasks too. Perhaps we could have done more if we’d put Freelancer and all the other services aside and made the auction our most important project.

But even with Amino’s traffic, we couldn’t simply compete with QXL. That’s an important experience to bear in mind when dreaming of building a new auction site. You’ll find more of my experiences of building businesses in Iværksætter til jeg dør.

Starting an online auction in a niche

If you still want to try, I’d choose a niche you know something about yourself. Don’t start with bikes, coffee machines and everything else.

A niche needs to be broad enough to get trading going but narrow enough for you to defend your position. The big competitor can’t be best at everything. I mention wine auctions as an example of something that can work.

If I were trying it myself, I might start even narrower with Barolo. I’d buy various interesting wines for perhaps 20,000 to 30,000 kroner and use them to get the first auctions started.

You need to provide stock and the first buyers yourself

I’d put my own wines up for sale with a starting price of one krone. Then there’s something tangible and tempting to bid on.

Before opening, I’d have been active on wine forums long enough for people to know me. Discreetly and helpfully, without spamming or annoying anyone. I’d have a page where interested people could enter their email address to be notified.

On opening day, I’d want a few hundred relevant email addresses, friends and contacts from places where I already had goodwill. Then I could tell the right people Barolo was now up for auction with a starting price of one krone.

That can bring the first wine enthusiasts in to bid. Then I need to encourage them to put their own items up for sale too.

Make it simple to join in

Watch out for all the features that come with an auction script. Some practically ask for your underwear size and colour before you can start. Keep the information required to a minimum.

Turn off the advanced auction types too. No Dutch auctions and all sorts of variants. Start with an ordinary auction that’s dead easy to use.

It’s not the number of buttons and features that creates trade. It’s good items, relevant people and an experience they can figure out.

Expect losses and gradual expansion

You may need to keep buying wine and putting it up for sale to keep the market alive. I expect you to lose money on your own wines for the first three or four months. That’s part of creating activity, not a shortcut to quick earnings.

Hopefully, others start listing their Barolo. Then you can expand to Amarone, then more Italian wines and later French ones. Gradually, until you have a working wine auction.

Once that niche is going well, you can consider related segments, perhaps collectables or something else that suits the audience. But don’t spread into everything from the start.

When can you charge?

I wouldn’t expect to charge the same fees as the big competitor from the beginning. If one day you have a strong market position and Denmark’s leading wine auction, that’s a different situation.

But that can take years. I mention two, three or four years to get a wine auction working properly, and perhaps five years to gain a really strong position. Those are my estimates, not a fixed schedule or guarantee.

Provide your own items to list and give others good terms for selling theirs. Then you have something to build on. It’s hard work and very much an uphill battle. But it can also be fun if you still want to do it after thinking the challenges through.

If you’re considering starting an online auction, there’s lots to think about. Here are some of my thoughts. Best wishes, Martin P.S. Also see Amino’s new category on Email Marketing