Auction-Based Business Models – How Does It Work?

In an auction-based business, the products or services are offered to the highest bidder. The goods are offered to the buyers with a set minimum price and the buyers start bidding for the items. The highest and qualifying bidders secure the items in the auction.

Auction based businesses work for both products and services industry alike. Tender bidding and sale of securities are common examples of auction-based businesses in the services industry.

What is the Auction-Based Business Model?

The basic auction-based business models are where the potential buyers are aware of the competition. The highest bidder from the buyers gets the item. There are several auction models that sellers can use. The conventional auction model is where the seller puts a small initial price to attract more buyers. Buyers then place bids to win the item.

The businesses use an auction-based model to attract more buyers. The competitive nature of the process means that valued items or services get the maximum returns possible. The sellers may set certain qualifying criteria for the bidders such as financial stability or the deemed usage of the items in the auction.

Traditionally, auction businesses were associated with unique products or antiques. Modern businesses have adapted the auction-based models in the services industry and e-commerce as well.

How does the Auction-Based Business Model Work?

The process begins with placing an item (or products) for selling through an auction process. Potential buyers are then invited to place their biddings. Depending on the type of auction model, the bidding process may be an open auction or closed auction process. The seller then declares the highest bidder to procure the products (or service tenders).

Check  Brokerage Business Model – How Does It Work? (Explained)

Although the auction-based process starts with the minimum price set by the seller, not all auction process end up successful. The sellers reserve the right to refuse the non-qualifying bidders at any time.

The auction-based business may take one of these several forms.

English Auction

It is the most traditional form of auction-based business. In this model, all bidders place their bids openly. Each participating bidder is aware of the competition and the rising bids. Subsequently, the highest bidder wins the item.

DUTCH AUCTION

It works with businesses selling the most unique or valuable items. The sellers place the highest perceived value of the item, and the bidders lower the value with each participating bid. The highest bidder wins the first rights to the products in this process too.

Targeted Auction

These auction-based models are used in high-end business transactions where a small number of bidders are invited. High-end sales of real-estate properties and business valuations are prime examples of targeted auction model.

Sealed Bidding

Sealed bidding as the name suggests uses the process through an undisclosed bidding process. The seller puts a starting acceptable price of the goods, and the bidders place their bids through sealed documents. The highest bidder then reserves the rights to the auction goods. Such sealed bidding models are usually seen in the services industry, where the competent authorities award projects to the highest bidders.

Modern e-commerce businesses have also adopted the auction-based business models. It has given rise to the sales of used goods at competitive prices. Governments and public organizations also go through the same tender bidding process where they award the projects to the highest and qualifying bidders.

Check  How Does eToro Make Money? - eToro Business Model Explained

Advantages of Auction-based Business Model

The auction-based business model provides different benefits for sellers or products and services.

  • It attracts a large number of potential buyers that increases the chance of sales.
  • The seller keeps control by adjusting the minimum acceptable value.
  • The sellers get the highest possible value perceived by the buyers.
  • Public organizations and the service industry get qualified bidders, which fulfills the compliance requirements as well.
  • Buyers also perceive the auction-based business models as the lower-priced option.
  • Buyers get access to a wider range of products as the sellers may not successfully sell all the items.

Disadvantages of Auction-based Business Model

The auction-based business model does not apply to all types of sellers. It also comes with some limitations.

  • Auction-based businesses offering goods at the retail level may not keep up with the quality expectations of the buyers.
  • There are chances of manipulation in the bidding process.
  • The sellers may have to set lower than perceived value prices to begin the bidding process.
  • It does not suit the businesses offering standardized and branded products.
  • The buyers are at risk of receiving counterfeit or low-quality goods from an online auction business.

Examples

Government tenders, mining rights, and royalty rights are all awarded through auction processes. These are all prime examples of auction-based business models in the services industry. Auction-based businesses selling products have also adopted modern e-commerce trends. Businesses like DealDash and eBay are prime examples of following auction-based businesses.

Scroll to Top