Bidding fee scheme

A bidding fee scheme is a grey area business model for online auction sites that allow them to make large profit margins on goods by charging non-refundable fees for bidding.

In the most common form of the business model, the products are supplied by the auction site and advertised at prices lower than cost.

How it Works

Despite being labeled as an auction, the winner is not necessarily the person who bids the highest. In bidding fee auctions, a bid limit (either maximum or minimum) is given, and the closest unique bid to the limit wins. Unlike most auction sites, the bids are usually hidden so that only the bidder can see their own bid. Bidding fee sites require skill and luck rather than just having the highest bid.

The selling point of bidding fee scheme sites is that the prices are very low. Since there is a fixed fee per bid, the auction site is able to sell the item for less than cost, and still manage to profit from the bidding fees. The auctions are set up to end after a certain number of bids rather than an ending date, which allows the business to ensure that they will profit on the item.

Example

In this example, the maximum bid is $15.00. The bidding fee is $10

Though there were higher bids than $14.96, it was the highest bid that only appeared once. Since the bidding fee was $10, the site made $150.00 in bidding fees alone.

If the product cost $100 for the auction site to buy, they make almost $65 in profit. This allows the auction site to have a high profit margin and still advertise competitive prices.

Risks

Since the profit is made through bidding fees, the bidding fees are not refundable. Also, as with any other site, bidding fee sites can appear and disappear quickly so it could be possible for a bidding fee site to collect bidding fees for several auctions and disappear before awarding the prize.

Since the webmaster is the only one who can see the bids, it is also possible for the webmaster to bid on the item his/her self, which would be unfair to others but hard to detect.

On the other hand, from a corporate point of view, there may be concern as to the long term viability of such a set up. The average person who pays for each bid and only wins, say, 1 of every 10 items they attempt, at some point may add up the accumulated costs of all the non-winning bids and realize they've probably paid more in bid fees than the item they finally won is actually worth. At that point, a person may not be as interested in the prospect of spending money on bids with no assurance they may actually ever win. By contrast, there is no cost for bidding at conventional on-line auction sites, thus less "overhead" expense to the bidder.

Other Common Traits

Many bidding fee auction sites claim to donate a certain percent of profit to certain charities. Make sure that you can verify that the site actually lists the charities they claim to donate to so that you can check with them if you desire. Sites that have been around for at least a couple of years are usually ones that you can feel comfortable with knowing that they are not a fly-by-night outfit and that they actually do what they say. Check their "About Us" page and the registration details of their web site to find out how long they have been in business.

External links

* [http://discussion.ottawabusinessjournal.com/article.php?sid=320 Discussion on the legality of a bidding fee scheme site]
* [http://www.theglobeandmail.com/servlet/story/RTGAM.20050922.gtuniquesep22/BNStory/Technology/?query=auction Globe and Mail article (requires purchase for full article)]