May 28, 2003, 12:00 AM

The learn-as-you-go plan at eBay

As sellers become smarter about using online auctions, they continue to refine their approaches to maximize returns.

As sellers become smarter about using online auctions, they continue to refine their approaches to maximize returns. Liquidator Genco Distribution Systems recently found a correlation between the starting price of an auction and the winning bid. Genco, which sells surplus goods at eBay, used to start all bids at 30-35% of the original cost of the item. The average auction generated five or six bids and the average selling price was around $60, says Pete Rector, senior vice president.

About four months ago, Genco dropped the starting price on all auctions to $9.99. “Bids have gone up and so has the average closing value,” Rector says. The average winning bid is now $75-$80. “We’re seeing pretty close to 50% of the original cost of the product,” he says.

The ease of online auctions early attracted the attention of liquidators who believed they could recover more at auction for excess merchandise than they could by selling in bulk. That turned out to be true, as consumers, caught up in the excitement of auctions, bid up prices. In one celebrated case, a consumer paid 50% more than retail for a low-cost, surplus bicycle.

Strategic liquidation

Liquidators quickly embraced the online auction model. But they also learned that auctions have a dynamic of their own. Take the case of the camp cots. Excess Technologies LLC, a merchandise liquidator, had overstock camp cots to sell, so it began putting them up at eBay. But as it put more cots up for auction, the price that each fetched went down. “If we have more than five a day at eBay, prices go down by 10-20%,” Joel Holtzman, president and CEO, says. “If we keep adding, the prices keep going down. If you have 200 of something that you want to sell in faster than a year, you’ve got to find places other than eBay to sell it.”

As a result, Excess Technologies has radically shifted the proportion of revenue it derives from eBay. Two years ago, 80% of sales came through eBay auctions; today, that portion is 5%. Excess Technologies now sells liquidated merchandise at Amazon and Yahoo stores, Yahoo auctions and Overstock.com as well as at eBay. It sells wholesale at Bid4Assets.com, Overstockb2b and eBay’s wholesale operation. It also maintains a database of 1,500 buyers to whom it makes product available, based on the channel the buyer operates in and the strategy of the seller. So, for instance, if a seller wants to liquidate some merchandise in bulk and sell the rest over eBay, Excess Technologies would not sell any of the products to customers in its database who sell on eBay. “It’s strategic liquidation,” Holtzman says. “Rather than blowing it out there and degrading the price or the brand, you make decisions about where and how to sell it.”

Excess Technologies is not alone in making that shift to other selling venues. Genco, too, turns to multiple channels for liquidation, sometimes splitting a lot so some items are sold direct to the consumer on eBay, some are sold in pallets to re-sellers and others are sold by truckloads to buyers who re-sell the merchandise again, often to overseas markets. “The bottom line is eBay is just one tool to liquidate products,” Rector says, “and it’s not the biggest tool.”

But while web auctions may not be the most efficient way to dispose of products, they provide important information to sellers: They’re an excellent measure of the value consumers place on items. “We benchmark our prices at eBay,” Rector says. “If we can sell one at eBay for $45, then we ought to be able to sell 10,000 at $34 each.”

The hook

Rector says Genco settled on the $9.99 price simply by experimenting. “We didn’t want it so low that we risked selling a $900 computer for $1.49, but we wanted it low enough to attract bids,” he says. “We have enough merchandise that we could experiment with it.”

That a lower starting price creates a higher closing price is part of the phenomenon of consumers getting caught up in the frenzy of bidding. The prospect of a low price draws them into the auction, and once they’re invested in the item, they continue bidding. “It’s like baiting a hook,” Rector says. “You get more with a bite-sized chunk of good bait than you do with a side of beef.”

But while liquidators like Excess Technologies and Genco limit the product they sell on eBay, their targeting hasn’t had much impact on eBay: First quarter sales of merchandise at eBay reached $5.32 billion, up 71% from $3.11 billion in Q1 last year and a record.

kurt@verticalwebmedia.com

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