From the February 2000 issue of Entrepreneur

Chuck Rozanski has a costly addiction, and he's not ashamed to admit it. In fact, the Denver entrepreneur will proudly tell you he spends roughly $1,000 per week to feed his habit, thanks to his discovery of online auctions.

His passion: collecting Indian pottery, which he purchases at Web auction sites and prominently showcases in his office. But while Rozanski may spend $50,000 a year on his pottery hobby, he earns about 10 times that amount in auction sales for his business, milehighcomics.com.

Rozanski, 44, who currently auctions his comics on Amazon.com and his own Web site, was using auctions in his business long before anyone had heard of the online version. Since 1985, he's conducted live auctions in his six retail stores in Colorado and California.

"We did them as a thank-you to our regular customers," Rozanski says. "We never expected to make much money."

Nor does Rozanski expect big profits from his Web-based auction, launched in 1997, or from other auction sites where his comics are listed. Thus far, sales from the online auctions have translated to about 10 percent of the company's overall annual sales of $5.5 million. In fact, Rozanski sees far greater value in the new customers brought to milehighcomics.com by the company's presence on high-traffic sites like Amazon.com and eBay.

"When you're using an outside auction, even though you may not get an optimal price on what you're trying to sell, it will definitely drag people to your own site," Rozanski says. "Auctions right now are the cheapest and easiest portals to attract traffic."

The Eyes Have It

Bringing in eyeballs is one of the primary advantages big online auctions offer to small businesses, says Sue Rothberg, a senior auctions analyst with Lincoln, Massachusetts, Gomez.com. The company evaluates and rates e-commerce businesses and provides auction scorecards on its Web site.

"Major players, such as Yahoo!, Amazon.com and eBay offer small merchants the ability to establish a storefront," Rothberg says. "Each of these sites has a significant amount of traffic every day; you get volume without having to put out any marketing dollars."

Since most buyers are looking for a deal, though, those eyeballs don't necessarily translate to big profits on auction items. E-commerce analyst Vernon Keenan of Keenan Vision Inc. in San Francisco has a different take, however. "If you go to eBay or Yahoo!, you're getting a critical mass of buyers," he says. "In my view, it's a near-mathematical certainty that you're at least going to find the market price and avoid the danger of under-pricing your product for the market."

While auctions may not be profitable for some businesses, they're certainly bringing in the bucks for other sellers. According to Forrester Research, online auction sales reached $1.4 billion in 1998 and are expected to jump to $19 billion by 2003.

With all this sales commotion, entrepreneurs can get lost in a huge marketplace like eBay, says Keenan. So it pays to find ways to improve access to buyers through marketing services offered by the sites. Some will sell you listing prominence, for example, such as a featured auction spot in a category, or even on the home page. Yahoo! just launched its featured auction area, where sellers can post items for a fee as low as 25 cents. Yahoo! sellers also have a chance to include a thumbnail image of their featured products on a rotating picture gallery. On eBay's home page, a featured spot costs $99, but that doesn't seem too unreasonable when you consider that 1.47 million unique users visit the site every day.

Brand Building

Paulo Santos, the 35-year-old owner of Purplus, a Sausalito, California, discount software company, says exposure is the primary reason for his online auction presence. Sites like Yahoo! Auctions, eBay and Auction World not only provide about half his $1 million in annual sales but have also given him an easy way to build up a brand name and reputation. Santos points to the feedback forums as valuable tools for this task.

"People might be skeptical about whether they should buy a product from us or give us their credit card number or send a check. Then they see we have 3,500 customer [responses] that say things like 'quick shipping,' 'easy transaction,' 'we like them,' and they feel at ease," Santos says. "They're not worried we're going to ship them a box full of rocks."

While good feedback can do wonders for a new company's image and customer base, bad feedback can be devastating. Keenan sees the feedback mechanism as a double-edged sword in that it enables sellers to reach millions of buyers at once but, at the same time, enables just a handful of buyers to pollute the reputation of the seller. It's up to the auction site, he says, to develop rules and a screening process to protect sellers against fraudulent and vindictive comments.

Most sellers have found that keeping feedback entries generally positive comes at a price: intensive customer service, which can cut into auction profit margins. Rozanski says the higher demands of auction customers are not necessarily due to the auction format but to the expectations of online buyers in general.

"E-commerce folks have this intense desire for instant gratification; everybody wants 24/7," Rozanski says, recounting a call from an angry customer who had learned milehighcomics.com was closed over the weekend. Rozanski plans to shape his operation into a 24/7 business over the next year and is also contemplating whether he needs to hire new staff to do so.

Lisa Johnson of Rjsauction@aol.com on eBay, takes extra pains to put customer service first. The Vineland, New Jersey, liquidation business, which Johnson, 36, co-owns with her fiance, Rick Salesky, 44, sells overstock of "As-Seen-on-TV" products and has done some 18,000 transactions since the couple started selling products on eBay in 1998. Johnson says the company's efforts have helped earn it one of the highest ratings of any seller on eBay, not to mention more than $1.5 million (a three-fold increase) in 1999.

Like Rozanski, Johnson believes auction customers are demanding in a different way than offline customers. "People get brave when they're behind a computer and no one can see them. They say things in an e-mail that they won't say to your face," she says. "We can have an extremely irate customer, for whatever reason, writing 'I'm going to do this' and 'I'm going to do that.' Then you call them on the phone, and they're pussycats. By the end of the conversation, they're laughing and joking with you."

Keenan says it's not the online format but the type of customer shopping in auctions that requires more attention. "Value-oriented buyers," like auction shoppers, have a higher expectation for service than people who are used to paying whatever price seems reasonable, he says. If they've already gone through the trouble of price shopping and finding a good deal on a particular product on a site, they're more likely to have issues when it comes to evaluating and accepting the product.

But Wait, There's More. . .

Besides eyeballs and the opportunity to build a customer base, online auctions can offer other advantages to small businesses, like providing a venue to sell inventory that may have sat in a warehouse for a while. "It gives you a way to profit from it rather than throw it away," says Santos, who often sells his excess inventory on the auction sites. "With the auctions, we can find those people who want that older software for collectible reasons."

Auctions also provide a good forum to test-market products, says Rothberg. Businesses put new products on auction sites to see if customers will bite, and then determine a price point.

Then there's the inherent benefit of auctions everywhere: Although many people are looking for a deal, the frenzy of some auctions may drive a price higher. Rothberg notes it's not uncommon for products to sell for more than they would in the physical world.


Seller Beware

Of course, there are some downsides to auctioning products, such as what Rothberg calls a "perception problem." While auctions may sometimes drive up a product price, buyers' tendencies to devalue items on auction may keep the price down or result in no sale at all. The key is to maintain realistic expectations and be sensitive to these views. "People expect to pay next to nothing [at auctions], and they're often disappointed when the price is too high," Rothberg says. That might result in a backlash against the seller, which means negative feedback.

Auctions are also time-consuming. Small businesses must be prepared to devote time to posting the listings; answering hundreds of e-mails; and dealing with billing, shipping, payment collection and other management responsibilities.

Many larger sites, like eBay, Amazon.com and Yahoo!, have tools to assist with some, but not all, of these responsibilities. One new business, Andale in Santa Clara, California, is carving out its niche by providing these much-needed auction-management services to small businesses in the form of Web-based tools. "Entrepreneurs are experts in their products and the domain, but not necessarily in managing their auction sites," says Andale's CEO, Munjal Shah.

Rothberg warns of one other disadvantage, particularly for small businesses collecting money without going through a credit company. "You sell the item to the highest bidder," she says, "and they might not come through. They may never send payment."

One line of protection against this is an escrow service, offered by many top auctions, where a third party holds the buyer's money until the product is shipped and determined to be in good condition. While this affords some protection to the seller, says Rothberg, it's mostly designed to protect the buyer.

Rozanski believes Amazon.com's auction handles this problem nicely with its 1-Click function, where bidders pay with their credit card. "Amazon.com takes care of the financial element of the transaction, so you're not having to run a credit card through your machine," he says. "It saves you the labor of doing that, and the credit card charge."

Merchants still need to pay a fee that's slightly higher than what a credit company would charge, but it's effective for smaller companies that don't already have credit card arrangements.

Site Selection

Entrepreneurs need to consider several factors when deciding which site to list their items on. Rozanski, for example, uses Amazon.com because of services like 1-Click that help sellers. His decision was also influenced by eBay's frequent down times, which became problematic for his business.

Johnson, on the other hand, believes it's well worth enduring an occasional site outage in exchange for the service she receives through eBay's PowerSeller program. "We have a wonderful [PowerSeller] representative," she says, "who helps us with everything and arranges immediate contact with eBay."

Businesses may also want to consider straying from the beaten path and trading quantity of eyeballs for a more focused audience on business-oriented auction sites, such as uBid and Onsale.com. If you've got some cash to work with, another option to consider is a listing on a mega-umbrella auction portal like FairMarket AuctionPlace, which will put your auction, by category, on a host of other Web sites.

When looking to increase sales, it also doesn't hurt to take advantage of different advisory resources offered by auction sites. EBay representatives attend hundreds of trade shows each year, where they host workshops on how to sell via auctions. Yahoo! has recently published a book, Online Auctions for Yahoos, co-written by bestselling marketing guru Seth Godin and Yahoo!'s Commerce Group vice president, Tony Surtees. Its pages feature valuable tips for making money through the auction format.

Finally, be vigilant about what you post, how you post, and how you present yourself and your products to online customers. Keep in mind that, in linking up with an auction, you're placing your business in front of a worldwide audience of demanding shoppers and just about every business decision you make can have global repercussions.

"It's like dancing naked on a stage in a public square," says Rozanski. "Every single thing you do that can be perceived as negative can be told to 100,000 people by a disgruntled customer, with unbelievable speed."

Food For Thought

Most people think of auctions as consumer-to-consumer or business-to-consumer sales, but John Schachat discovered the auction format was a natural for business-to-business sales as well.

Schachat, 47, is a co-founder of Networld Exchange Inc., an online network for buyers and suppliers that provides Web-based tools to move products. The San Diego company focuses on the food and hospitality industry but plans to spin off to other vertical markets in the future.

The auction model on the Networld Exchange site is a bit different than the traditional auction format. "The way you see online auctions in the B-to-C side wouldn't necessarily work in the B-to-B side," Schachat explains. "What we do is provide the e-commerce piece that enables the transactions between the buyer and the suppliers; it works off the suppliers' online catalogs we have on our system."

On the Networld Exchange auction, buyers can often find products at prices lower than they'd normally pay. Suppliers, in turn, can move dead inventory without having to tie up their sales force. While many of his clients agree the auction format makes sense, Schachat says it's a different model for most of them and they're just starting to adapt to it. He admits that buyers haven't quite warmed up to the "perishable side" of the auction yet, for obvious reasons, but nonperishables seem to do just fine.

Would Schachat advise other companies to take the auction route? That depends on the business, he says. The food service and hospitality industry, for example, would benefit from any mechanism to get excess inventory sold. "You really have to look at the industry you're marketing to and decide whether [the auction model] will be palatable to buyers and suppliers," he says. "For any nonperishable item, I think it's a winner."

10 Ways To Increase Online Auction Sales

1. Study an auction for a few weeks to see what kinds of postings work. Look for items similar to what you want to post, monitor the response and determine an appropriate price.

2. Test-market your items. See which sell on which auctions. Sometimes 10 items will sell better on 10 separate auctions than lumped together on one auction.

3. Specialize--serve more needs of a few people rather than fewer needs of more people.

4. Do what you can to get people to try you once, then give them a reason to come back.

5. If you fear an item might sell for less than its value, set a reserve so that you'll at least get your minimum price.

6. Make sure descriptions of items are accurate. If there's a scratch, say so. Exaggerating the quality could result in dissatisfied customers, which could damage your reputation.

7. Take advantage of featured listing opportunities, auction networks and other chances to get your product before a larger audience. Also use chat rooms and other community features to build a name for your business and make yourself accessible.

8. Consider using an auction site with a smaller, but more targeted, audience. You can find objective ratings at http://www.gomez.com.

9. Take advantage of auction seminars, on-site advice and other benefits offered by an auction site to help you sell your products.

10. Underpromise and overdeliver--give customers a reason to give you good feedback and recommend you to others.


Julie Vallone covers business and technology for publications such as Investor's Business Daily, Salon magazine and The San Francisco Examiner.

Contact Sources

Andale, (408) 938-9050, http://www.andale.com

Gomez.com, (781) 257-2000, http://www.gomez.com

Keenan Vision, vern@keenanvision.com, http://www.keenanvision.com

milehighcosmetics.com, (303) 455-2659, chuck@milehighcosmetics.com

Networld Exchange Inc., (760) 639-4900, http://www.networldexchange.com

Purplus, (415) 456-6388, paulo@purplus.com

RJS Enterprises International Inc., (856) 507-9200, rjsauction@aol.com

Yahoo!, http://www.yahoo.com