How do Online Auctions Work: A Comprehensive Guide For Online Auction Technology

March 24, 2023
7 mins read
Last Updated March 28, 2023
How do online auctions work

How do Online Auctions Work: A Comprehensive Guide For Online Auction Technology

Whether you have attended an online auction, Hollywood movies, and shows have made it popular among the masses. In gist, the online auction is where the auctioneer describes the item on sale, bidders place the bid, and the highest bid wins. Though it may seem simple, there are several types of auctions. This is why it becomes crucial for you to understand- “how do online auction work?”.

Online auctions facilitate buyers and sellers to connect through a platform. These digital platforms require reliable backend technology and resilient architecture to ensure a seamless experience. So, choosing the right tech stack and features for your online auction platform becomes important.

This article will focus on how do online auction works, key terminologies, benefits, and what type of tech stack you need to create its platform.

Simform is an expert software product development company that provides reliable platforms for auction houses custom-made according to their requirements. So, if you are looking to build one for your business, signup for a 30-minute free session with our experts.

What is an online auction?

An online auction is a type of auction that’s held over the internet, unlike in-person auctions. The best part of holding an online auction is the freedom of bidding from any location with bidders connected through the internet. However, activities in online auctions can differ based on it’s type, such as business-to-business (B2B), business-to-consumer (B2C), and consumer-to-consumer (C2C).

There are many platforms that offer B2B, B2C, or C2C products for online auctions. Ebay is a fine example where all three types of auctions are used. Apart from eBay, website, OnlineAuction, and Overstock are some examples of online auctions platforms.

How do online auction work?

An online auction involves several phases, each requiring enhanced digital product engineering for advanced functionality.

How do online auction work

#1. Develop an online auction platform

The first phase of the online auction process is creating a reliable platform that can handle auction activities such as managing multiple bids, adding or removing product descriptions, showcasing all the items on the auction, and synchronizing data in real time.

Here are key steps to building an online auction platform,

  • Gather all the information covering features, functionalities, budget, goals, platform types, etc.
  • Create a software development plan and onboard developers or partner with a software development company
  • Design a prototype with all the necessary features.
  • Build a minimum viable product for the online auction platform.
  • Test the platform using MVP by providing limited access to some bidders.
  • Deploy CI/CD pipelines to achieve continuous improvements.
  • Deploy auction platform across hybrid environments for higher resilience and performance.
  • Once the auction begins, monitor system performance, security, and infrastructure for higher platform availability.

Pro-tip: Ensure fair bidding to avoid practices like shill bidding, which can artificially inflate auction prices, and comply with the rules of the Federal Trade Commission.

#2. Registration process

Bidders register online for the auctions to access the platform. It allows them to place bids and negotiate item prices. While on the business side, registration is a standard process for every auction house, on the technical side, you need to consider

  • The infrastructure needed to store the bidder’s data
  • Access management policies for bidders
  • Authorization and verification mechanisms
  • A unique ID that registers each bid during the auction

#3. Bidding process

The bidding process begins with the auctioneer announcing the base price with the first item on sale and asking for bids. On an online auction platform, auctions are often live-streamed, where bidders can place their bids in real-time.

To create a platform that can live stream the entire auction and facilitate the bidding, you need a resilient, flexible, and scalable software architecture.

Apart from the live streaming, you should also design the online auction website with real-time chat features for bidders to communicate with auctioneers.

Auction platform architecture

Take an example of the online auction platform where an operator works on-site to input every bid on the web interface. This feature helps all the bidders to have more visibility on what is happening in the auction platform.

Auction houses can use automation and create a virtual clerk that bids on behalf of the bidders on-site. Each time an online bid is placed, the system records it. Further, based on this record, a virtual clerk places the bid, and an operator updates the web interface for all the bidders to view in real time.

#4. Payment options

Online auction platforms typically offer a range of payment options to facilitate transactions between buyers and sellers.

These payment options include:

  • Card payment through secure gateways integrated into the online auction platform. These gateways ensure that sensitive payment information is encrypted and transmitted securely.
  • Third-party payment system for online transactions, including auctions. Bidders can link their third-party payment accounts, like Paypal or others, to online auction platforms for their purchases.
  • Bank transfers where buyers can make payments directly from their bank accounts. The auction platform provides the seller’s bank details, and the buyer can transfer the payment directly to the seller’s account.
  • Escrow services (third-party services) hold the payment until the transaction is completed. This option provides additional security to both the buyer and seller, as the payment is released once the buyer receives the product and confirms its condition.
  • Cryptocurrencies as offered by some online auction platforms. Bidders can use Bitcoin, Ethereum, or Litecoin to buy items at auction. This payment option provides buyers with anonymity and reduces the risk of fraud.

The technology behind online auction platform payments involves a combination of secure payment gateways, encryption technology, and fraud detection mechanisms. These systems ensure that payment information is securely transmitted and that fraudulent transactions are detected and prevented.

#5. Certificate of sale

A certificate of sale is the legal document issued by an online auction platform to the bidder after a successful auction. It serves as proof of purchase and ownership of the items on auction. This document typically includes the auction date, item description, purchase price, and buyer’s details.

The technology behind the certificate of sale involves a secure database that stores all transaction data related to the auction. The online auction platform uses this database to generate the certificate of sale, which is then sent to the buyer via email or the platform’s messaging system.

Top online auction features you must have in your auction platform

An online auction requires plenty of features that facilitate different activities like registration, bidding, and sale of items on auction.

Seller features

Sellers’ primary goal is to list their products and services, capture the bidders’ attention, and make profitable deals. Hence, the seller app should include the following:

  • Item listing: Sellers need to be able to list the items they want to sell on the online auction platform. The app should allow sellers to provide detailed item descriptions, upload photos, set starting bids and reserve prices, and specify auction end dates and times.
  • Auction management: The app should provide features for sellers to manage their auctions. This includes monitoring bids, setting bid increments, extending auction times, and accepting or rejecting bids.
  • Communication: Sellers need to be able to communicate with potential buyers during the auction. The app should provide messaging functionality that allows sellers to answer questions, provide additional information, and negotiate with buyers.
  • Payment processing: The app should integrate with secure payment gateways to process buyer payments. Sellers should be able to receive payments directly to their bank accounts or through third-party payment services like PayPal.
  • Reporting and analytics: The app should provide reporting and analytics tools that allow sellers to track their auction performance, view sales histories, and analyze buyer behavior.
  • Notifications: The app should provide real-time notifications to sellers when bids are placed, auctions end or payments are received.
  • Customer support: The app should provide customer support to sellers with questions or issues with the platform.
  • Auction tracking: Sellers can track all the bids on an item in real-time, along with different buyer dynamics.

Buyer features

Buyers’ needs should be addressed comprehensively. Here’s what they should be able to do on the auction app.

  • User registration and login: Buyers can register and log in using their email, social media accounts, or phone numbers.
  • Browse and search: A user-friendly interface that allows buyers to search for specific items by category, keyword, or seller.
  • Bid and buy: Buyers should be able to place bids and buy items listed for auction.
  • Push notifications: Notify bidders when they have been outbid, when auctions are ending, and when they win or lose an auction.
  • Real-time tracking: Buyers can check the status of their bids in real-time, along with the bidding amount.
  • Payment options: The payment feature offers a secure payment gateway that supports multiple payment options, such as credit cards, PayPal, and other payment methods.
  • Bidder’s watchlist: It allows buyers to add interested items to their watchlist to keep track of them.
  • Ratings and reviews: Bidders can rate and review items and sellers.
  • Shipping and delivery: A feature provides a shipping and delivery service that can be tracked.
  • Support and feedback: This feature helps improve customer support through a helpdesk, email, or chatbot.

Admin features

The key role of the admin is to encourage interaction between sellers and buyers. Thus, you would need the following features:

  • User Management: To manage registration, authentication, authorization, and accounts using this feature.
  • Auction Management: To manage auctions, which includes creating new auctions, updating or editing existing auctions, and deleting auctions.
  • Bid Management: To manage bids, including tracking user bids, accepting and rejecting bids, and notifying bidders about the auction status.
  • Payment Gateway Integration: To facilitate secure and efficient payment processing for successful bids.
  • Reporting and Analytics: To monitor the performance of auctions and track key metrics, such as bidding activity, auction revenue, and user engagement.
  • Inventory Management: To manage inventory, including adding, editing, and deleting products and monitoring stock levels.
  • Customer Support: To manage customer support, including responding to user inquiries and resolving disputes.

Tech stack required for online auction platform

The technology stack ensures the functionality, scalability, and security of your online auction platform. Here’s the list of necessary programming languages, frameworks, and tools.

  • Front-end technologies: HTML, CSS, JavaScript, React, or Vue.js for building the user interface
  • Back-end technologies: Node.js or Ruby on Rails for building the server-side logic
  • Database: MySQL or MongoDB for storing item data and auction information
  • Payment gateway: Stripe, Braintree, or PayPal for processing payments
  • Messaging API: Twilio, SendGrid, or Mailchimp for sending notifications and messages
  • Analytics: Google Analytics or Mixpanel for tracking user behavior and performance metrics
  • Cloud services: Amazon Web Services or Microsoft Azure for hosting the application and scaling as per need.

Types of online auctions

Online auctions have made selling items, bidding, and transacting with bidders easy. You can bid on any item from the comfort of your home through online auctions. However, if you plan to build one for your businesses, it is vital to understand different auction types and their rules.

#1. English auctions

English auctions are one of the most popular formats where one item is auctioned at a time. Auctioneer announces the starting bid, and individual bidders will increase the price with every bid until no one can outbid the last bidder.

This style of an auction is popular due to higher transparency among bidders on the changes in bid prices. Some auction houses have the highest bidding price threshold. If the bids reach the upper limit, bidders can quit the auction or top the last bid.

#2. Reverse auctions

Unlike English auctions, the bid price in reverse auctions has a lower ceiling. In reverse auctions, there are multiple sellers who sell their items to a single buyer. So, instead of outmatching other bidders for a higher price, sellers try to give the lowest possible price until it matches the expectation of a bidder.

However, the lowest price does not necessarily become the winning bid. For example, if a bidder with a higher price offers quicker delivery, it is far more preferable to a bid with a lower price with a delayed delivery time.

#3. Penny auctions

Penny auction type happens only online, and bidders must buy a right to bid before the auction begins. Bid prices go high by a penny during the auction, called a penny auction. This type of auction has a limited timeframe within which all the bidders need to place the bid.

It is a popular type of auction because bidders can get items at a lower cost compared to retail pricing.

#4. Dutch auctions

Dutch auction type is similar to reverse auctions but with a slight twist. Unlike reverse auctions, the Dutch type has only one seller selling items to the bidder. During the auction, bidders will place lower price bids, and a single seller will offer items that match the bid.

This auction type has only one seller making the auctioning process a little easier. In particular, startups opt for Dutch auctions to sell their products and services.

#5. First-price sealed-bid auctions

This type of auction is similar to English, but the bidding process is different. In first-price sealed-bid auctions, every bidder provides a single bid, and at the end of the bidding process, all the bids are compared for the highest one to win the auction.

The difference in the bidding process determines the auction type. So, understanding the bid and bidding process is crucial if you plan to build an online auction platform.

#6. Silent auctions

Silent auctions are for non-profit causes and fundraising goals. Unlike live auctions or other types where an auctioneer conducts the bidding process, there are bid sheets where donors can place bids for different items to contribute to charities.

As simple as it sounds, online auctions involve several components that work together. To comprehend the various components and fundamentals of the online auction, let’s understand the basic terminologies to comprehend the various components and fundamentals of the online auction.

Auction terminologies

Every auction house has specific terminology you need to know before designing an online auction platform.

  • Auctioneer- A trained professional who hosts the auction and presides over the entire bidding process. Bidders are present online, and auctioneers can place the bid on behalf of absentee bidders. Auctioneer also announces the bids being placed, and if an item does not attract any bidder, it is signified as a “pass.”
  • Catalog- There will be a digital catalog with all the items bidders can bid on for an online auction.
  • Valuation- Each item available at the auction has to go through a valuation process. A professional evaluator will examine all the items and determine the base price for each item.
  • Lot- A lot is a group of items shown on the auction platform with the bid price, high-quality images, and descriptions. There can be multiple lots in an auction, depending on its type.
  • Bids- It is the amount bidders pay to win the auction.
  • Bid increments- Every bid amount that a bidder places is in the increment of the last bid, increasing the item’s price, and the highest bid wins the auction.
  • Seller commission fee- It is the percentage of the sale price that the auction platform charges the seller for using their services to sell their item.
  • Hammer price- The winning bid at the auction is called the hammer price. This is the amount the bid winner must pay to acquire the item.
  • Buyer’s premium- The auction house charges the buyer an additional fee with the hammer price for the privilege of buying at auction, where prices are less than retail. It helps cover all the costs of an auction house.
  • Fair warning- It is a warning an auctioneer gives to the bidders to signal the close of all bids on a lot. A fair warning offers a final call for bidders to increase the bidding amount before the sale is completed.

Benefits of online auction platforms

  • Designing and developing an online auction platform can help your business with the ease of selling, bidding, and transacting.
  • Online auction platforms help your business attract bidders worldwide to find new and unique items over the internet and place bids from anywhere in the world.
  • Auction houses can use online platforms to maintain the bid sheets
  • Startups can leverage such platforms for fundraising goals and cater their services to different bidders
  • Businesses can use online auction software to reduce the time and cost of auctioning
  • Online auction platforms can provide higher security with auction fraud reports, monitoring, and policies that ensure compliance with standards like European Union fair trading rules.

Simform’s expertise in developing online auction platforms

Here at Simform, we have been providing high-end digital product engineering solutions for different use cases, including online auction platforms. One of our clients needed an online auction platform to help auction houses with enhanced digital transformation.

So, we helped them build one with microservices architecture, DevOps practices, and container implementations. Our team offered an end-to-end white-label solution for 100s of deployments. Contact us for more information on how to develop an online auction platform.

Hiren is CTO at Simform with an extensive experience in helping enterprises and startups streamline their business performance through data-driven innovation.

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