Pennies from Hell?
Some call it ‘entertainment shopping,’ to others it’s gambling; some even say it’s a scam. Welcome to the controversial world of ‘penny auctions’ like Swoopo, in reality a highly innovative web-business model, a ‘bidding fee scheme,’ which budding Web Ecologists should check out – although having said that, they should be very wary of getting sucked into any bidding.
The idea is simple. The site will show a wide range of very desirable products, like expensive digital cameras, laptops, games consoles, TVs and mobile phones; each to be auctioned. The auction is run simultaneously around the globe, although each country has its own unique interface showing prices in a local currency. Clever. It maximizes the audience, and ensures a 24-7 auction.
The current bidding price is shown on the screen (starting at zero), and each bid entered with the simple click of a button adds a ‘penny’ to the auction price. The successful bidder will pay the displayed price for the product, usually a fraction of the full retail price.
However, each bid actually costs a UK bidder 50 pence (75 cents in the US). Note that not all auctions are ‘penny auctions’ – some increments are 10 pence or more with each bid, but we’ll stick with the penny’ variety here as they are typical.
A date for the end of the auction is given, often a couple of days or more away. But there’s a twist. There’s a running clock that starts with the auction, but it is set to a much shorter time (typically the order of hours). It clicks down second by second, and if it reaches zero then the final bidder wins the product. And there’s twist. Each new bid not only adds the one penny to the price, it also extends the time on the running clock by a few seconds. The 24-7 clientele means the clock won’t run down in the middle of the night, keeping the auction going and maximizing Swoopo’s profits.
It’s fascinating to watch an auction. When the clock goes down below fifteen seconds it glows red, and when it gets close to zero the bids start coming in, and not only does the price go up, but also the time on the running clock is extended. It’s fascinating to watch the behaviour patterns of individual bidders – very easy to do since the site displays the bids as they come in.
What a brilliant business model. If the final ‘penny auction’ price is £x, then the total number of bids will have been 100x (100 penny bids for each pound in the final price); and the income for Swoopo is £51x pounds. (For every penny in the final price Swoopo gets 50 pence for each bid, plus that penny from the sale). This is a profit of £(51x-y), where £y is the original retail price of the product. The break-even point is just less than 2% (1.9607…) of what the product cost Swoopo.
Take a real example: a popular brand of TV (retail price £679.99) sold for £86.83 in a penny auction. The income for Swoopo was £4341.50+£86.83 (that’s £4430.34): profit £3750.34. Not bad! Swoopo would have broken even at £13.34, and that’s always assuming they bought the TV at the full retail price.
The rational Web Ecologist in this situation would note that if Swoopo can make £3750 selling a £680 product, then there will be a lot of losers out there. Granted the winner gets the goods at a very reasonable price, but hundreds of failed bidders will have spent a lot of money. A classic example of the “victory of hope over experience.”
So it was bound to happen! Now there are sites that sell books purporting to provide a strategy to win on Swoopo. Let me give you a word of warning from Game Theory! If more than one bidder is operating according to the same strategy, then the non-linearity introduced into the situation will negate the strategy.
It only goes to show that the great American showman Phineas T. Barnum was right: “There’s one born every minute!”
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