Friday, August 21, 2009

Response to reader: Since we don't know how much an auction winner payed for their bids how do we know if they got a good deal?

An anonymous reader left the following comment on a post I made about a Swoopo auction in which the winning bidder lost money and would have been better off purchasing the iPod he won at the retail price. I decided to post my response here instead of in the comments because I think many readers will find this argument interesting. Here is my original post and below is the comment:

"Swoopo also auctions of bids. Hence, you assume that he paid $108 in bids, but he may have purchased the bids at a substantial discount. 50 bids recent sold for $3.62. It is likely that his cost of bidding was below $43.60 and he earned positive profits."

You make a good point Anonymous, the winner may have paid less than retail price for his bids which would increase the value he received from winning. However, your argument is incorrect because in actuality it is highly unlikely the winner spent less than $43.60 on bids, as you suggest. Here is problem with your argument:

If the bidder paid $43.6 in bids (which is, as you point out, the most he could have paid to have received a favorable price on the iPod)and he cast 144 bids ($108/.75), he would need to be paying $0.30 per bid (43.6/144) to stay below $43.6. This means he would need to have won the bidpack in your example (and several more just like it) with just 15 bids or fewer.

Here is where 15 comes from:

3.62 +.75(X) = 50*.3

Where X is the number of bids cast to win (rounded), .75 is the price of a bid, 3.62 is the cost of the 50 bid bidpack for the winner, 50 is the number of bids won and the .3 is the required price per bid won.

Winning a 362 bid auction with 15 bids (4% of bids cast) is unlikely. It's possible but I don't think you can argue this is the norm and not the exception. I'm not saying winning is based on odds, it's not, but people tend to win when they demonstrate their willingness to win at all costs, ie exhaust their competition - a feat than cannot be accomplished with 15 bids. People do win with only one bid, but these situations... are highly, highly unlikely, especially on Swoopo, the most popular penny auction site in the world.

Let’s take it one step further. Say this bidder is a repeat player and acquires all of his bids by winning bidpack auctions (never buying any) and let’s assume in doing so the price per bid he receives from winning bidpack auctions is $0.30. If we use this as the price per bid cast for him to win the bidpack auction in your example he would need to win the bidpack with the following number of bids or fewer:

3.62 +.3(X) = 50*.3

X = 38

He would need to win the bidpack auction with 38 bids or fewer to hold his price per bid at or below $0.30. Winning a bidpack auction in which 362 bids were cast with 38 bids (10.5% of bids cast) is still highly unlikely and even more unlikely on a repeat basis – which is required for his price per bid placed to stay at $0.30.

This outcome also fails from a theoretical standpoint. If users could expect, with a high degree of certainty, to win bidpack auctions at a cost per bid won of $0.30 on a regular basis they would never buy bidpacks at the retail price. Swoopo would be losing money on almost every single auction and would also have to be auctioning off far more bidpacks than we see them doing.

Note: the auction for the iPod in my earlier post is from a period of time when Swoopo charged $0.75 per bid, the auction for the bidpack Anonymous cites in his comment is from a more recent auction after Swoopo started charging $0.6 per bid. The change in bid prices would likely alter the outcomes of these two auctions slightly, but the general argument still holds.

Anonymous makes a good point that we don't know how much other bidders paid for their bids or how this impacts their bidding decisions. However, in the case of the iPod auction discussed here, the winner almost certainly lost money.


  1. Having just discovered Swoopo tonight, I'm taking time to investigate the concept before bidding on something.

    Finding the auctions for bidpacks, it occurred to me that one could conceivably learn the swoopo system by bidding on bidpacks, thereby minimizing or potentially removing the cost of bidding on other items.

    If one could reduce/remove the cost of bidding by accumulating bidpacks, then bidding on actual items would then put the actual cost of items down closer to the winning auction price.

    Then (before finding your article) I made a leap of logic that, if one could consistantly buy items on swoopo for significantly less than retail, using the bidding-for-bidpacks strategy to pay for the bids of items, one would then have new items for less than retail that could be sold at a profitable margin on a site like eBay.

    I'm sure I'm not the only one who ever thought of this.

    Your article, however, makes it seem like this would be more difficult to execute in practice than in theory.

    If one were to employ your "Nikon Camera" strategy from your "Living in SIN" article, however, or some combination of the bid-for-bidpacks and the "Nikon Camera" strategy, it seems that one would be more than likely able to win the item for less than retail price, assuming they were committed ahead of time, as in your Nikon camera example.

    I'm left wondering how viable that could be as a profitable venture, to find a method that consistantly gets the products plus bid price at less than retail in order to still have enough margin to sell at a competitive price on eBay.
    You'd have to basically factor the bid price in as an operating cost, and find the most effective methods of keeping that cost low.
    Of course, you'd also have to factor in the time spent, since you can only have one bidbutler running at any given time, meaning only one auction at a time could be automated and any other auction you were bidding on would have to be run manually.

    So, assuming you could find a method for keeping the bidding cost low, and could sell the products for more than your cost plus bidding, you'd have to factor the time spent against any net profit to determine whether the pay was worth the time.

    Then again, if one were a student with a little spending cash to invest in the concept and were spending all their time on facebook etc. anyway, it might be worth a try.

  2. Interestingly, budpack auctions are some of the most competitive. I've seen bidpacks go for more than retail without even factoring in bids spent! I literally saw a bidpack auction price go above the price you could buy it for instantly on Swoopo.

  3. Thanks for responding. I agree that it is unlikely. However, let me provide an example from the first completed bid voucher auction I saw on Swoopo this evening:

    $30.60 in bid costs + $52.30 auction price = $82.90

    Price per bid: $0.276

    Cost of 144 bids: $39.79
    Auction price for iPod: $155.40
    Total cost: $195.19
    Profit: $3.80

    And, Zorro could have bought the iPod for $175 from Amazon. Which, by the way, is probably where the item will come from. According to the T&Cs section 8, delivery comes directly from their supplier.

    Regardless, the whole thing is a great way to prey on the naïve.