Bidso Going for Penny Auctions

Bidso launched recently with a reveal price auction (similar to Circuspop, and one of Dubli's auctions) but according to a post on the business networking site ScriptLance, they are looking to make a foray into penny auctions.

This post shows that they are willing to pay up to $150 for a penny auction feature, and have gotten several bids. I'm surprised that the cost of implementing this feature is so low.
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The Auction Squirrel Merges with BidMyDreams

The Auction Squirrel announced on their website that they have merged with BidMyDreams, another penny auction site. Auction Squirrel also stated that their closure was due to, "as some of you know" a "family crisis," unless the family crisis was running out of money, this is news to us. I never saw The Squirrel say anywhere that their closing was due to a family crisis.

This is a bright spot for Auction Squirrel customers because bids will be transferred and honored by BidMyDreams. Also, all Squirrel customers to register with BidMyDreams before Oct. 31st will receive 5 free bids.
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Economic Papers on Penny Auctions

If you love economics read these two great academic papers on Penny Auctions. If you don't love economics, wait till tomorrow (more urgent things came up and this will have to wait, maybe by the end of the week) and I will provide a layman's summary of both. These papers are the best I've seen and provide a depth of analysis that has incredible value for anyone who plays penny auctions, is thinking about playing or operates a penny auction site.

For example, Edward Augenblick states in his paper (1), "the top 11% of bidders in terms of experience create more than 50% of the total profit [for Swoopo, which was where the data was collected]." He also finds that there is value added for experience, calculates Swoopo profit margins and makes quite a few interesting remarks.

Augenblick states, "There are strategies that have significant effects on the estimates of the effect of experience. Broadly, the most important appears to be "bidding aggressively," in which a player bids extremely quickly following another player's bids."

1) Pay-As-You-Go: Theoretical and Empirical Analysis of a New Auction Format by Edward Augenblick at Stanford:

http://www.stanford.edu/~ned789/Pay_As_You_Go.pdf

2) Penny Auctions by Toomas Hinnosaar at Northwestern:

http://toomas.hinnosaar.net/pennyauctions.pdf
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Dubli Goes Public!

MediaNet Group Technologies, an OTC company (MEDG.OB) that manages online rewards shopping programs, announced Monday that it completed a reverse-merger with Dubli (aka CG Holdings Limited). The deal grants Dubli executives control of MediaNet and allows them to choose a new board of directors. After issuing new shares, MediaNet will have 299 million shares of which Dubli will own 269 million. MediaNet has a market cap of $6.55 million, revenue of $2.55M and net income of -$911,870.

A reverse-merger is the cheap and easy way for a private company to go public, avoiding cumbersome SEC requirements. However, trading over the counter will require Dubli to file with the SEC so we will soon know much more about Dubli's financial position than we currently do. Should be interesting.
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That's It, That's All: The Auction Squirrel Has Left the Building

It is with great sadness that I report The Auction Squirrel shuttered its doors today. The penny auction site auctioned 516 items and lasted just shy of one month, it opened on Sept. 23rd. I initially mocked The Squirrel, saying it was foolish to open a new penny auction site without having a "special sauce" when there were nearly 100 other sites competing in this market. However, as time went by I was impressed by The Squirrels apparent honesty and dedication to being an upstanding business. There were a few times when it seemed like The Squirrel was a few small tweaks away from bumping up against the break-even point, however after one month of losses, the site has decided to throw in the towel.

I applaud their honesty and want to point out that, as Obama would say, this is a teachable moment. If The Squirrel couldn't make it what does that say about a lot of similar penny auction sites out there? Are they legitimate, are they shilling, do they intend to ship your products? Anyone can open a website and anyone can cheat you. It has become very difficult to make it in this business and I suspect that a lot of people who would open a site in this environment have the intention of cheating you, or even if they set out with good intentions would turn to fraudulent practices after the losses start to mount. This is a strong argument in favor of only shopping at the most established and trustworthy penny auction sites.
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Nick Lachey's Winnit.com is booming, at least its traffic is

Winnit.com has seen a huge spike in traffic since launching recently and is moving swiftly up the PennyAuctionTraffic.com rankings. The reverse auction site is now in 8th place behind Winners24 with 54,400 unique visits in September. Part of Winnit's success is undoubtedly due to Lachey's media blitz, including a recent interview on Good Day Philadelphia where the anchors conduct what might just be the softest interview in television history. Here is the clip:

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Christmas Wishes

Ho Ho Hold on Walgreens, today the retailer rolled-out (dusted off?) its Christmas merchandise - a good week and a half before Halloween and a month before Thanksgiving. While excessively early and funny in its own right, Walgreens's jumping of the gun got me thinking about the holiday season, and penny auctions.

This is baby's first Christmas, yes Swoopo was active in the US last Christmas, but there was no BidCactus, no RockyBid, no Bid Rodeo, no Poor Daddy's Penny Auction House, No Auction Squirrel, none of our favorites! The birth of the US penny auction industry really happened this year, meaning I expect to see some fairly interesting and innovative promotions this holiday season.

As a commenter on Penny Auction Insider pointed out some weeks ago, most people play penny auctions (he/we think) because they can't easily afford the retail price of the items they are bidding on and hope to get lucky. During the holiday season the budgets of even middle and upper class people are stretched or broken, with things purchased on credit and material dreams fulfilled. Penny auctions amplify this mentality, especially among the poor and we expect many people to spend their entire holiday budgets on bidpacks, in an attempt to parlay a little into a lot, and most of these people will lose everything in the process.

Note to penny auction sites: If you don't have a "Swoop it now" feature, you should probably start working on that ASAP. The holiday season is when people are really going to want that option.

And when/if you have exciting holiday promotions, I will happily discuss mock or praise them on this blog if you email me at pennyauctinguy1 [at] gmail DOT com. This is your opportunity to think outside the box (many of you for the first time) so do something creative and intelligent and I'll sing your praise. This is also a gentle reminder to stop spamming the comments section.
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The Scams of the Internet

Analyzing penny auctions has really opened my eyes to internet scams. Last week my friend was elated when she found ibagdo!, an online retail site featuring woman's designer shoes, bags and accessories at more than 50% off retail. She picked out some token of frivolity she couldn't live without and began the checkout process. However, she became confused when she saw that the only payment options where WesternUnion, MoneyGram or bank wire transfer. From this alone I can discern that ibagdo! is a complete scam. If you need further proof, their customer support email address is bagdo.com@gmail.com.

Paypal is a multi-billion dollar company for a reason. Wiring money to an internet company you know little about is an awful idea, almost as bad as buying or selling anything to anyone in Nigeria.
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Reader Comment on The Squirrel: Shills?

Here is a new comment I received from an Auction Squirrel user that you might find interesting:

"I think [The Auction Squirrel] turned to shills. My wide did one auction with her pack of 30 and I did another with a total of 31 bids. Both were for $25 or less items. We both got outbid by one bidder (who obviously also overbid to win) and the auctions all around those two went for next to nothing...no bidders. the one just before mine, for example, went for ONE bid. Sour grapes I'm sure...just suspicious enough to keep me from buying another pack though I can tell you that much."

This is suspicious and had I been the bidder I expect I would also be weary of The Squirrel. I don't know for sure if The Squirrel is using shills, I am fairly confident they are not. I see lots of names on the ended auction page that I know to be real bidders and I myself have won.

Last night I watched the auction for the Shell gas card and it seemed normal. There were only three bidders and the card sold for 18 cents. The winner was rbw63, who I believe is a real person. I'm sure readers can confirm whether this is true or not since he is very active on The Auction Squirrel.

I think the reason why some items go for cheap and some go for over $1 has to do with the resilience of the competition. Some people give up early and others are determined to win no matter what. As has been discussed in much detail here and elsewhere, there is an incentive for users to convince other players that they are willing to win at any cost, because if other players believe this person they won't challenge him and the item will be won on the cheap. People on the Penny Auction Watch Forum love to berate bid-to-two-2-too-win for winning at all costs, he is trying, with much success, to develop this kind of reputation.
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The Auction Squirrel Looking Healthy

Today I took a look at the last 30 ended auctions on The Auction Squirrel, and it looks like they may be making a profit (or close to it!). A few physical products aside, The Squirrel sold 24 gift cards and bidpacks for revenue of $677 (assuming 15% of bids are free) and a total COGS of $550 + $120 for shipping (24 products @ $5 each), for a profit of about $7 (EBITDA). In looking at this estimate I would say that my estimate for number of free bids is too low, meaning the Squirrel is probably not cash flow positive quite yet. I'm also not factoring in all of their fixed costs, mainly hosting the site. I'm also ignoring a promotion The Squirrel is doing which gives winners free bids if the price of the auction goes over $1.00 (Squirrel, why are you torturing me?). And this also ignores the fact that The Squirrel has been bleeding cash the last few weeks and has some serious ground to make up from losses early on. But maybe The Squirrel has passed the lowest point on it's J-curve and is heading toward break-even and then on to more profitable pastures. The holiday season is also coming-up and I'm sure there will be an abundance of people looking to fill Christmas wishes on the cheap this year, so if The Squirrel can make it till then it might be OK.
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Why Gift Cards are Great for Penny Auction Sites

Most penny auction sites auction gift cards, Bidcactus started with them and the Auction Squirrel loves them, it seems the only site that stays away from gift cards is Swoopo. In fact, I can't remember Swoopo ever auctioning gift cards. But Swoopo aside did you ever wonder why penny auction sites love gift cards? I did, and below are some reasons why gift cards are the perfect product for penny auction sites.

1. No sales tax. It's a cumbersome process to obtain a resellers permit (I'm sure this varies by state and am not sure what the details are in each one) which allows the penny auction site to avoid paying sales tax on the items they buy. And some businesses might not accept the permit, meaning the penny auction site is stuck paying the sales tax - which is hard for an internet business to legitimately pass along to the auction winner. Gift cards purchases are not assessed sales tax because the tax is collected by Uncle Sam when the card is used to make purchases at the store, meaning the penny auction site can avoid any issues with taxes, including paying, collecting, and worrying about in state/out of state.

2. Cheap to ship. Many penny auction sites do not charge shipping, meaning they eat the fees when they send you that 50" plasma that weighs 70 pounds. Gift cards, on the other hand, are cheap and easy to ship, meaning penny auction sites can offer free shipping without breaking the bank.

3. Easy to find. Selling a PS3 requires negotiating a relationship with a drop-shipper or heading to the local Best Buy to pick one up and send it yourself. Running around town finding the goods one needs to fill orders for won products doesn't sound like a lot of fun. However, gift cards can easily be found at the nearest grocery store, all under one roof.

4. Pricing is easy. Calculating the amount saved or other metrics to determine how good of a bargain the winner received requires knowing the price of the auctioned item. This introduces questions like do I use the MSRP or the current price, the Amazon price, the lowest price I can find or is it something else? Prices change all the time, especially on electronics which become outdated quickly when new models become available. Saying that the "correct" price of a gift card is its face value will never get you into any trouble and since gift cards can sometimes be purchased at a discount this means the penny auction site might make a little extra money on the auction. Today Best Buy had $50 iTunes cards for $40. I wonder if The Squirrel stocked-up.

The downside of gift cards is that they aren't as exciting as tangible products, but with points 1-4 above, you can see why most penny auction sites feature gift cards.
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Psycho Auction: "In for a dime, in for a dollar"

Psycho Auction is a penny auction site that has been around at least since the spring, but I didn't hear about them until this week. Psycho Auction is kind of a smorgasbord of penny auctions, all packed under one roof.

The site has traditional penny auctions, as well as Virgin, Killer, Speed and Reverse auctions. Virgin is for people who haven't won before, Reverse drives the price down (can go negative), both Speed and Killer are won by casting the most bids - Speed doesn't add time with each bid and Killer does.

Psycho Auction is fairly hard to understand because there is so much going on and because the user interface is not spectacular, but if you like variety, it certainly has that going for it.

The site also has a tab for selling items which is intriguing but this is the only explanation that is given: "Sell an item and get all the bids placed on it plus the fair value equivalent in bids! Or do you want to open your own Psycho Auction site? We can help you! Contact us under software@psychoAuction.com." I don't understand how selling things works from this explanation but allowing users to post their own items on the site is interesting, although it has some logistical complications I don't see a way to get around. Clearly, Psycho Auction did not address any of my concerns in its explanation.
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Bidcactus and The Squirrel

As many are aware, I've been extensively covering the birth of The Auction Squirrel over the past few weeks in an attempt to provide the community and myself with a better understanding of what it takes to start a new penny auction site. In many of these posts I've made some comment comparing The Squirrel to Bidcactus and yesterday I received some feedback from Bidcactus that I wanted to share.

At one point I said Bidcactus was "really good at being average while spending thousands per day on AdWords." Understandably, Bidcactus was not fond of this comment and I wanted to explain what I meant because I feed the context is not all that clear as I reread my own post.

What I meant to say is that Bidcactus is really good at being an average ecommerce site. They are, in my opinion, exceptional at being a penny auction site. If one compares Bidcactus to it's own industry, Bidcactus and Swoopo clearly shine. They have all of the details down and their sites are well functioning. However, when compared to ecommerce sites internet-wide, both Bidcactus and Swoopo are second tier. This is no strike against them, no one is expecting Bidcactus to compete with Amazon, eBay or Gilt on an aesthetics front. It takes a lot of resources to create such a site. This is all I was trying to say.

Criticizing Bidcactus for not looking like a top ecommerce site would be like criticizing Penny Auction Insider for not looking like Slate or the Huffington Post, which as a comment might hold some value for gaining perspective, but clearly does not compare the site to its relevant peers. I wouldn't take any offense if someone told me my site wasn't nearly as good as Slate, I'm not trying to compete with Slate, and I hope Bidcactus takes no offense when I point out that there are more sophisticated sites on the web.
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Checking in on The Squirrel: Week 2

One might think that on its 14th day of practically giving away items, The Auction Squirrel would have generated enough buzz to get some reasonably competitive bidding on the site. Not so. I just looked at the last 30 ended auctions there and estimate the cost of acquiring and shipping those won items (bidpacks cost nothing) to be about $975. Revenue from sales of won items amounts to $8.97 and bid revenue is about $717.6. In total, The Squirrel took a loss of about $245 on these last 30 items, which is on top of mounting losses from the past 13 days. On average, The Squirrel has been losing nearly $10 on every item it ships, and this only accounts for variable costs, not fixed ones like rent for the office or site hosting and assumes the owner is willing to work for free.

However, with an average of 30 bids per item, the Squirrel is coming close to breaking even. If you stripped all non-$25 gift card items as well as the five worst performing auctions out of this bunch of 30, the Squirrel would be about $20 in the black (assuming all bids were paid for, which they were not). Perhaps a few simple tweaks could help the site go cash flow positive.

Many people have won and received items from The Squirrel so we know they are a legitimate business and I think their performance to date characterizes the challenges of operating a successful penny auction site.

As I mentioned in my last post about The Squirrel, the site needs a plan. An "I have built it so they will come," philosophy is not working in this space. The Squirrel needs to focus on building traffic and building trust, both of which require significant cash outlay. A new visitor to The Squirrel is frankly not going to be impressed with the user interface of the site - and the less professional a site looks, the less people are going to trust it.

However, maybe I'm being anxious, the site has only been up for 14 days. If the owners can afford to give it another month, perhaps they will go cash flow positive without the help of AdWords or a site redesign. BidCactus has been doing very well without much sophistication for quite some time now.
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Checking Circuspop Prices

Earlier today I received an email from Circuspop (reverse auction site) saying they would give me 3 free bids to be used "as I see fit" during a special Apple product sale they are having today from 12 - 5pm EST. Circuspop says their Apple products will be 20% off or more.

I just looked at the site and used my free bids to check the price on a MacBook Pro and iPod Nano (twice). The MacBook had a starting price of $1168, a little cheaper than the Apple Store price of $1199 and the same as the Amazon price. When I looked, the price on the MacBook was $1070.5, about $100 cheaper than Amazon which would be a great deal if I liked Macs.

I used my other two bids to look at the price of the iPod Nano. It has a starting price of $179, the same as the Apple Store and higher than the Amazon price of $169.99. When I checked the first time the iPod was $165.50 and when I checked a few minutes later it was $164. This price is a little better than the Amazon price (by about $6).

The site has sold out of a few of the iPods and the Nike+iPod Sport Kit but not the laptops.
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Case Study: The Auction Squirrel needs to go cash flow positive

This is part of an ongoing examination of The Auction Squirrel, a penny auction site I decided, almost at random, to analyze on Penny Auction Insider.

The Auction Squirrel has been bustling along for a while now after launching last Wednesday and now has 202 ended auctions. As a new site, The Auction Squirrel suffers from two problems, 1. convincing users that it can be trusted and 2. getting enough traffic to make the business cash flow positive.

I have been informed The Squirrel is not shill bidding and quickly shipping won items. Most people who are bidding at the site probably know this, meaning they will become repeat customers. Since I've been informed of this by a credible source, I am willing to confirm the legitimacy of The Squirrel on this blog, meaning my readers should feel comfortable bidding on the site also. This helps to solve problem 1 above.

For problem 2 - getting enough traffic - The Squirrel is clearly struggling. To give them the benefit of the doubt, they've only been live for a week, however by looking at ended auctions anyone can see that most items don't have much bidding competition and are selling at a loss for The Squirrel. To solve this problem, I think The Squirrel is going to have to think outside the nut shell. If The Squirrel goes the way of Bidcactus - that is to be really good at being average while spending thousands per day on AdWords - then they're going to struggle. There are already a half dozen good penny auction sites with significant traffic and positive reputations with bidders. The Squirrel is either going to have to take significant, month after month losses from ad spending to get site traffic, find a way to differentiate its self, or be content with coasting along staying cash flow neutral (if it's lucky).

I doubt The Squirrel has the cash reserves to start a massive AdSense campaign, most penny auction sites don't. Competing with the big guys is not a good strategy for The Squirrel, they need to find a way to differentiate themselves. My next Squirrel post will address this issue, but I should say upfront, I certainly don't have all the answers.
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