Penny Auction Insider

BidRodeo's anniversary

2010-05-27T18:31:00.000-07:00

Last summer, I got an email from Weronika Cybulska, head of marketing of at BidRodeo, saying nice things about this blog, and suggesting I write a blog-post covering her site. I did write a blog-post, but you know me, most of the post was making merry of her name. There's a reason why this site isn't called "Mature and Polite Penny Auction Insider". When she responded, sounding a little hurt, I apologized and removed the post.

So now it's BidRodeo's first anniversary and I get another email, not from Weronika herself, but Weronika's PR representative. Hmmm, I thought, BidRodeo doing well enough that they need their own flack. Then I saw the flack's name: Heddi Cundle.

I'm not criticizing, it's a great name. I will probably mutter it in my sleep tonight. I don't know if I remember my first girlfriend's full name, but I'll remember Heddi Cundle's wondrous appellation to my dying day and I bet that now you, gentle reader, will too. It's Dickensian, in a vaguely suggestive way. I hope to meet Heddi Cundle some day, if only to see if she matches the mental picture her name paints. Of course, if I do meet her, I hope she hasn't read this post.

Anyway, BidRodeo seems to be doing well. The site looks beautiful: elegant and animated. Take a look.

On the business side, Heddi Cundle's email said, "Users have saved average 67% on video games." I assume that she's quoting that category because it's showing higher savings than other categories. Say the site-wide average is 50%. Don't forget, BidRodeo's revenue from tokens might be 50 or 60 times what the winner pays for the merchandise, so their gross margins must be staggering, 95%, 98%. Nice work if you can get it.

A risky proposition

2010-03-21T10:27:00.000-07:00

Not all the email I get is about Nigerian royalty who need my help getting money out of the country or miracle cures for psychosomatic diseases. Because of this blog, a lot of my email is from marketing people flogging various penny-auction sites. I do what I can to cover these sites though I don't get to many of them, partly because I'm busy with other thing but mostly because I'm lazy as hell.

The latest was from Baffol. Baffol is a pretty drab-looking site (which can be a relief after some of the ridiculously tarted sites I've seen) but has two features of interest:

Each purchase of tokens also results in a credit against their "online store".
They haven't opened yet.

The first isn't really that interesting. The online store isn't open yet and the odds that you'll want any item they happen to have at the offered price (even after the credit) aren't good. Plus, when you bid, you might competing against other people who may be better motivated (because they do want something from the store).

The reason the second thing interests me is that every penny-auction site loses money when it starts. When the store opens tomorrow, there's going to be almost nobody there. If you bid, you're likely to win.

Of course, these Baffol people have zero track record. They could fold in a week, taking your money (and your credit-card number) with them. But you might pick up a Kindle for next to nothing.

Tired of peanuts?

2010-03-18T14:24:00.000-07:00

Yielding, as so often, to heart-felt entreaties combined with appeals to my self-interest (see my previous post for a full disclaimer), I went to visit BidOnCash. There are a lot of amateurs in this business, even where you wouldn't expect them, so I was pleasantly surprised.

BidOnCash cash is pretty much what the name implies: an ordinary ascending 100:1 bid-fee auction (that is, each bid costs the user $1 and raises the price of the item by $0.01), the interesting twist is that the items are all cash.

Which makes sense. You go to BidCactus or Swoopo and they're selling GPSs and digital cameras and you ask yourself: do I actually want a GPS or a digital camera?

Homer: Aw, twenty dollars! I wanted a peanut!
Homer's brain: Twenty dollars can buy many peanuts!
Homer: Explain how!
Homer's brain: Money can be exchanged for goods and services!
Homer: Woo-hoo!

So that's good. And the site looks good: the color-scheme of a Rottweiler, brown, black, and gray and a very sleek user interface. On the minus side, the home page is dominated by a Flash banner vid of some blinged-out white guy apparently enjoying his winnings but, thank goodness, you can turn it off.

Some notes in no particular order:

As with every bidding site, some bidders are much more aggressive and successful than others. The site puts a limit of three wins per bidder per day -- and measures the day as midnight to midnight, California time. I'm guessing that around 11:30, most of the serious players -- the people you don't want to be playing against -- have already been limited out. Of course, that's 2:30 in the morning if you're on the East Coast, but hey, do you want to sleep or you want to win?
If you want to play, buy a small bid pack and use it to win a bigger bid pack. Bid packs always go at a discount on this site (as elsewhere). The average 30-bid-pack auction goes for about 12 cents (that is, all the bidders collectively expended 12 bids and the winner also expended $0.12). So if you buy a 20-pack and just dump it into BidJames, their automated bidding service, you can probably pyramid your bid war-chest without too much risk.
And BidJames? The name must be their variation of Swoopo's equivalent BidButler. I guess they're just too Non-U to know that butlers are addressed by their surnames ("Collingsworth another round of gin and tonics!"); it's chauffeurs who are called by their given names ("Home, James.") Of course, BidCollingsworth would be non-obvious.
Higher-valued auctions go for more, even proportionally, than lower ones. I saw a $200 auction go for a staggering $25.95. If people bought those bids at full-price, BidOnCash made (and their customers lost) almost $2400 on that one auction! Realistically, the bids probably bring in 12 cents apiece or so, but still.
Most of the auctions are considerably out of the money -- that is, even valuing the bids at full price, all the bids expended plus the (negligible) item price is less than the value of the item. While that's good (very good) for the players in the short term, either it will change (and good deals will become considerably scarcer) or the site will have to close. Either way, you don't want to keep a big account of bids that will become either worth less or worthless, depending on BidOnCash's success.
The auction is technically a penny auction (because the price of the auction goes up with every auction) not a dollar auction (where the auction price is fixed) but because the ratio between bid-price ($1.00) and the bid-increment ($0.01) is so high (100 to 1, something like 6 to 1 being average in the industry) I wonder if it will be more inclined to act like a dollar auction (few bidders, but those bidders inclined to get into bidding wars). I will be keeping an eye on it.

Another day, another dollar auction

2010-03-18T11:54:00.000-07:00

A few weeks ago, a nice guy named Markus wrote me, asked me to check out his auction site. I didn't, mostly because I didn't get his email. Actually, I didn't get anybody's email because I was at the bottom of the Gulf of Thailand. Depending on who you talked to, I was either learning to scuba dive or "practicing to drown" (in the words of my instructor). Whichever, the only way you were going to get a message to me was to write in on a rock and drop it off the back of a boat.

When I eventually ran out of money and compressed air, I came back, found the original email and a second one offering me [a moderate reward] to run a review on the blog, and a third assuring me of his sincerity. I wrote back, told him I believed that he was sincere but that I was really busy (especially with all the things I'd let slide during my vacation). He wrote back bumping his offer to [a slightly less-moderate reward].

Now if I'd had the brains God gave chickpeas, I would have demanded [a completely unmoderate reward]. Instead I just wrote him back, told him I'd review his site and he could [reward me with] whatever he felt like.

Actually, now I've been to the site, it looks pretty good, so maybe I'll end up with [a reward of some sort].

[Update: Markus -- who, as I mentioned, is an extremely nice guy and who apparently lives in Cyprus for some reason -- wrote back and asked me remove the details of proposed reward. He was concerned it would look like link-farming. Suffice it to say, the reward was sufficiently moderate in its nature and scale, it would not have moved me to even link to his site, let alone go to the effort of reviewing it; it was just sufficient incentive to get me off my voluminous backside and do my job by tracking penny-auction sites. ]

Still confused about dollar auctions

2010-03-17T10:58:00.000-07:00

There's a sport, supposedly popular in Afghanistan: two players bang their head together until one gives up. The other is declared the winner.

A dollar auction is the financial equivalent of that sport. You bid on an item and the bid costs you a dollar; the other guy bids, costs him a dollar; and it goes back and forth until one of you gives up. The price of the item doesn't change but it's attractive enough to make you start playing.

I tried, without any luck, to analyze the auction.

First, there's not much reason for the auction to ever end. Each round of the game is identical, except that each player is a dollar poorer and each player has learned that the other is determined (or foolish) enough to play this far.

Then I thought: well, maybe that's enough. Dollar auctions (this has been tried in real life) do end. Maybe one player just ran out of money or decided that the other player was crazier than he was.

Given that, is there any reason to start playing -- especially given that most dollar-auctions end with both players paying much more than the item is worth? Well, if you decide that no, it isn't worth playing, your opponent has a powerful reason to play: with no opposition, he can snap up the item for a single dollar!

But hey, you could be the one reason that your opponent has decided to forfeit -- or you can convince him to forfeit by boldly bidding the first time. Of course, he might treat that first bid as a bluff and bid back, but if you bid twice...

And it's on. The basic problem is that whatever strategy one player adopts, the other player has incentive to adopt the opposite strategy, and I haven't figured out any way to get off the merry-go-round. I'm open to suggestions.

"You see, this profession is filled to the brim...

2010-03-16T11:08:00.000-07:00

.. with unrealistic m-----f-----s."
-- Marcellus Wallace

I was consulting with a friend-of-a-friend who wanted to put up an auction site. I'm under NDA so I can't go into the details but the site was selling items, well, I can't tell you what they are but the price-point was like that of a car. So a major purchase.

His model was a timed auction, like eBay's. I pointed out that fixed-time is fine when there are a lot of auctions compared to the number of bidders (many charity auctions are timed) but are prone to sniping. He suggested adding popcorn-timing -- that is, the auction doesn't end until some number of seconds after the last bid, which is very common in ascending bid-fee auctions like Swoopo and virtually universal with open-outcry in-person auctions ("Going once, going twice") -- but the point was, he had never heard of sniping.

This idiot, who I was told had been very successful in selling these items by traditional means, apparently thought he could start a huge business (he was endeavoring to raise some tens of millions of dollars to launch his site) without doing even basic research.

What the hell? I mean, what the hell? What is wrong with people?

Auctions are complicated. Four or five years ago, Britain auctioned off some space in the radio-spectrum for 3G cell-phones. The auction was very cleverly designed and the British government made more than $30 billion, 2.5% of their GDP! A huge sum, enough that they could lower taxes (although -- surprise! -- they didn't).

Some other countries tried to copy the British auction, although the designers of the auction publicly warned them that differences in their situations required different designs. Those countries made effectively nothing, tiny fractions of the money they had been expecting.

Fools and their money...

Haggle - Under the radar penny auction site

2009-11-23T00:24:00.000-08:00

Penny Auction Insider has been taking a break to get some much needed work done, but I came across a penny auction site by accident today and wanted to share. Haggle (which to my knowledge has not been discussed on Penny Auction Watch nor is listed on Penny Auction Traffic - as of this post), is running a Facebook ad that caught my attention just long enough to make me want to investigate whether it was a penny auction or not. Verdict: penny auction. However, they make no mention of the industry phrase in the ad or on their site, which suggests they are going after new customers, not existing penny auction players.

That is all. Hope everyone is having a lovely holiday season.

Busy, Busy

2009-11-11T16:02:00.000-08:00

I'll be very busy studying/working through early December and won't be able to post daily/frequently like I have in the past. In the meantime, if something truly interesting happens in the penny auction industry I'll cover it, but won't be able to write as much as I previously have. However, I'm looking forward to discussing the holiday shopping season, its impact on penny auction sites and the broader economy and will share these thoughts whenever I get a moment.

Thanks

PAG

Bidso Going for Penny Auctions

2009-10-26T09:34:00.000-07:00

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.

The Auction Squirrel Merges with BidMyDreams

2009-10-25T16:24:00.001-07:00

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.

Economic Papers on Penny Auctions

2009-10-22T17:02:00.000-07:00

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

Dubli Goes Public!

2009-10-21T09:17:00.000-07:00

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.

That's It, That's All: The Auction Squirrel Has Left the Building

2009-10-20T15:19:00.000-07:00

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.

Nick Lachey's Winnit.com is booming, at least its traffic is

2009-10-20T11:41:00.000-07:00

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:

Christmas Wishes

2009-10-20T10:26:00.000-07:00

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.

The Scams of the Internet

2009-10-19T10:16:00.000-07:00

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.

Reader Comment on The Squirrel: Shills?

2009-10-16T09:30:00.000-07:00

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.

The Auction Squirrel Looking Healthy

2009-10-14T09:46:00.000-07:00

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.

Why Gift Cards are Great for Penny Auction Sites

2009-10-14T09:10:00.000-07:00

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.

Psycho Auction: "In for a dime, in for a dollar"

2009-10-09T11:43:00.001-07:00

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.

Bidcactus and The Squirrel

2009-10-07T10:27:00.000-07:00

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.

Checking in on The Squirrel: Week 2

2009-10-06T09:34:00.000-07:00

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.

Checking Circuspop Prices

2009-10-01T11:27:00.000-07:00

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.

Case Study: The Auction Squirrel needs to go cash flow positive

2009-10-01T10:24:00.000-07:00

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.

RockyBid Under Attack Again

2009-09-30T14:14:00.000-07:00

RockyBid just sent this email to users:

I regret to inform you that at this time we are currently suffering from technical difficulties in the form of a second malicious DDOS attack on our website and server. We will have www.Rockybid.com up and running as soon as we have shielded ourselves from this attack. While not common DDOS attacks have already crippled other well known websites such as Twitter and Gmail. You can check out this website for more information on DDOS attacks and how it works http://news.cnet.com/2100-1017-236728.html. I want to assure you we are doing everything possible to mitigate this attack while maintaining the integrity of our website and the security and privacy of our customers. Rest assured that due to the nature of the attack no private information is in any danger. We will reverse and re-list all auctions that conclude during the DDOS related downtime, in order to allow for a fair bidding environment.We appreciate your patience as we deal with this issue in a timely fashion. Thank you for being a part of the Rockybid family and we hope to get you bidding soon.

All the best,

The Customer Service Team at RockyBid.com

The Auction Squirrel Ships Products

2009-09-29T12:28:00.000-07:00

I have been fairly skeptical of The Auction Squirrel since they launched last week for reasons I blogged about here. Namely, I'm getting tired of new penny auction sites that launch yet do nothing different. I know it looks like easy money, but even if it was it no longer is. If there are nearly 100 sites competing with you and you aren't special you have a fundamental business problem. If your plan to address this problem is to call yourselves "new and exciting" or "the best penny auction site" or "the number one penny auction site," you have an even bigger problem. The fact that there are big sites like Swoopo and BidCactus makes it even harder to compete (FYI - I keep mentioning these two because their traffic is 10 times as high as the next closest competitors).

So, needless to say, I was none too excited to see The Squirrel pop-up last Wednesday. However, while their site traffic is low and bidding activity meager, The Squirrel appears to be a legitimate business with no shill bidders and one that actually ships products. I spoke with two people last week who won items on The Squirrel and one person today reported that they received the gift card they won. In the penny auction industry being able to confirm that a site is shipping items and not shill bidding is a substantial victory it its own right.

Winnit is gambling

2009-09-28T15:09:00.000-07:00

Sorry I've been away so long. Would you believe I was busy rescuing orphans from burning buildings? What about tigers, I was rescuing orphans from tigers? Yeah, my wife didn't believe it either.

What brought me back was reading the How it works from Winnit.com:

Winnit members bid against each other by placing their guess for the lowest, unique amount on any given product, which results in a winning price that equates to a small fraction of retail cost. The goal is to be the first (and only!) member to bid a price as close to zero as possible without guessing a price that someone else has already bid.

Yeah, this is just gambling, and I'll tell you why.

Imagine that you are the last person to bid. Let's say you are bidding on the Porsche Cayman and you've decided to bid no more than $10. Assume for the sake of argument, that of the 1000 possible bids (that is, 1¢ to $10.00), 9999 are already taken. You don't know that, of course, but it would still be a good bet: $4 for a 1000-to-1 chance of winning a $50,000 car (even after the $10,000 - $20,000 you'd pay in taxes).

But which one should you pick?

Should you pick 1¢? That's cheap, which is good, but being cheap, someone already must have picked it. Should you pick $10 then? The price will have frightened off everybody else! Ooh, everybody else who doesn't realize that what you just realized, that a higher price is more likely to be unique. On the other hand...

But after a moment, this reverie is broken by the obvious: you only have to pay your bid if you win. And be serious, is there any difference paying 1¢ for a new Porsche or $10? Of course not: either way, it's effectively a free car. And if you feel this way, so does everybody else. None of the 1000 possible bids is really any different from any of the others. Picking the winning price is just a matter of luck.

And there's a name for any game where winning is just a matter of luck: gambling.

Interestingly, if the system awarded the victory highest unique bid, it would become less like gambling. While there is obviously no meaningful difference between paying 1¢ and $10 for a sports-car, there is difference between paying $10,000 and $20,000. They are both great deals, but they are still quite distinguishable. So, at least in theory, you could plumb the psychology of your opponents and make yourself more likely win by picking the price none of them would.

Pposh Up For Sale: Asking a pretty penny

2009-09-28T11:52:00.000-07:00

Penny Auction Watch just broke the story that Pposh.com is up for sale. Pposh is the penny auction site focused on travel packages that employed some very suspicious practices after launching late this summer. According to Website Broker, where Pposh is listed for sale, the site has a monthly income of $3000, expenses of $350 and an asking price of $500,000.

As someone with a little bit of experience in the private equity world, let me evaluate this deal for all you prospective buyers, free of charge.

While PAW said some Pposh employees were not getting paid, let's just assume this is a wash and that it really only costs $350 a month to operate Pposh. That brings EBITDA to $31,800 per year. With the asking price of $500,000 you are looking at about a 16x multiple for Pposh. That's on the very high side, a good multiple on a brick and mortar operation of similar size might be 4 or 5x. However, before we declare Pposh overpriced by nearly $350,000, let's dig a little deeper and evaluate it's business potential, market potential, competition and barriers to entry ie let's do a quick and simple SWOT analysis:

Strengths: The site looks good for a penny auction.

Weaknesses: As I have long argued, the only barrier to entry in this space is credibility, Pposh has none. In fact, for such a young site Pposh actually has a very bad reputation (see earlier posts on PAW and Penny Auction Insider). They have no site traffic. Travel packages have huge inherent challenges. For example, selling a flight from one city to another requires the bidder to be in one of those cities and have a need or desire to go to the other city within a limited window of time. This severely limits the number of potential customers.

Opportunities: I believe there is a lot of room for growth in the penny auction industry.

Threats: Pposh has no barriers to entry. There are nearly 100 sites offering similar services for a similar price. The only thing that makes Pposh unique is its product set - travel packages - which poses inherent challenges, and even if there was an attractive market here, more established sites could easily enter this market and leverage their existing customer base to win this sector. There are many larger, more established penny auction sites with experienced management teams and some with VC funding.

In conclusion, Pposh has a weak business model in a competitive industry with no barriers to entry. Pposh has very little site traffic and what reputation it does have is negative. The stated costs are far lower than would be required to adequately run the site and income potential is small given the limited customer set in travel auctions. One big problem is that if expenses are only $350 per month, Pposh can't actually be selling much of anything, which raises questions about the legitimacy of their earnings. According to the Pposh ended auction page they sell over a dozen items a day, including expensive travel packages, car rentals, flights, computers and other electronics. Clearly, Pposh is either not counting the products it sells in its expenses or not actually selling products, which is something we accused them of doing weeks ago. This is very suspicious and appears to be one big fraud.

After doing a basic analysis of the company fundamentals, I believe Pposh.com is overvalued by approximately $500,000 and wouldn't pay a single cent for the "company."

Nick Lachey's Latest "Project" is Penny Auction Site

2009-09-28T09:54:00.000-07:00

Last week on the Rachael Ray Show former pop sensation, 98 Degrees band member and reality TV star Nick Lachey told Rachel he is working on a new "project" called winnit.com, a lowest unique bidder auction like Dubli. I don't know if Nick is an investor, a partner or what, but having a celebrity in the penny auction arena is pretty interesting.

Winnit.com is auctioning off a 2010 Porsche Cayman, but it doesn't end for 63 more days.

Here are a few quotes from the interview:

Nick: "It's a really, really, really cool website I'm a part of now."

Rachael: "You can literally win it for a couple of bucks, isn't that weird?"

To see the part of the interview where Nick talks about winnit.com click here.

To see the rest of the interview where Nick and Rachael talk about Jessica Simpson, the break-up and all that jazz, click here.

For contrast, here is an interview with Foundation Capital's Charles Moldow, who invested $4.5 million in Project Fair Bid along with two other VCs.

Update from The Auction Squirrel

2009-09-25T17:50:00.000-07:00

The Auction Squirrel recently posted this announcement on their site:

More on The Auction Squirrel

2009-09-25T16:00:00.000-07:00

I don't know what happened but The Auction Squirrel doesn't have any live auctions right now. They ended all auctions last night and then earlier today posted a message on the site that said they were switching to a new server. After a period of down time they are now back, but still with no live auctions. I spoke with two people yesterday who said they won items on The Squirrel, and for extremely low prices, which makes me think they have no shill bidders. However, I don't know what the lack of auctions means.

The Squirrel, which opened for business on Wednesday, has sold 92 items so far with a total cost to the site of approximately $3,400 (assuming they buy at retail and bidpacks cost nothing) and collected about $39 in auction fees. Since all Auction Squirrel auctions are of the 1 cent variety this means about 3900 bids were cast. Each Auction Squirrel bid costs $0.80 (slightly less if larger bidpacks are purchased), meaning The Squirrel collected at most about $3120 (rounding). Total bids + auction fees = $3159. However, I believe The Squirrel made much less than this because it gave away three free bids to every new user and because about 1/3 of all auctions were for bidpacks, meaning many placed bids were actually won not purchased. Based on these calculations I expect the site made very little money from bidpack sales, maybe $1000.

If my assumptions are correct, The Squirrel took a hit of over $2,000 from their first two days in operation. Given that they paid $800 for the SwoopoClone software, maybe $80 for a month of hosting + domain registration and $20 for the Squirrel graphic, that would bring total costs to date to $4,300 on revenues of $1,039 ($39 from auctions and $1000 from bids).

As I have previously stated, there are two major problems with penny auctions. 1) They can easily cheat you by using shill bidders and 2) They could go out of business and never send you any of your winnings or refund your money. The Auction Squirrel falls into the second category. If The Squirrel folded up shop today and never came back there is nothing anybody could do about it. No one is going to sue the owner of the Squirrel for a $300 XBox 360 (the most expensive item sold), which means the owner of The Squirrel could simply walk away today. Of course they would suffer a loss of $800 spent on software and maybe $100 on other miscellaneous things.

The real question is whether the owner of the Squirrel thinks they can turn their losses these first two days into a sustainable profit going forward. After all, the sunk cost fallacy applies to auction players as well as site owners.

Penny Panties - Nope I'm not kidding

2009-09-24T17:23:00.000-07:00

"Think Swoopo meets Victoria Secret," the latest penny auction site (sigh) is none other than Penny Panties - a niche site akin to PennyPurses and PennyLaptop, which specializes in, you guessed it, women's panties. Penny Panties hasn't launched yet and they have Google Adwords on their site which makes me wonder if they are serious.

I've often dreamed of making a spoof penny auction site. I almost did after seeing The Auction Squirrel, I was going to call it The Auction Beaver with the tagline "Woodn't you like to win!" Penny Panties has the tagline "Not how your grandmother bought panties." If I hadn't just seen sites like The Auction Squirrel and Poor Daddy's Penny Auction House go live I would have certainly believed Penny Panties to be a spoof, but alas I don't think there is anything in the penny auction universe that can surprise me anymore.

Penny Panties has an email sign-up list if you feel so inclined.

Day 2: The Auction Squirrel

2009-09-24T11:35:00.000-07:00

So today is the second day of operations over at The Auction Squirrel. I've been following the site with an unexpected degree of interest since it's launch at noon yesterday. I think The Auction Squirrel holds my interest because I've never watched a penny auction site go from pre-launch into open-for-business mode before. I also don't see how the Squirrel could possibly make it (with nearly 100 similar sites out there), which gives it a bit of an underdog feel. I am also very curious to see what the Squirrel's strategy is because as I've loosely monitored it's progress these past two days I've seen it sell everything for less than $1. Clearly this cannot be sustained for very long and I don't see them spending any money on Adwords so I don't know how they are planning on getting enough traffic - and bidders - to make the site sustainable. I think with penny auctions the most important thing for bidders is not that they can get a good deal on your site but that they can trust you. Bidders need to believe there are no shill bidders and that they will actually receive there winnings before they spend money. This is the biggest hurdle for a penny auction site and I think the several largest sites, namely Swoopo and BidCactus, have been able to win customers' trust, this is why they are so successful. I would like to see if and how The Squirrel is able to build trust with users.

I'm going to make The Auction Squirrel my little case study. I'll monitor their progress and share my thoughts with the community. If you have any experience with The Squirrel, please share it with me. I am especially interested in hearing from people who have won things on the site. Thanks for your help with this!

The Auction Squirrel Goes Live

2009-09-23T09:43:00.000-07:00

I spent a few minutes over at The Auction Squirrel shortly after their launch at noon today. There were only three or four people bidding at most and I noticed a few usernames from other auction sites like janyce16 and drbud57, however, I also read on the Penny Auction Watch forum that there are now some copycat usernames out there, so I don't know if we are talking about the "real" janyce16 and drbud57. I also noticed that on the auction for the Bed Bath & Beyond giftcard (pictured below), the site stalled at 1 second and never recovered. I stayed on the page for about 30 seconds and when I hit refresh the card was gone. I suppose drbud57, who was the high bidder at the time, won that one. It's hard to fault the site for being a bit glitchy on the first day, if Blogger wasn't writing the code on this site I'm sure there would be lots of bugs. Either way, with such low bidding activity it looks like there are some good deals to be had, that is if drbud57 let's you win anything.

Swoopo's Days are Numbered: Auction Squirrel is Here!

2009-09-22T14:31:00.000-07:00

This placeholder for the soon to be launched penny auction site The Auction Squirrel speaks for itself. I hope Swoopo has a contingency plan. For more on The Auction Squirrel see my earlier post Does the world really need another penny auction site?. FYI I added the "Our prices are nuts!" bit, that wasn't really on the Auction Squirrel page - but it probably should be.

Great Forum Post Over at PAW

2009-09-22T14:14:00.000-07:00

I really enjoyed reading this thread - you can learn a lot about the mentality of a penny auction player from this forum:

http://www.pennyauctionwatch.com/forum/showthread.php?p=1925#post1925

Does the world really need another penny auction site?

2009-09-21T19:17:00.000-07:00

Calling all entrepreneurs, please, stop launching new penny auction sites. Today I saw an ad for Poor Daddy's Penny Auction House, and while I like the name and the simple cartoon-ish feel of the logo, I found myself saying,"Really, does the world really need another penny auction site?"

I know we're in a recession and you don't have anything better to do. I know you can buy the software out of the box for less than $1,000. I know you don't have to know anything about computers or even have a phone number. I know running these sites require no special knowledge or expertise, even the inventory you can buy straight off of Amazon.com. I know, I know. But does the world really need another penny auction site?

The problem is that while anyone can go through the steps above, very few people can do them well. Running a business requires business sense, and when you create a virtually identical copy of a website that already has 95 (literally, 95!) copycat sites out there, you are an idiot.

Take some advice and start a blog about penny auctions. I promise it will be far more lucrative.

The Expanding Penny Auction Universe: Part 2

2009-09-17T15:04:00.000-07:00

So earlier I blogged about how the penny auction universe is expanding. We went from 1 (Swoopo) to 95 penny auction sites in about a year. Whoa! Actually, Swoopo was in the EU for a few years before it came to the US, but like most things, this blog is US-centric.

However, not only is the penny auction universe getting larger, it's also diversifying. There is now a wide range of sites and products, you can go for sites with or without bidbutlers, true penny auctions, or alternatives like the 12 cent-step variety at Swoopo. Penny auction sites are selling a wide variety of products and even a few cars.

Now, entrepreneurs are taking entertainment shopping in new directions. We blogged about SevenSnap, a bid-fee app for the iPhone and Penny Auction Watch recently blogged about Rackup and CircusPop.

Rackup was featured at the TechCrunch50 conference in San Francisco earlier this week and TechCrunch blogged about them here. Rackup seems like a great way to get gift cards on the cheap. Users enter a virtual room and when the auction starts they can click to buy the featured gift card. The first 10 people get the card with a varying bonus from between 3% and 100% of additional money on the card for free depending on when they clicked "buy." The earlier they click, the higher the bonus. However, if more than 10 people buy then the earlier people get kicked out and must enter again at the beginning of the list (lowest bonus). It's a little confusing, but the TechCrunch video explains it all clearly. The most important point is that if you want to buy a gift card anyway, you might as well do it on Rackup - the worst you can do is a 3% bonus and the best you can do is a 100% bonus. It costs nothing to play but companies that feature their gift cards are charged an 8% transaction fee. No wonder the TC50 conference-goers loved this one, we do!

Another interesting concept in online bargain hunting is CircusPop. This company charges users for bids ($0.75 - in bidpacks) which can then be used to "check" the price of an item for sale, until then prices are hidden. If users like the price, they can buy the item from CircusPop the same way they would at at traditional e-tailor like Amazon. CircusPop says that their prices only go down because every time someone views the price of an item, that price drops by $0.25. The site guarantees that users will find the lowest prices or their bids will be refunded. Like with Rackup for giftcards, the worst a user can do on CircusPop is get the product for the retail price, and it seems there is an opportunity to get the item for a substantial discount. CircusPop launched a few days ago and seems to have generated a fair amount of buzz (they have 700+ facebook members, as Penny Auction Watch pointed out).

Penny Auctions Under Siege

2009-09-16T09:56:00.000-07:00

Last night BidRodeo informed us hackers were attacking their site. This is the second time in about a week BidRodeo has experienced a cyber attack according to BidRodeo's Weronika Cybulska. Apparently there have been no interruptions to bidding this time, however during the last attack on September 8th, the site experienced delays. During that outage Bidrodeo honored all ended auctions and also refunded all bids to losing bidders, Cybulska said.

Penny Auction Watch also reported that Rocky Bid was under attack about a week ago. All of the attacks appear to be denial-of-service (DOS) attacks where hackers flood a target's servers with so many requests for information that most or all of the server's bandwidth is consumed. During a DOS attack legitimate users either cannot access the target site or experience a dramatically slower connection. If anyone tried to read the Michael Jackson death story on the LA Times or New York Times websites in the first 30 minutes after the news broke, you know what it feels like to try to access content on a site that is overloaded with requests for data. The good news is that these penny auction site hackers are not trying to steal personal information, just temporarily disrupt access to the site.

DOS attacks are fairly common and Google, Facebook and Twitter have all recently been attacked. Twitter, which is notoriously cheap on bandwidth, was down for hours after the attack while Google experienced only minor interruptions.

Cybulska said she didn't know why BidRodeo was being attacked, but suspected it might be a user who is trying to eliminate the competition in order to win an item on the cheap. It might also be a competing site trying to get users to defect.

Penny Auction Insider will continue to report on DOS attacks to penny auction sites and provide updates when sites are under attack.

Steven Seagal was unavailable for comment on this article.

Understanding Ended Auction Prices

2009-09-12T17:49:00.000-07:00

I'm still not over thinking about the Mini Cooper that Swoopo auctioned off last week. The selling price was just under $4,000 for the $24,550 car. Why did the car sell for such a low price? Since this was an auction, you might reasonably conclude that $4,000 was the highest price any of the bidders was willing to pay for the car, even though the winner got a phenomenal deal. This thinking might also be used when looking at other ended auctions where the auction price was a fraction of the retail value. If a TV that retails for $1000 sells for $100 does that mean $100 was the most any of the auction participants was willing to pay for it? The answer, as you might have guessed, is no. Sometimes we see items sell for more than their MSRP and sometimes we see those same items sell for a fraction of the retail price. I see this happen a lot with bidpacks on Swoopo - the ended auction prices are all over the board. The question is why? It might have to do with auction dynamics like how many people are watching an item or whether any known "hawks" (game theory) are playing. But I think it has more to do with psychology and the bystander effect. I'll elaborate.

Psychologists have determined that the grater the number of people observing an emergency situation, the less likely they are to assist. This is not because they are apathetic, but because they believe someone else will help. This is the bystander effect. In penny auctions, I believe the same theory applies. If the group of bidders believes the ending price should be significantly higher than it currently is, they logically assume casting a bid at this time will only cost them money since surely someone will bid over them. Thus, no one wants to bid just yet because doing so is a waste of $0.60. However, as the clock winds down to zero someone has to bid or the auction is over. Often, bidders will hold out till the last second hoping someone else will bid and increase the auction time. These bidders will place a bid only if it seems like no one else is going to. We see this happen all the time on Swoopo, and I saw it happen repeatedly during the auction for the Mini. As the clock ticks down to zero there is a pause and then two or three bids come in at the last second.

I think that when items go for shockingly low prices (even by penny auction standards) it's because bidders believe someone else will "save" the auction by bidding to prolong the ending time. When all of the bidders think this, no one bids and the auction expires. All of the bidders who did not win are upset because they would have loved to purchase the item for the closing price, but hoped that someone else would extend the auction time.

So how does one use this information to their advantage during an auction? By knowing that anytime you are the high bidder, even early on in the auction, there is a chance you win the item - not because no one wants the item, but because they all think someone else is going to bid first. The odds of you being the lucky high bidder in this situation are not good, but odds of winning should only be considered relative to similar alternatives, right? Just for fun I looked into California lottery odds and if I had my choice I'd spend $0.60 on a small shot of winning a Mini for $4,000 over a 1 in 240,000 chance of winning $500, the top prize, on the Let it Dough scratch-off lottery ticket.

But not to get confused, on this blog we maintain penny auctions are not gambling. However, the element of chance is introduced through the bystander effect.

All The Penny Auction Traffic Data One Could Ever Want

2009-09-10T09:23:00.001-07:00

Wow, someone has gone and done my work for me. PennyAuctionTraffic.com has a list of traffic for 95 penny auction sites (more than I knew existed) which will be updated daily, the site claims. PennyAuctionTraffic.com has stats from Alexa, QuantCast and Compete and ranks the results using a weighted average to determine at PAT rank. Nice work, my only request would be to see it on a graph, and if the site calculates monthly change that would be amazing. Either way, hats off to PennyAuctionTraffic.com for compiling this data in what appears to be an act of altruism (academic?).

Penny Auction Traffic Data for August

2009-09-08T14:30:00.001-07:00

Compete.com's monthly traffic scores for August are out. Below is a graph of the top 39 penny auction sites by unique monthly traffic. We see that Swoopo and Bidcactus are far ahead of the competition and that the distribution of sites follows a long tail pattern. So does this fit the Chris Anderson "selling less of more" philosophy of ecommerce 2.0? No, not really, more of a coincidence I think.

One of my friends made an interesting point when I showed him this chart. What if Swoopo owns Bidcactus, he asked. While we have absolutely no reason to believe this is true, it does make for interesting dinner table conversation. What if, in order to dominate the market Swoopo opened a second site, which happens to have a very similar color scheme and aesthetic, and funded that site from their own operations. Bidcactus does spend a huge amount of money on AdWords, after all.

Either way, I think I'm going to start calling Swoopo "Coke" and Bidcactus "Pepsi." The Dr. Pepper Snapple Group of the group has yet to be decided but there are a few strong contenders including BidRodeo and Rocky Bid as well as newcomers For10Cents.com and Winners24. This is actually the first time I've visited Winners24 and their site looks pretty clean.

The Penny Auction Universe is Expanding

2009-09-07T17:14:00.000-07:00

It must have been lonely for Swoopo back around this time last year when they were the only penny auction or "entertainment shopping" site in the US. However, since then dozens of copycat sites have sprung up, 54 to be exact as of my count earlier today. Of these 54 sites, 36 are active, 2 are preparing to launch and the rest are either dead or in a coma.

From an economic perspective, watching the penny auction universe is fascinating, we are witnessing an industry develop in hyper-speed. When there are low or no barriers to entry, as in this industry, new firms can freely enter the market. They do so as long as there are profits (perceived profits that is) to be had. This time last year, Swoopo developed an industry in the United States in which there were highly attractive profit margins. Soon, competitors entered the market. This was relatively easy to do because all that is required to operate a penny auction company is a website and a contract with a drop-shipper (essentially outsourced inventory management). Soon we saw dozens of new penny auction sites. However, there is a point at which the market for penny auctions becomes saturated and profits are reduced until some of the less competitive firms exit the market and profit margins are driven to a stabilization point (equilibrium) where firms neither enter nor exit the market. However, in practice things tend not to work out as cleanly as they are stated in theory. In the penny auction industry we have seen firms exit the market (Hasteno for example), but we do not know if this is due to over-saturation in the market or to operational or personal difficulties encountered by individual firms.

Also, theory assumes market participants to be rational and knowledgeable, a set of qualities human beings often fail to exude. Theoretically we expect new penny auction sites to open only if it makes sense for them from an opportunity cost perspective. Well, in a recession like this, one can argue that opportunity costs are pretty low. I wouldn't be surprised if several of the penny auction sites out there are run by unemployed IT guys who are trying to keep the lights on between business cycles. Also, since it can be hard to tell how much money a site is making, new competitors might enter the market only to find the profit margins are not as high as they expected. I suspect this is what is happening now with some of the sites that have just launched or plan to launch soon.

There is not enough room in this market for 30+ penny auction sites and many will be eliminated, the question is how long can they hold on for before exiting the market. This leads to a problem for the consumer which is that sites that are under stress and slowly going under have a stronger incentive to behave badly. I fear that many of these 30+ sites are going to damage their customers be failing to deliver product, failing to redeem bids or committing outright fraud before they bow out of the penny auction race for good.

Swoopo Mini Cooper Sells for $3939.36

2009-09-07T16:24:00.000-07:00

Swoopo's auction for a new 2009 Mini Cooper convertible with a street price of $24,550 ended minutes ago at a fraction of that price. The winning bidder, CaCO3, won with 2655 bids and will pay a total price (bids + ending auction price) of $5,532.96 + a $550 delivery charge.

32,828 bids were cast in the auction which started last Wednesday and stretched across Labor Day weekend. If Swoopo collected full revenue from each bid (they didn't) their take from bids would be just under $20,000 which when added to the final selling price of $3939.36 brings them pretty close to price of the car. While we don't know what Swoopo's purchase price of this car was we have no reason to believe they bought at a substantial discount, meaning they almost certainty lost money on this item.

I originally guessed the car would sell for around $18,000, which to me allowed for the winner to take a small margin that I perceived as sufficient compensation for the risks and efforts involved in acquiring the car. Boy was I wrong. Now Swoopo has a bit of a dilemma, do they put another car up because people saw what a great deal it is or do they never mention this day again? I expect we won't be seeing another car on Swoopo anytime soon.

Here's an Honest Penny Auction Site

2009-09-07T15:12:00.000-07:00

I've been using this lazy Labor Day to take inventory of all the penny auction sites out there. I want to see how many old ones are still active and how many new ones have sprung-up, at last count the field stood at 52. I'll post the full report later, but in the meantime I thought I'd share this landing page announcement from Hasteno, perhaps the last honest penny auction.

I don't know what it was about Hasteno that caused it to fail, the name and the color scheme are two obvious choices. However, if one thing is clear it's that in this industry there will have to be lots of losers. With more than 50 penny auction sites currently in existence and more starting-up all the time the market is simply too small to support all these sites. Economies of scale and credibility should allow the top few sites to dominate the industry while others fail and die out. Credibility might be the largest barrier to entry and if this is the case Swoopo should be just fine - I think the guys over at August Capital who plunged $10mm into Swoopo should breath easy - although, I really don't know what their exit strategy is. I can't imagine seeing SWPO on my Bloomberg Terminal anytime soon.

I'll post the full report later today, and FYI the Swoopo Mini auction is now at just under $4,000 with no sign of stopping anytime soon.

A Post All Penny Auction Players Need to Read

2009-09-04T10:19:00.000-07:00

Penny Auction Watch has an incredible story about shill bidding at new site Pardoo. They really did their detective work on this one. Nice job.

Swoopo's Mini Cooper auction stopped being exciting hours ago, now in marathon phase

2009-09-04T09:54:00.000-07:00

If one thing has become clear from Swoopo's auction of the red Mini Cooper convertible, it's that they need a better (quicker) format for selling expensive stuff. The Swoopo bidding model works well for moderately priced items, but a $24,550 car is going to take forever to sell. I understand Swoopo wants to minimize the risk of the car selling too cheaply (like the $1.24 Honda over at Rocky Bid) and so putting the Mini up in a 24 hour auction was smart. It increases the number of people who see the auction and gives them time to prepare to bid. However, as the auction approaches the 48 hour mark, with a price of just over $800, we here at Penny Auction Insider are starting to experiencing mental fatigue and wonder how much longer this thing will go for. I speculated earlier that I thought the car might eventually sell for around $18,000. Even if the car sells for $10,000 we've got a long, long way to go.

In the future I think Swoopo should tweak the auction format for expensive items like the Mini. A faster countdown or less time added to extend the clock with new bids might be a good solution.

The Mini has a current price of $806.40 with about 30 minutes on the clock. Last night we saw the time go to under one minute before spiking due to a BidButler war. Why anyone would exercise their BidButler so early in the auction escapes me. We'll continue to follow this auction and provide updates on the blog.

With just under 4 hours to go Swoopo's Mini Cooper auction at $109

2009-09-03T10:32:00.000-07:00

The price of the 2009 Mini Cooper convertible Swoopo put up for auction yesterday is at about $109 with just under 4 hours to go. Should Swoopo be concerned that the price of this $24,550 car has risen to just over $100 (910 bids) as time winds down on the 24 hour auction?

No. We observe two things about everyone who has bid thus far. 1. They are placing single bids, not using BidButler and 2. They're not seriously trying to win the car, at least not yet.

Any serious contenders for the Mini won't jump in until the auction approaches closing or until it goes into overtime. Once the auction nears close I think we're going to see a huge increase in bidding activity and see the price rise quickly from a few hundred dollars to several thousand. However, there is always the chance that bidders feel winning the car is so unobtainable that they don't try and someone scoops it on the cheap, but I find this outcome unlikely. I think bidders will be reluctant to use BidButler and that we're going to see a lot of single bidders in a very long, drawn out bidding war. But who knows, I could be completely wrong in my predictions. We have never seen an item like this on Swoopo before so it's hard to tell how bidders will react.

Also, I received an email last night from someone close to Swoopo who asked not to be named but who said my break-even estimates for this auction are too low. This person said I failed to calculate the cost of acquiring customers and that I should give it another shot. I'll scratch my head on this one for a while and post something later.

Updated: Swoopo Auctions Mini Cooper

2009-09-02T13:43:00.000-07:00

Update 8:08 pm EST:

We are watching this Swoopo auction for the Mini Cooper very carefully, as I am sure Swoopo executives are, and wanted to let everyone know what the magic number is. Assuming everyone paid full price for their bids and Swoopo paid full price for the car, the selling price of the car needs to be $4091 for Swoopo to break even. If 24% of users are bidding with FreeBids or bids subsidized through winning bidpacks, etc., the car needs to sell for $5168. Anything over that is pure profit for the company, and we do expect the car to go for well over $5168. However, this auction for the Mini Cooper introduces one dynamic not seen in auctions for less expensive products: the winner needs to be able to pay for the item. Most Americans do not buy new cars in cash, instead they finance or lease and most often trade in an old car. I speculate that most people bidding on Swoopo don't have $24,550 to buy a car with, or even $20,000 or $15,000, this will limit the number of people who are competing for the car. Of course, the winner could borrow money from the in-laws, but that complicates things.

My prediction is that this is going to be be a wildly successful auction for Swoopo and also that someone is going to get a great deal on the car - not a $1.24 great deal like at Rocky Bid - more like an $18,000 good deal.

End of update, original post follows

Today Swoopo put a red Mini Cooper convertible up for auction. The auction lasts 24 hours and each bid raises the auction price by 12 cents. As of 4:46 EST the price was $6.60. This is the first time Swoopo has offered such an expensive item, valued at $24,550, and the second time (to our knowledge) a penny auction site has auctioned a car. The first was Rocky Bid which sold a Honda Insight for $1.24 back in June. Rocky Bid lost some serious money on their auction, but tried to use the event to generate strong PR for the site. How Swoopo's Mini Cooper auction goes is anyone's guess, but they have much stronger site traffic than Rocky Bid did in June - that site said there were just two bidders when the Honda Insight auction closed for $1.24.

We will watch this auction closely and update the blog accordingly.

SevenSnap: A New Take on Entertainment Shopping

2009-09-02T10:25:00.000-07:00

SevenSnap is a new take on entertainment shopping, and no it's not a penny auction site, marking a refreshing change of pace for this blogger who is getting pretty tired of new penny auction sites popping up every day claiming to be the industry leader or exciting and new, when really they're just copying what's already out there.

Not so with SevenSnap, a truly innovative take on entertainment shopping. SevenSnap is an iPhone app (with plans to produce a web-based version later) where users purchase time credits and then use those credits to enter a virtual room with a featured product, such as a MacBook Pro, and other bidders. The price of the item starts falling as soon as someone enters the room (starting at retail) and the speed of decline depends on the number of people in the room - as fast as $100 a minute if the room has many users. The first person to buy gets the item at that price and then the price resets for everyone else in the room.

SevenSnap is a pure price discrimination model where the person with the highest willingness to pay in the room gets the product at whatever their threshold price is. This price must certainly be less than the retail price of the item or else people would just go to their favorite store to buy. I expect there could be some decent deals on SevenSnap but that really depends on the type of people in the room and all it takes is one person who is willing to buy at close to retail to ruin it for everyone else.

The SevenSnap app is not in the app store yet which has led some people to speculate on whether Apple would even approve the program. Apple has been notoriously cloistered about its approval process and created a firestorm of controversy this summer with its decision to block certain Google-developed apps as well as for its re-engineering of iTunes to block the Palm Pre from accessing that platform. I expect SevenSnap looked into the likelihood of Apple approving its app before it went to the trouble of developing it, but with the app store nothing is for certain.

SevenSnap has a cool video demonstration that you should probably watch once or twice.

Swoopo Promotion With a Twist

2009-08-31T11:46:00.000-07:00

Swoopo sent me an email promotion on Friday night saying they would give me all my bids back on the first auction I won in the next 24 hours. The bids are refunded in the form of FreeBids and usable in the next seven days. It would be interesting if two people in this boat found themselves bidding against each other. I expect this would increase their willingness to expend bids to win the auction and this drive up the profit for Swoopo and the cost to the bidder(s) who doesn't win.

This concept does have its limits because people are only being refunded bids in the form of more bids and there is a limit to the amount of money anyone is willing to spend on bids. However, if Swoopo wanted to be truly diabolical they would refund the winner's spent bids in cash.

Imagine if two people who received this modified promotion found themselves bidding against each other. Each would expend ever larger amounts of money on bids, confident that eventually the money would be returned to them when they won the auction. However, as the auction progressed, each bidder would find himself desperate to win - having passed a point of no return in which they would see devastating losses if they failed to win the auction. The price of the auction item would easily go beyond MSRP with both bidders determined to win. The problem is that eventually someone must lose and when that happens one of the bidders will get out alive but the other will take a huge hit.

Swoopo isn't doing this though, and I'm glad they aren't. While a huge fan of free markets, self control and personal accountability, a system like this would be rigged to hurt people and penny auctions should be entertainment, not mechanisms of self destruction.

Top 5 Funniest Penny Auction User Testimonials

2009-08-28T18:47:00.000-07:00

5. "The Redneck"

4. "This is going to be my future Christmas wonder present"

3. "To go with my Wiiiiii"

2. "My daddy bought this guitar for 5 cents!"

1. "Serial Killer"

Honorable mention

"I'm doing this from my bathtub"

In His Own Words: Swoopo CEO Explains How His Company Works

2009-08-28T17:15:00.000-07:00

Swoopo CEO walks a reporter through how is site and his company work. Very cool, not a lot you probably didn't know already, but cool to hear it from the boss.

Enterprising eBay Seller Sells Penny for $1

2009-08-28T09:42:00.000-07:00

I found a penny for sale on eBay today with a Buy It Now price of $1. What's so special about this penny you ask? Well, it's a randomly selected, circulated coin with a face value of 1 cent - making it strikingly similar to many other pennies in the world. So what's the appeal? The seller claims this penny could be your lucky one! "Never quite found that "lucky" penny? Well let us find it for you!" You might scoff at the idea of selling a run of the mill penny for one dollar but I couldn't help but laugh at the sellers entrepreneurial spirit.

Only one of these "lucky" pennies has been sold but the seller (jerrys-stuff-shop) has more than 10 available in case you're thinking ahead to the Christmas season - makes a great gift in these hard economic times!

Penny Auction Insider Now on Twitter

2009-08-27T14:10:00.000-07:00

Pposh Claims to be in Testing Mode, Questions Remain

2009-08-27T09:55:00.001-07:00

I received lots of angry comments (almost certainly from Pposh employees) about my accusation that Pposh is a scam. People in the comments claim the site is still in testing mode and that users were sent an email saying so. I did receive such an email, posted below in its entirety.

"Salutations-

Thank you for signing up with Pposh.com. We are in the middle of testing the site. We do apologize for the inconvience but can you please come back in a few days. We will of course hold your bids and will send you an email as soon as it is ready.

Thank you for your patience and we look forward to seeing you soon!!

Pposh.com"

However, this alone does not clear the site from what I would call dubious practices if not from being an outright scam. First, nowhere on the site could I find a disclaimer saying it is still in testing mode - a huge problem. Pposh lists ended auctions with details about when they were won, who won and for how much. Pposh do you see any problem with posting over 170 ended auctions with full descriptions of the travel packages won with really low prices that were not actually won? That's false advertising if not illegal. Your blog has similar false advertising, which I took a screen shot of and posted here. If you are in testing mode why would you post on your blog "I just won a Caribbean cruise on a new website I just stumbled on and I feel they are going to be very successful ... they have just launched the site a few days ago. Check it out." So you didn't win a cruise 1. because you work at the site, 2. because there is no cruise because you are in "testing mode" and 3. you were OK with lying about this auction to potential customers.

Also, how can you claim to be giving away five "free" bids when you are in testing mode - obviously if I can't win anything because you are in testing mode you can't legitimately charge me for bids. I don't know if users can use bids they purchased at Pposh to bid on these "testing mode" auctions, but when I used all five of my "free" bids this morning I was prompted to select a bidpack and enter my credit card information (again, without ever being told I was bidding on "test" auctions). This is very, very wrong, if not, again, a huge SCAM.

Pposh, we will watch you closely when you claim to leave "testing mode" and see what is going on then. However, in an industry that already has a credibility problem you have dug yourselves a large hole with your lack of disclosure and misleading if not fraudulent information posted on the site. Everything about your site looks and feels like a fully operational penny auction site, if you are in testing mode you need to say so on the site. I really don't know why you would do live testing anyway, except in my honest opinion, to deceive potential bidders.

Pposh - I have not deleted your comments on the previous post and have no plans to do so. However, if this pattern of comments continues and you do not properly identify yourselves as Pposh employees or persons with a vested interest in the company I will delete them. I believe fully in transparency and user freedom of speech, however, if comments are deceptive in their own right than as the administrator of this site I have an obligation to filter them.

Penny Auction Insider community: Pposh has been extremely deceptive, I would avoid the site until it can be verified that they are legitimate. I am not the only one who feels this way, Penny Auction Watch had a similar story this morning. We will continue to follow this story but in the meantime, as Penny Auction Watch stated earlier today, anyone with $150 and a few spare hours can start a penny auction site and anyone with an internet connection can post a comment on this blog. We need to be careful before we spend money on any new penny auction site, unfortunately it's just too easy to defraud people online.

Even Swoopo, the largest and most credible site is getting destroyed by angry users on their Facebook page who claim to have won items and not received them or purchased bids and not received them. I think Swoopo is completely legitimate, but if even the best sites have glitches why would you trust a newcomer that is being deceptive before they even go live? If you have a Facebook account go here to read the comments on the Swoopo Facebook page, it's a mess.

How Swoopo Alters Dopamine Levels in the Brain

2009-08-26T17:42:00.000-07:00

Swoopo is addictive not because of sunk cost (as we have argued here) but because it impacts dopamine levels in the brain, says writer Jonah Lehrer of The Frontal Cortex, a science blog. Lehrer writes this fascinating article comparing the results of a scientific experiment - one where the impact of a reward on dopamine levels in monkey brains was tested under various circumstances - to Swoopo. In the study Lehrer describes, scientists found that monkeys responded to the expectation of a reward (apple juice) with an increased flow of dopamine to the brain, the same increase in dopamine as when the juice was actually received. However, once the monkeys became conditioned to expect the juice, their brains no longer responded with a dopamine spike, neither to the expectation nor to actually receiving the juice. The study concludes that neurons are concerned with expected rewards more so than actually receiving a reward. This applies to Swoopo, Lehrer writes, because bidders are kept in a state of perpetual expectation. Every time a user places a bid he becomes the high bidder and hopes/expects to win the item. According to the monkey experiment, this act causes dopamine levels to spike and since the reward is never guaranteed the brain is kept in a state of perpetual suspense, which stops the dopamine spike from diminishing over time. This spiking of the "happiness" chemical in the brain is what causes people to bid over and over and over again, says Lehrer.

Apart from being interesting, Lehrer's article adds legitimacy to Swoopo's claim that the site offers "entertainment shopping," for better or worse.

More on How PPosh is a Scam

2009-08-26T16:46:00.000-07:00

Caption: Updated graphic of travel packages fake bidder Shasta1 has won on Pposh, green = hotel, blue = cruise, red = flight. These packages must be used in August or September of this year

I found the new penny auction site, PPosh, yesterday and exposed them for being a scam in this post. Warning flag raised, I could call it a day, content that Penny Auction Insider readers won't fall for this trap. However, pointing out the ridiculousness of PPosh is just too much fun to stop now. Below is a screenshot from today showing PPosh shill bidder Shasta1 bidding on yet another travel package. Apparently Shasta1 is not content with the 18 flights, cruises and hotel stays he has racked-up in the past two weeks and needs a flight from Miami to Mexico before he can call his vacation to end all vacations complete. Shasta1 is also currently the top bidder on two golf packages.

Penny Auction Site Pposh.com is Complete Scam

2009-08-25T14:30:00.000-07:00

I rarely blow the whistle on penny auction sites, frankly because we can almost never know for sure whether a site is legitimate or not. Even if Swoopo users like their experience and receive their products, how do we know the site doesn't throw in an autobot every once in a while just to give the house an extra buck? Well, fortunately for penny auction players, the sites that seem to be complete frauds make it pretty obvious.

The latest one, Pposh.com, is so pathetic it's almost funny.

Pposh.com is a penny auction scam site that claims to sell vacation packages; everything from flights to cruises to rental cars and even Hooters gift cards.

While winning travel packages sounds more appealing to me than electronics, they present a logistical nightmare for penny auction websites. Vacation packages which include flights, hotels or cruise cabins are time sensitive, they include components that change in price and that need to be reserved so the seat or room doesn't get overbooked. Also, departure locations will need to depend on where the bidder is located, another logistical challenge. For these reasons auctioning off vacations is very difficult and will likely draw a very small audience. Take a recent example from a Pposh.com auction which was for a round-trip flight from Orlando to Pittsburgh or vise versa. Orland to Pittsburgh or Pittsburgh to Orlando, are you kidding me? A site that just launched and has such low traffic it isn't even covered by compete.com can't auction off a product that is only of interest to people in Orlando and Pittsburgh (and who have an interest in visiting the other city) and who want to fly in August or September (the terms of the ticket being auctioned).

So Pposh is trying an innovative penny auction concept that seems deemed to fail, but why are they a fraud you ask? One Pposh penny auction for a Disney vacation is going for $31.22 which sounds suspicious - really Pposh, you've had more bids on this item than pageviews to your whole site?

I was pretty sure at this point Pposh was a scam but when I looked at the ended auctions I started to laugh. First, the site has over 170 ended auctions, which seems high for a site that's only been open for a short while. But if you look at the bidders you see one user, Shasta1 seems to win quite a bit. This might not seem that odd if the items were electronics, but how many vacation packages, hotels and flights can one person use? Let's review what travel auctions Shasta1 has won on Pposh (feel free to laugh out loud).

1. 8/13 - 3 night Bahamas vacation
2. 8/13 - 2 night stay at a Sheraton in Philadelphia
3. 8/13 - a second 2 night stay at a Sheraton in Philadelphia
4. 8/13 - 2 night stay at a Hilton in Paris, France
5. 8/13 - roundtrip airfare from New York to Miami (or vise versa) to be used in August or September
6. 8/13 - 2 night stay at a Sheraton in Boston to be used in August or September
7. 8/13 - roundtrip airfare from New Orleans to New York (or vise versa) to be used in August or September
8. 8/13 - 2 night stay at a Sheraton in Cleveland to be used in August or September
9. 8/13 - 2 night stay at a Hilton in Tel Aviv, Isreal to be used in August or September
10. 8/13 - roundtrip airfare from New York to LA (or vise versa) to be used in August or September
11. 8/13 - 2 night stay at a Sheraton in Dallas to be used in August or September
12. 8/14 - 3 night stay at the Bellagio in Las Vegas to be used in August or September
13. 8/14 - roundtrip airfare from Boston to Ft. Lauderdale (or vise versa) to be used in August or September

Then Shasta takes some well deserved time off, presumably to enjoy his recently purchased vacations, before coming back 7 days later to purchase more.

14. 8/21 - 3 night cruise to British Columbia departing from Seattle to be used in August or September
15. 8/23 - roundtrip airfare from Atlanta to Denver (or vise versa) to be used in August or September
16. 8/23 - 3 night stay at the Marriott in Orlando to be used in August or September
17. 8/23 - 2 night stay at the Hilton in Chicago
18. 8/23 - a second 3 night cruise to the Bahamas departing from Orlando to be used in August or September

Shasta1 is quite the jet-setter now isn't he? I thought I'd plot his travel plans on the map below to help make sense of all those vacations! (green = hotel stay, red = flight, blue = cruise)

Pposh also has a blog with three entries on it. Two of the entries announce the new site and the third so funny I had to show you instead of tell you, see image below. Note the person who posted the comment and if you click on the link to the ended auction (you need to go to the Pposh site to do so) you will see the winner was none other than Shasta1.

I rest my case. Since I first heard about Pposh in the comment section here on Penny Auction Insider, I hope the owner of Pposh sees this post and responds. I will also ask Penny Auction Watch to chime in on this site because they seem to have a knack for uncovering fraud from the bid patterns on sites.

Bidcactus is back after "internal improvements" and prepares to offer fresh product line-up

2009-08-24T18:00:00.000-07:00

Many users, including me, noticed that BidCactus did not come back online Friday night as they said they were going to earlier Friday after going down for "improvements," according to a notice posted on the Bidcactus homepage and re-posted here on Penny Auction Insider. However, the site is now back up and appears to be running fine. I was hoping for some cool new updates, but couldn't see any difference in the appearance or operation of the site when I perused this afternoon. I contacted Bidcactus's Marjorie Almansi to ask about what was new that I wasn't seeing. Almansi said in an email message the the site had undergone internal improvements and that they would start featuring a variety of new items, but declined to ruin the surprise. I didn't see anything new this afternoon but Almansi assured me we can look forward to a "variety of cool new things that will be displayed every day on the site."

Looking forward to it!

In other news, PennyAuctionWatch had a cool story about how Rocky Bid auctioned off a signed baseball photograph, which the article points out can't be found on any other penny auction sites.

In the mailbox: BidHof, again

2009-08-24T14:53:00.001-07:00

Victoria from BidHof wrote back about my rather dismissive review of her site. I won't quote her email, but suffice it to say, she wasn't happy about the post

Now, I stand by substantive remarks. The site does seem like a clone of a lot of other sites, and doesn't (yet) offer any consumer-to-consumer features.

But Victoria was right about something else: there was no call to be as dismissive as I was. It's easy to be callous on the Internet, but that's not an excuse. I've already apologized to her by email for that, but you, Gentle Reader, can help me make it up to her. Go over to BidHof and take a look. If you like it, use it.

Bidcactus site goes down for maintenance

2009-08-21T12:10:00.000-07:00

Here is the disclaimer on the Bidcactus website from early afternoon on Friday. They should have said "back in time for happy hour with 2 for 1 bids between 5 and 7pm," or something like that - missed marketing opportunity. They should also have auctions for wine of the month club and premium alcohol during happy hour, don't you think?

We'll provide an update when we see what kind of improvements they implement.

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?

2009-08-21T11:17:00.001-07:00

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.

Which Penny Auction Site Spends the Most on Google Adwords?

2009-08-18T17:38:00.000-07:00

Our friends over at Spyfu.com have a formula for estimating how much any website spends on Google Adwords advertising each day. Penny Auction Insider ran all of the known penny auction sites through Spyfu and created the following graph of the eight that spend the most on Adwords. Bidcactus and Swoopo spend by far the most, followed by BidsTick, no other penny auction site spends nearly as much on Adwords.

Please note that Spyfu.com stresses their data is an estimate. Also, Spyfu provides a min and max number (in blue and green, respectively), and I went in and calculated an average (in red) as a means of trying to better compare each site's numbers. Please note that taking the average makes the numbers easier to compare but may also further distort the picture.

On The Media Continued: Penny Auctions Featured on Motley Fool and in the Economist and Time

2009-08-18T11:08:00.000-07:00

Penny Auctions have been a fairly quiet affair for the past year. When Swoopo entered the US market last September, the media barely noticed. This spring as new penny auction sites started cropping up all over the web, with dozens to date, few in the media took note. This is part of the reason why we founded Penny Auction Insider. Then, this summer, journalists started to write. There were articles in the San Jose Mercury Times, Washington Post, New York Times, a local ABC station in Philadelphia and on many blogs. Now that the cat is out of the bag, the rest of the media appear eager to follow the story. Last week, the Economist had an overview of penny auctions and earlier this week there were articles on Motley Fool and in Time magazine. I expect an AP or other wire-source story soon that will be syndicated by many more news outlets (if one hasn't already appeared, let me know in the comments if it has).

However, it should be noted that the vast majority of the articles published in the mainstream news are real snoozers for people already... knowledgeable about the world of penny auctions. We at Penny Auction Insider will continue to follow how the media covers the industry, however, will spare readers from summaries of articles that are themselves summaries of the penny auction industry. If you read this blog you are well aware that Swoopo is the biggest site and was first to market, and launched in Germany before coming to the US, I'm yawning , and you know full well that some people get good deals while others lose money, and the games are viewed as deceiving by some because they pit people against each other and some spend more than they realize, exc. exc.

What is most interesting about these recent penny auction articles (most feature Swoopo and mention others in passing) is that there are articles about penny auctions. What will this do for the industry? I think it will allow penny auctions to move closer to the center from the fringes, I think more people will check them out and I think society will become more polarized with some people loving the excitement of playing the games and some people hating them. As I mentioned in an earlier post, the penny auction industry is a small fraction of the size of the big e-commerce sites like Amazon and eBay and has lots of room to grow. In July, eBay had 10 times the traffic on Swoopo.

On The Media: Swoopo in The New York Times Today

2009-08-17T19:23:00.000-07:00

Flipped open my New York Times today and what did I see? Well it was an article on a topic I know and love: penny auctions. The Times offers what for the in-the-know penny auction enthusiast would be a fairly blase overview of how Swoopo works, with a few interesting facts laced in.

We learn from the Times article that Swoopo has 2.5 million users, a number that would be more significant had Bidcactus not declined to state the number of users they have in our interview last week.

We also learn that former... hedge fund quant Glen Whitney, who the Times asked to review Swoopo, believes the site is a "chump's game."

And most interestingly, we hear from a lawyer who says It Isn't Gambling, which was also the title of an earlier Penny Auction Insider post on the topic. The lawyer backs-up the claim Malvolio and I have been making from the beginning which is, in lawyer Anthony Cabot's own words, "Lotteries are games of chance, and an auction does not have what you would call any systematic chance, a random event that determines the winner." We rest our case.

On a side note: compare this Times article to the ABC 6 story on GoBid I reviewed last week and you see why the Times is "All the news that's fit to print," and ABC 6 is something less than that. Sorry ABC, but you didn't even tell your readers the name, title or significance of your only source, a guy who's opinions formed the bulk of your story.

Reader mail

2009-08-17T10:09:00.000-07:00

My co-blogger and I have been make gallows-jokes about "our many faithful readers", but it looks like we are actually getting readers. Wow, this Internet thing actually works! In honor, we've created a new logo for posts where we answer user emails. It's called The Penny Auction Post.

One reader, Jack Simmons, writes:

I'm relatively new to the pennyauctionsphere. I have placed a few bids on Swoopo and looking at Bid Cactus. One of my buddies was telling me both of these sites are a scam. Essentially since neither wants to lose money, they won't allow an auction to end before breaking even on the item. therefore, both Swoopo and Bidcactus both use bots or ghost bidders (pick your lingo) to keep the auction alive until at least they break even. To the best of your knowledge, are all of the bids on swoopo and bid cactus real? Do they often lose money on auctions?

The problem you mention is called "shilling", it's been a problem since primitive man first started auctioning off mammoth tusks, and it's particularly insidious in bid-fee auctions, since it's possible to defraud your customers much more thoroughly than in ordinary auctions.

A few years back, the government of Turkey broke up a highest-unique-bid scheme auction that was shilling. 30 people went to prison. Turkish prison.

Are Swoopo and/or Bidcactus doing the same thing? It's possible, but I sincerely doubt it.

First of all, by my observation, they lose money on most auctions. (Of course, the winners might be shills, but that is much more risky -- it's easy enough to conceal "ghost bidders", but if there are a lot of ghost buyers, everyone inside the company would become aware of it.) They make their money on those comparatively rare auctions that zoom up to 300% or 500% profitability.

Which brings us to the next point: they are making a lot of money at this, even if they're honest. Risking serious jail time (you know if the somewhat lackadaisical Turkish government can catch shillers, the frenetic Bundeskriminalamt in Swoopo's home country of Germany would be after them like the hounds of God) just to increase an already healthy profit margin would be phenomenally unwise.

In addition, Swoopo has serious investors: August Capital (who invested in VideoEgg and SixApart) and Wellington Partners (who did Xing). Even if Swoopo's people are willing to go to jail for a few extra bucks, these guys are not and they are in a position to watch, very carefully.

So, yes, there are plenty of scammers out there, and yes, it isn't impossible that Swoopo or BidCactus has its hand in the cookie jar, but no, it strikes me as very unlikely.

Correction: An earlier version of this post incorrectly attributed first usage of the word "penny auctionsphere" to Jack Simmons. It was actually first used by Pennyauctionguy here on a post at Penny Auction Insider.

Bidcactus Overtakes Swoopo After Just Five Months

2009-08-14T15:30:00.000-07:00

Bidcactus overtook Swoopo in unique visitors in July according to data collected by Compete.com. This is surprising news to the penny auction universe where Swoopo has long been seen as the industry leader, both in the US and Europe and is the oldest penny auction website, having launched four years ago in Europe and one year ago next month in the US.

Bidcactus, a Connecticut based company, launched on April 23 of this year and has experienced phenomenal growth. The company reached 693,013 unique visitors in July, to Swoopo’s 578,712, despite being in operation for less than five months and launching with only 36 users on its first day. Swoopo's growth in terms of unique visitors for July was 13.34%, BidCactus’s was 275.38%.

Penny Auction Insider spoke with Bidcactus Director Marjorie Almansi earlier today to discuss her company’s breakout success in a marketplace than has become crowded with competitors, knockoffs and scams.

“We’re growing in leaps and bounds,” she said. “We have great customer service; we’re the only [penny auction] site that offers 24/7 customer support and 9 a.m. to 5 p.m. phone support.” Almansi also credited ... player referrals, satisfied users who become repeat players, a strong engineering team and successful online marketing strategy that targets Google and Yahoo as key components to her company’s success. “We’ve surpassed every monthly goal we’ve ever set,” she added.

However, Bidcactus also appears to have spent slightly more than Swoopo on keyword advertising in July, an advertising method popular with penny auctions that drives significant traffic but can also be expensive. According to data collected by Spyfu.com, Bidcactus is spending between $991 and $7,370 on keyword advertising per day, while for Swoopo the number was between $725 and $6,530.

In turning to questions about the state of the penny auction universe, Almansi said she is concerned about rumors of fraudulent practices at some penny auction sites. “Unfortunately many people who are getting into [the penny auction business] are questionable. With box software you can get [a site up] for next to nothing. There are a lot of new sites out there and I don’t know what is going on behind the scenes,” she said. Almansi said she would be happy to lead the push to develop an audit panel that examines penny auction sites and certifies them as being legitimate. She also said she would welcome auditors to inspect her company and hopes others would be willing to do the same. “I’d be happy to carry the torch,” she said.

Almansi is optimistic about the future of Bidcactus and the penny auction industry as a whole. “There are very few people who know about us or who use penny auctions, but I think this could be a whole new way for the masses to shop,” she said. Amazon.com and Ebay, the two preeminent ecommerce storefronts on the internet each get about 70 million unique visitors per month, or about 14 times the number of visitors Swoopo and Bidcactus receive.

Bidcactus is currently running about 150 auctions per day and will soon expand operations to offer bidding around the clock.

Correction: An earlier version of this article quoted the advertising expenditures of Swoopo and Bidcactus in dollars per month, the figures given were actually for dollars per day. Thanks to Weronika Cybulska over at BidRodeo for pointing this out.

The Sunk Cost Fallacy

2009-08-14T09:44:00.001-07:00

Penny auction critics say these auctions exploit the sunk cost fallacy, ie "throwing good money after bad." I don't know if the average user experiences the pitfalls of sunk cost (irrational) psychology, but Zorro2612 certainly did in this recent auction over at Swoopo. This user spent $108 on bids and $155.40 on this iPod Nano worth $199 retail. Swoopo gives users a hand by automatically calculating their savings on an auction (retail price - (bids +cost)). Too bad this calculator only goes to $0 because you can have negative savings, they're called losses. Zorro2612 had savings of $199-$155.4-$108 = -$64.4. Didn't exactly slash a bargain now did we Zorro?

Here is what I bet Zorro was thinking:

Aye corrumba, i've already spent $100 on this auction, now I have to win it no matter what. If I back-off now, I'll have wasted that $100.

The problem with thinking about sunk costs this way is that it leads to irrational decision making. Having "sunk" $100 worth of bids into an auction does not make you more likely to win, therefore Zorro would have been best off to walk away after his total money spent on bids + cost of the item passed the retail price of the iPod. However, he did not do that, and in this case did end up winning the auction. Note that the outcome he received ie paying $263.4 for an iPod (including bids) is a better outcome than walking away at say $90 in bids and then buying the iPod at the street price of $199. However, when he made the decision to "go for it, all or nothing," there was no way of knowing he would be the winner. There very well could have been only one competitor on that auction who's strategy was also "go for it, all or nothing," and who got nothing. Zorro could have easily been out $200 with no iPod, instead of out $90 with no iPod as in the hypothetical situation I construct here.

To maximize value in all things; cars; houses; investments; penny auctions, users need to ignore sunk costs. As many critics point out, this seems especially hard to do in penny auctions, institutional investors (who I'll assume to be more sophisticated, but perhaps undeserving of the distinction) are known to be more likely to sell portfolio holdings that have appreciated in value by a certain amount to "take some profit," then they are to sell holdings that have declined in value by a similar amount, which they should do to minimize downside risk if the same standard of logic is to be applied evenly. This comes from a field called behavioral finance, which I find to have much in common with penny auctions, and is part of what initially drew and continues to hold my interest in these types of auctions.

Attack of the clones

2009-08-13T09:07:00.000-07:00

"Craig", presumably Craig Pratka, part-owner of Zoozle.com, wrote to us to correct the timeline we have up about bid-fee sites. I'll leave it to my co-blogger, who likes doing stuff like that, to make the correction to the graphic, but I'm always excited to hear from other people in this industry.

In doing some research about Zoozle, I came across the press-release they put out on the occasion of their going live. It included this shocking paragraph about their experience with the standardized "turnkey" software so many penny-auction sites use.

The software came with an 'Autobid' feature and instructions for the site admin to set fake user names and autobid timing from the back end. The feature can be disabled.. but when disabled, the sites critical functions, like bidding, did not work properly.

Shocking, but candidly, not surprising. It's very easy to be dishonest in this business -- even the word "dishonest" is somewhat euphemistic, here; "autobid" is shilling and in a bid-fee auction, shilling is outright fraud.

Cynical as I am, I was still shocked that the commercial software had shilling built in, had defraud-your-customer built right in. Wow, how do the people who develop that software justify what they do for a living to themselves?

So stay away from clone sites. They're easy to spot, they look just like Swoopo. Same green buttons, same unmistakeable red flicker when the timer is pushed back. They are all using the same software underneath. I have no idea what fraction of clones are actually using the shilling feature (or doing anything else dishonest), but why take the risk?

In the mailbox: BidHof

2009-08-13T08:47:00.000-07:00

I got an email from someone calling herself "Victoria Blechman". On the Internet, you always have to be suspicious about names (my parents didn't name me "Malvolio", for example), but would anybody pick "Blechman" as an alias?

In her somewhat eccentric English, the presumably-authentic Ms Blechman plugged her new Germany-based auction site, BidHof ("hof" is "yard" or "court" in German). The pitch involved eBay-like consumer-to-consumer (C2C) auctions. Now, I've always been a little dubious about C2C penny auctions, so I was curious to see her site.

Sadly, the site was still embryonic at best. It offered a set of ordinary bid-fee auctions, using what is obviously same software used to implement a lot of other auction sites. It talked in vague terms about C2C but didn't actually support it as far as I could tell (the site implementer has the same English-as-a-second-language style as Ms Blechman; it might have been Ms Blechman).

Ah, well, the search continues.

UPDATE: See here for more on Ms Blechman and BidHof.

If It Sounds Too Good to be True, It Probably is, Unless it's a Penny Auction

2009-08-12T18:42:00.000-07:00

(What do you mean these TVs don't cost $10?)

Late last night BestBuy accidentally set the price of a 52-inch TV on its website at $9.99, instead of the true retail price of $1,699, allowing shopping pandemonium to ensue. Consumers who noticed the deal in the wee hours of Wednesday morning jumped at the amazing offer, with many buying several or more of the sets. However, as age old wisdom goes: if it seems too good to be true, it probably is. BestBuy quickly fixed the mistake and told customers who purchased the $10 TV that the sale would not be honored.

While no one expects to get a 52-inch HDTV from BestBuy for $10, readers of this blog probably know of a few good sites where they might be able to snag such a deal. In the world of penny auctions, $9.99 doesn't sound like such an unrealistic price for a 52-inch TV, maybe a little low, but not unrealistic. Swoopo recently sold a similar TV for just over $100 and some of the lesser known sites can have even better deals.

The Never Ending (Penny Auction) Story: Jungle Cents

2009-08-12T14:52:00.000-07:00

So, as I blogged about in an earlier post, I registered with Jungle Cents and was given a free bid to get me started, this was on July 30th. I used the bid to reserve a space in a seat auction for an iPod Shuffle, which at the time was the only auction I could afford with my one bid. In my original post about Jungle Cents (also on July 30th), I noted that the seat auction for the iPod shuffle received its first bidder on July 8th. Back then I said of that original bidder, "...that person has been waiting weeks for this auction to start and only a small fraction of the seats have been sold. This isn't fair! People who buy bids to compete in these auctions expect their auction to start in a reasonable amount of time. At this rate it's going to take months before anyone can bid on that iPod!"

Now it's been over a month since the original bid was cast and 13 days since I cast mine. When I placed my bid there were 63 out of 75 seats vacant, today there were 49, and the auction can't start until all are full. In my original post I said one of the risks users face when playing penny auctions - or any "game" where money is exchanged for a product that is not received or consumed immediately - is the possibility that the company goes out of business. I don't know what Jungle Cents' financial or operational status is, and their website claims they have completed 170 auctions, but they have been very quiet since I started watching and appear to have locked-up some players' money for a very long time. I don't agree with this practice, and if I had spent money on my bid I would be complaining to customer service. If you have had an experience with Jungle Cents, good or bad, please let us know in the comments section or by email.

GoBid.com Is Blessed by the Gods of Publicity

2009-08-10T14:11:00.001-07:00

Local ABC affiliate WPVI in Philadelphia ran a story about GoBid this past week and had nothing but good things to say. The story, which runs about two minutes, profiles what in my opinion is one of the lesser penny auction sites out there in the station's "Saving With 6" segment.

ABC describes GoBid as a site where users can get amazing deals, but where they might spend more than they realize. An ABC reporter talks with who I will assume is a GoBid executive, but I say "assume" because the guy's name and title are never mentioned. The report never even mentions whether or not he works for GoBid.com.

I thought it was interesting that ABC chose to profile GoBid without any mention of other penny auction sites. GoBid is one of dozens of small penny auction sites that cower in the shadow of Swoopo and Bidcactus. Ok, "cower" is a bit of an exaggeration, but they're certainly much smaller than Swoopo and Bidcactus from a traffic perspective.

So why did ABC choose to profile GoBid?

Is GoBid doing something unique that warrants media coverage?
No, they're just like 15-20 other penny auction sites.

Is GoBid from the Philadelphia area, and ABC wanted to focus on a regional business to better connect with their audience?
No, GoBid has offices in Miami and San Francisco.

In other breaking news, ABC WPVI sucks.

Penny Auctions Aren't the Only Place to Get A Great Deal

2009-08-10T12:16:00.000-07:00

We at Penny Auction Insider enjoy penny auctions, obviously, and while we don't play as often as many of our readers, we get just as excited about the savings that can be had. However, penny auctions aren't the only sites on the web where online savvy consumers can get great deals and a little entertainment. Woot and GroupOn are two social media entertainment shopping sites that allow users to get a fabulous, if not completely random deal of the day.

Woot offers a "Today's Woot," which is a product the site has managed to buy in bulk at an extremely low price. Take a scroll down their blog for an idea about past Woots. They offer everything from mid-range laptops (today's Woot) to golf bags and talking smoke detectors. It seems like a lot of Woot-ers buy the deal of the day just so they can share their experience in the online forum. Woot also displays statistics about how fast the product is selling and how long it takes to sell out (sometimes it does, sometimes it doesn't, but there is always a new product the next day).

GroupOn is a collective buying site that features a new deal each day for 17 cities around the US. Today in San Francisco it was a bay cruise for $26 (50% of the list price). The site negotiates with the supplier and they agree that if a certain number of people buy the item, the deal goes through at the list price and if it doesn't, the deal is void. GroupOn leverages the power of the masses to get good deals. However, most of the stuff is local, so you have to be in the geographic area to take advantage of the deal.

For an interesting economic analysis of GroupOn, Evan Miller goes to town here.

Living in SIN

2009-08-04T16:21:00.000-07:00

I've been following Swoopo's new feature "Swoop It Now" (SIN) with considerable interest. This is a feature that allows non-winning bidders to apply the cost of their expended bids toward the outright purchase of the merchandise. My prediction was that it would drive the bid levels way up, as a bidder who was interested in buying the merchandise would have no reason to stop bidding once he had invested enough bids to make buying the item a good deal.

This has not happened. At all. At least, it hasn't happened yet. And I want to know why not.

Right now, Swoopo is selling a Nikon D90, a very nice camera, I happen to have one myself. Amazon sells it for $1,139.95 and by what is certainly not a coincidence, Swoopo shows $1,139 as its list price. So if you want the Nikon, instead of going to Amazon, go to Swoopo, buy 1900 tokens at 60¢ each, $1140.00 bucks works, and load them into the BidButler.

You might win and get the camera for something around $76.00 (1900 of your 2¢ bids plus the same number of 2¢ bids from whoever is foolish enough to bid against you). In fact, you'll probably win, because you have the huge war-chest to discourage rivals.

And if you don't win? You buy the camera for the same price you'd pay on Amazon.

Somebody should try this. I'll wait here.

Comprehensive Review of Penny Auction Sites

2009-07-31T18:06:00.000-07:00

To follow-up on my last post about the importance of picking a credible penny auction site, my next few posts will feature a comprehensive review of all the penny auction sites we know about. If you know of another site, feel free to add it in the comments or send me an email (pennyauctionguy1@gmail.com) and we'll add it to the list. Let me preface this post by saying I was really surprised by the findings of this study. Over the past few months that I have been following penny auctions, I feel there is a new penny auction site popping up every time I turn on my computer. In looking at the data however, the majority of these newcomers have awful user interfaces which appear to come from the same box software package, low site traffic, frustrating practices and polices and many appear as though they could go out of business at any moment.

Here is a timeline of the 24 penny auction sites we were able to get hard data on. Note that we know only the month auctions started significant operations and not the day. Therefore, the placement of sites within a month does not indicate the order in which sites started in that month, but is an arbitrary placement for aesthetic value.

An earlier version of this timeline incorrectly placed Zoozle's start date as June, 2008. We have been informed by the founder that Zoozle actually launched in March, 2009.

Picking a quality site has never been more important

2009-07-30T14:23:00.000-07:00

As I dig further into penny and online auction sites my conviction that users need to pick a reputable company grows stronger. If they are not careful, users risk losing their money through fraudulent practices or sites going out of business. Here is a good example I came across today:

Jungle Cents - This site claims to offer both traditional penny auctions and seat auctions. The latter is where users spend bids to buy a spot in an auction with a finite number of bidders. Once all of the spots are taken the auction begins in the traditional brick and mortar sense. That is, bids are free and the highest bidder pays that price for the item. I really like this idea in theory because it limits the number of people who can come in over the top of your bid, unlike at sites like Swoopo where anyone can poach the auction at the last second. However, I'm not saying it will be easier to win or that the prices will be lower in the seat auction, actually I don't think they will be because bids are free. I registered at Jungle Cents today and was given one free bid. Since there are no live penny auctions I went to the seat auctions of which there are six. The only seat costing one bid was for a iPod shuffle, so I went with that one. So far 12 of the 75 available seats are taken in this auction. The auction won't start until all of the seats are taken and as I got looking I noticed that the first seat was purchased on July 8th! So that person has been waiting weeks for this auction to start and only a small fraction of the seats have been sold. This isn't fair! People who buy bids to compete in these auctions expect their auction to start in a reasonable amount of time. At this rate it's going to take months before anyone can bid on that iPod!

I'm working on a study of which sites look legitimate, however in the meantime PennyAuctionWatch.com seems to be vigilant about exposing fraud and dubious practices.

The wages of SIN

2009-07-30T10:36:00.000-07:00

For several weeks, German customers of Swoopo have been allowed to use their expended bids as credit against the purchase of the auctioned merchandise, calling it Swoopo It Now (or "SIN"). Today (or recently -- I do have a life and Swoopo doesn't seem to send out press releases), they extended that courtesy to American bidders as well.

Of course, the merchandise is sold at MSRP, but if you lose big, you can salve your wounds a bit by buying the item for a not-terrible price. Say you blow 100 bids in a failed attempt to get that flatscreen TV -- Swoopo will give you $60 (100 bids at 60¢ each) off list if you buy it outright (and spot-checking a few items against Amazon suggests that Swoopo "list" is a pretty reasonable price).

Several issues:

There's a tight time-limit: you only have an hour to redeem the bids
You can do it while the auction is running -- but then you automatically lose.
Free bids are excluded, of course.
It isn't clear from the terms whether bids you buy at auction are valid: "vouchers" are excluded and auctioned bid packs are sometimes, but not always, referred to as "vouchers" on the site.

It's my analysis that SIN will drive up the price level. A bidder who has already expended more bids than the difference between "list" and what the product is worth to him has no incentive to stop bidding, since every 60¢ bid saves him 60¢ on the purchase if he doesn't win, and he might win.

Of course, that assumes that there are a lot of bidders out there who think like I do. We'll see.

The Penny Auction Paradox or Why Users Flock to Swoopo

2009-07-30T00:55:00.000-07:00

In earlier posts I began to flesh out ideas of safety in numbers and group dynamics surrounding the penny auctionosphere ("penny auctionosphere" term coined here and now by me: Thursday, July 30, 2009) and how the economic idea of pooling is present and how this concept makes auctions safer but also harder and more expensive to win.

The idea that the QWERTY keyboard, Blu-ray dvd players and English as the language of business have evolved to be (virtually) universally accepted is because certain products or situations require that all users behave the same way; this is the idea of pooling. The QWERTY keyboard has been proven not to be the most efficient layout of keys for quick typing, so why don't we change to a more efficient layout? The reason is that re-training millions of people to use the new keyboard would be more trouble than the gains are worth. Why Blu-ay as the standard for high definition DVD? Because electronics companies don't want to have to make a DVD player for each new format (remember HD DVD, It lost), consumers don't want to have to worry about getting the correct disk from Blockbuster, and content providers don't want to worry about making the correct number of each format, exc., exc. English has become the "universal" language because the world needed one and as the largest economy and most influential country, the US probably seemed like a good choice. I don't know the specifics on how English came to be the "universal" language, but it did, maybe it has to do with all that colonization. In penny auctions, a kind of pooling is also starting to take place. However, this pooling is less like Blu-ray and more like Ebay and Craigslist, perhaps the two best examples of "e-pooling." If you want to sell your old coffee table you post it on Craigslist. All people who want to sell old furniture sell on CL and all who want to buy also look there. There is no other practical way to sell used furniture anymore (newspaper classified are dead). Ebay is the same way.

With penny auctions the market is still highly fragmented (37 sites in the US and counting at last check) however, Swoopo is without doubt the standout industry leader. But this is an industry still in its infancy, so will the kind of expansion we have seen over the past year continue, or will one or several penny auctions come to dominate the industry? I think one would be hard pressed to argue that penny auctions require the type of pooling seen in Craigslist and Ebay, however there are benefits to going with the industry leader that are becoming more apparent.

Users flock to Swoopo because the site has a professional layout and is perceived to be trustworthy, especially when compared to many of their peers who's penny auction sites look like they are being run out of a garage in Mexico. I won't name names here but just go down the list in the directory on PennyAuctionWatch.com and you will see what I mean about quality. With Swoopo, users can feel safe that they will get their products and that the site is not manipulating or gaming the system on the back-end to cheat them - others have been accused of doing so. In this sense, Swoopo represents a type of pooling, one based on safety in numbers.

Yet the concept of safety in numbers in the penny auctionosphere is kind of ironic because the more users who to go to Swoopo, the harder and more expensive it becomes to win auctions. There are deals to be had at the lesser known sites, like RockyBid selling a car for little more than $1, but there is also risk. So does herd mentality make sense in penny auctions? Sure, humans always do what others are doing when they know no better, but the key to being successful at penny auctions is finding the credible and less popular sites. How does one do this? I just analyze the market, I don't play the game.

Why I don’t Like PriceDrip

2009-07-28T16:58:00.000-07:00

While not a penny auction, PriceDrip is a social shopping website and therefore warrants discussion on Penny Auction Insider. For those who are not familiar, PriceDrip is a site that sells a variety of electronics equipment from iPods to LCD TVs, however what makes it unique is that prices slowly go down over time and users place anonymous bids for the most they would pay for the product. Bids are kept secret from everyone and when the falling price reaches the highest bid, that person wins the auction at their bid price. PriceDrip claims to be able to offer users “amazing deals” because advertising on the site offsets the falling price. Apparently, the more users who visit the site, the faster the prices fall.

So why don’t I like PriceDrip? Well, for one, a simple Google shopping search yielded lower prices on almost every item they sold. Take a recent auction for a Sony LCD TV which sold on PriceDrip for $1,082.19, representing a 23% savings over the $1399 retail price, the site claims. That same TV was found the same day on Amazon for $874.99 after tax and free shipping (PriceDrip also offers free shipping). So PriceDrip’s “amazing price” really is amazing, amazingly high. I don’t know why consumers are buying items on PriceDrip, but I think it has to do with not using the web effectively. Unfortunately, shopping comparison sites have been around a lot longer than PriceDrip but consumers don’t appear to be using them in this case.

A second reason why I am suspicious of PriceDrip is that their claim to offer lower prices through advertising seems impossible. The site has only one ad, a banner on the bottom (for BidStick.com when I checked today) and does not have much traffic. The amount of revenue generated by this advertising must be miniscule.

I have another problem with PriceDrip, which is that they posted a very suspicious press release announcing venture capital funding. The press release does not say what amount was raised, and the investing firm, 2G Associates, has no trace on the web, except for in the press release in question and a website with a “under construction” page. The press release also offers no contact information for either PriceDrip or 2G Associates.

eBay for penny auctions?

2009-07-25T09:04:00.000-07:00

A subject that comes up in conversation (when you spend as much time talking about penny auctions as I do) is "Why isn't there a consumer-to-consumer penny auction, an eBay/Swoopo mashup?"

The dialectic goes something like this:

Socrates: Why, in all the wide world, isn't there a site where one person, not previously engaged in commerce, can offer for sale to passersby some personal possession -- and be assisted by another person, an auctioneer, that auctioneer being compensated not by the seller, but by each would-be buyer, who pays a small fee even to make an offer.

Plato: I think, Master, that auctioneer would collect the lion's share of the money -- and what man would offer his property for sale, knowing he would receive only a tiny fraction of its true worth.

Socrates: Is there no solution to that objection?

Plato: Perhaps, the auctioneer could share with seller a portion of the fees he collects?

Socrates: Is there not an epistemological problem with that proposal?

Plato: I do not understand.

Socrates: Does the auctioneer know how much a bid has earned him? Are not the bids themselves a chief stock-in-trade of the auctioneer? Each bid has been itself bought in auction, and in those auctions, bids that were bought in auction were expended, and so on.

Plato: And so on, Master, but not ad infinitum. Careful, painstaking bookkeeper would tell the auctioneer just how much was brought in by each bid and its ancestors.

Socrates: It would tell the auctioneer, but not the seller, who would have to rely on the auctioneer's diligence and honesty. And this world is full to bursting with lazy and dishonest men who would pose as auctioneers.

Plato: Perhaps the auctioneer could pay the seller some fixed price per bid expended, regardless of how much that bid truly brought. Or perhaps the auctioneer could guarantee a price for each good. Or perhaps ...

Socrates: Perhaps we have reached the limit of philosophy. Perhaps we just have to attempt it.

Plato: Perhaps.

One of my many, many readers writes

2009-07-25T08:42:00.000-07:00

Jeff H. writes:

I have read all of the recent (good and bad) comments about Swoopo and penny auctions in general. Let me give everyone a point to ponder. If one day, a company like Swoopo said ok! we will no longer list our own items on the site, from now on, anyone who wishes to list their own items for sale may do so, you can keep all of the profits you make using the Swoopo bidding method, all you have to do is pay Swoopo a listing and final value fee just like ebay charges, these fees are for use of the site.

I can't help but wonder how many of you who are against the penny auction concept would suddenly be listing your own items for sale with the hope of pulling in the same kind of profits on your item that you say Swoopo is pulling in on theirs?

It follows then, that for those in favor of the Swoopo method, they obviously would jump at the chance. It also follows, that for those who are presently against the Swoopo method, they also would suddenly see a clear road to make a profit on any item they list on Swoopo.

Methinks in the latter case, there will be double standards flying all over the place and the naysayers will suddenly be saying things like, "You know something, Swoopo is not such a bad deal after all." LOL.

It appears to me that the overall mentality is, if it is new and has never been thought of or done before then it has to be crooked, that type of mentality is a clear demonstration of idiocy at its best. Those of you who are agianst the penny auction concept may not like what i have just said, but it is nevertheless true and you know it.

Whoever it was that originated the Swoopo (penny auction concept) most definitely has the millionaires mentality, those of you who criticize the concept are demonstrating that they are economic illiterates, (special emphasis on the word economic) at least until they would be allowed to list their own items for sale, then they would suddenly become financial wizards, LOL (sarcasm intended).

Come now you guy's, be honest and fair, tell it like it really is, you know that what I have just said is true and would happen in a heart beat if Swoopo allowed you to list your own items. When you bad mouth Swoopo and the like, you are opening your mouths just to change feet, if Swoopo gave everyone the opportunity to list their own products for sale you would jump at the chance and not one of them would give a rats ass for all of the losers that they presently feel sorry for in their blogs.

Now be nice people, respond to my post and admit that what I have said is true, put the sense of fair play back into your lives and start thinking of how you can make a buck instead if coming down hard on those who are at least trying to make a better life for themselves.

If all you naysayers are so concerned that there are people out there who are easily influenced, then stop trying to be a Mother Teresa by trying to influence them.

If you are still against it then simply keep your mouths shut and stay away, then no harm done.

I don't agree with everything Jeff says, but I'll respond in posts of my own.

Yottabid? More like Nottabid!

2009-07-24T17:53:00.000-07:00

I always liked YottaBid. First of all, I liked the name. "Yotta" just means "eight", but because it is used in the metric system to mean 10²⁴ (that is, 1000 to the eighth power, or for those of you bad at math, 1, 000, 000, 000, 000, 000, 000, 000, 000) it has come to mean "really big". I like really big, so I liked YottaBid.

Second, YottaBid is one of the few penny-auction sites with user forums. Now, I suspect that user forums are a bad, bad idea. They're an open invitation for bluffing ("I have loaded 1000 bids into the automatic bid-bot!"), collusion ("Bob, if you don't bid against me on this auction, I'll won't bid against you."), and other misbehavior.

But the fact that YottaBid is doing something that isn't in YottaBid's own best interest doesn't mean they're not fun to watch.

Until today (or recently -- again, I only noticed today). You go to their site and all there is is:

We currently have no auctions posted as we evaluate the type of format we will have in the future. Until then, please feel free to comment in our forum at this link, or email us at support@yottabid.com

Not good news. Either the message is the truth, and the YottaBid management is completely dazed by whatever is going on in their corporate life, which is bad; or the message is not the truth, and YottaBid management is just lying to us. Two bad choices.

Countries aren't the only entities that print their own money, penny auctions do it too!

2009-07-24T15:01:00.000-07:00

Bidcactus is a decent site, they've been around for a while and they seem to be stable. However, they offer a fairly limited product list and only run 8 auctions at a time and these 8 auctions are often dominated by bidpacks and giftcards. Earlier today 5 of the 8 auctions were for bidpacks, leading us here at Penny Auction Insider to joke about Bidcactus "printing its own money." Penny auction sites are getting people to spend money to buy bidpacks that cost the company nothing to produce. This is pure cash inflow for the penny auction sites in much the same way that the US Government can turn on the printing press and start churning out cold hard cash.

This leads to the issue of credibility and reliability. US dollars are a fiat money, ie they only have value because they are backed by faith in the US Government. People are willing to accept compensation for services rendered in dollars and stores are willing to trade goods for dollars, not because they want dollars or because those green pieces of paper have special meaning to them, but because the rest of society will also accept those dollars. This is a faith based system. If people feared that the US government might become unstable they would have serious concerns about their dollars. With penny auctions, people who have bids in their account have faith that the site they purchased from will not go bankrupt, discount the value of bids or otherwise hurt the value of their investment in bids. This is a strong argument in favor of participating in penny auctions only at the most reputable companies with the smallest likelihood of running into trouble. However, it is at these heavily trafficked sites where bidders also face the most competition.

Oh shucks, it looks like that with penny auctions, like in finance, there really is no free lunch - if you want a higher return, you're going to have to accept higher risk.

On Friday morning 5 of Bidcactus's 8 auctions were bidpacks. I would like to see a penny auction site go for all bidpacks and see how long people stick around before realizing the only thing they can use their bids for is winning more bids. In Bidcactus's defense, I have noticed that one of the items users ask for the most is bidpacks.

Why do fools

2009-07-24T11:17:00.000-07:00

Frankie Lymon & The Teenagers had a big hit in 1956 with "Why Do Fools Fall in Love"

Why do fools fall in love?
Why do birds sing so gay?
And lovers await the break of day
Why do they fall in love?

Always the rationalist, I wanted to answer, "Because pair-bonding improves the survival chances of offspring in any K-strategy species, especially ones that have long gestation times!" (OK, arguing evolutionary biology with a song on an oldies station may not be my most rationalistic moment, but let that pass.)

I believe that people really do have good reasons for the things that they, even the things that seem completely irrational and counterproductive. We fall in love because it's genetically advantageous to provide a stable home for child. We root for sports teams because pack-instincts improve our chances of survival in the wild.

Like Anne Frank, who wrote "Despite everything, I believe that people are really good at heart," I've had some reason to reconsider my beliefs about people.

Why do people pay more than face value, often a lot more, for bid packs?

One possibility is rational ignorance. A person is busy, and it may be (overall) more efficient to make guesses and approximation rather than do the work of research and calculation. Once in a while, the theory goes, you lose money that way -- in this case, by not understanding you could get the same bid-pack much more cheaply -- but in the long run the time you save will supposedly compensate you for losses and inefficiencies.

I don't know if this really explains it. The bid-packs are marked "$30.00" in big bold type. The effort of reading and understanding that line, which is right in the center of the screen, is minuscule compared to the effort of actually bidding.

Another possibility is that winning itself, regardless of what is won or at what cost, is pleasurable for the bidder, enough so that he ignores or discounts his self-interest.

It might even be superstition. The universe is a complex place and it's difficult to trace causality. A bidder having a bad day might think that if he "wins" even one auction, at any price, he will be moved into that golden cohort called "Winners", people that universe favors in all things.

None of these explanations is particularly convincing and more and more I feel the appeal of my original, knee-jerk conclusion: some people are just nuts.

Swoopo shafts its customers

2009-07-23T12:05:00.000-07:00

All of my many, many readers know that I'm a strong defender of penny auctions, but when an auction house steps over the line, I'll call them on it.

Today (or recently -- I just noticed today), Swoopo started doing something subtly egregious.

Remember I talked about Swoopo was going to start allowing bidders to use their expended credits towards purchases of the merchandise for retail price.? So if you spent $24 worth of bids in an unsuccessful attempt to buy a $100 TV, Swoopo would sell you the TV for $76.

I had my doubts about whether this change was a good idea, but Swoopo went and implemented it in just about the most dishonest way imaginable, taking it from "maybe not a good idea" to "maybe an actual felony".

Swoopo's mistake -- which was probably made in honesty -- was they only offered their purchase-credit program to bidders in Germany even when the auction was also being offered in the US as well.

Swoopo has always been a little dense about internationalization issues ("I18N", as we in the business call them, for the 18 letters separating the first "I" from the last "N" in the word). They had their German bidders bidding in Euros at a nominal 1:1 exchange rate with Americans. Problem is, a Euro is worth about $1.43, so they end up losing a lot of auctions against Americans with our cheaper money. Plus, Hans and Franz have to pay €0.60, almost a full dollar US, for each bid.

Well today, Swoopo, a German company, made it up to their compatriots.

Here's the scenario: Bob and Wolfgang are both bidding on the same TV. Because of Swoopo's odd pricing policy, the official list price is $100 in the US and €100 in Germany and by a huge coincidence that makes my explanation simpler, they would be perfectly happy to pay $80 and €80 respectively.

The two of them bid neck and neck until they have both poured in 20 bids, the TV is at $4.80. Then Wolfgang has a flash of insight: the 20 bids he already spent are gone, but his bids from now on are free, since Swoopo will credit their cost dollar-for-dollar against the purchase of the TV. He puts 80 more bids into Swoopo's automated bidder, the BidButler, which dutifully pounds the hapless Amerikaner into submission. If Bob figures out what's going, he bails out early (Wolfgang wins the auction for €24.80 or a little more) and loses only $20 or so. If Bob is unlucky enough or stubborn enough to power through the 80 bids, he "wins" the auction and ends up blowing $124 for a TV he values at only $80. Worse case, he could just give up at the 99th bid, spending $99 and getting nothing at all.

The worst part here is that Bob isn't told any of this. He thinks Wolfgang is playing by the same rules when in fact the situation is very, very different.

Swoopo owes it to their customers to make a full and frank disclosure of this appalling situation as soon as possible. In the meantime, if you do have any Swoopo bids on account, don't waste them on any auction with the "global" tag -- you would be playing a game rigged against you.

Some people are just nuts

2009-07-23T12:02:00.000-07:00

This auction on Swoopo is right now at $31.32 -- and still going! The insane part is that the auction is for 50 Swoopo bids worth 60¢ each: the whole package is worth $30 at the absolute maximum. It even says so right on the auction page: "Worth up to: $30.00". But several people are still bidding.

Now it's $33.72. Sigh. What will happen next in the world of penny auctions?

"Our food is dreadful, so there's never a line!"

2009-07-22T09:42:00.000-07:00

I've never seen an restaurant advertising that way and don't expect to. BidRodeo is now running Google ad saying that they're less popular than their competitors.

It isn't completely absurd. In any auction, the fewer the bidders, the better the deal, and you can't blame BidRodeo for making a virtue of necessity. But consider:

First, most people who participate in auctions don't realize that they're better off with fewer competitors. Seriously. They seem to think that the presence of a lot of other bidders just means the auction must be a really good idea. The technical term used by behavioral researcher for the victims of this crippling cognitive deficit is "stupid". Lot of people are stupid. (The foregoing does not apply, of course, to readers of this blog, who are not only clever and perceptive, but also very good-looking and charming.)
People who are sharp enough to understand that less competition leads to lower auction prices are probably also sharp enough to understand it doesn't matter how busy the site is, just how popular the specific auction is. They also understand that if BidRodeo isn't popular, there might be a very good reason, and they'll go to a popular site that also has lots of auctions, some of which are likely to therefore be sparsely attended.
And what is BidRodeo's long term plan here? Their "visit BidRodeo because no one else is" strategy will either fail, and they'll go out of business, or it will succeed and lots of people will visit BidRodeo and then ... what? They'll change their ads to read "remember how we said you shouldn't go to busy auction sites? Well, forget that, come to our site!" ?
Finally, what is BidRodeo telling its investors? That low site traffic was the plan? That it's a key business strategy?

Then again, BidRodeo isn't a fan of RockyBid either

2009-07-21T18:01:00.000-07:00

I think this trashing of the competition on Google paid keywords could get ugly. Let's hope it does. For now, BidRodeo appears to be the only site paying to post negative advertisements next to Google searches for its competitors. But with new penny auctions cropping up all the time and the established brands fighting for market share, I expect we could see some more aggressive marketing in the near future. We'll keep you posted, and if you see something funny, please let us know in the comments section.

Cut to the chase marketing

2009-07-21T17:52:00.000-07:00

Our friends over at BidRodeo.com have an important message for would-be BidCactus penny auction players, "Don't bid on BidCactus." Very funny.

Credit where it's due

2009-07-21T16:24:00.002-07:00

Rumor has it that Swoopo is changing its model.

Right now, when you make a bid and you don't eventually win the auction, that's the end of it. Any money you spent buying the right to make the bid is lost.

The rumored change is as follows: if you bid on an auction and lose, the money spent on the bidding can be used as a credit towards purchasing the product at list price.

This is a game-changer, and not in a good way. Let me explain.

Say Bob is bidding on MP3 player listed at $100. The player is "worth" $75 to Bob -- if he had the opportunity to buy it for $75 cash, he'd snap it up. It's a standard $1/1¢ auction - a bid costs $1, the bid-level goes up by 1¢ with each.

Bob and Sam are the only bidders and they've bid it up to $0.50 -- each of them has bid 25 times and Sam is currently leading. Should Bob bid again?

His choices are conceding the auction and then spend $75 (plus his 25 expended bids, which are unrecoverable anyway) to buy the MP3 or bid and spend one more dollar. If he wins, he gets the player for $0.51, which is great; if he loses, he's no worse off. Sure, he spent a dollar, but the product that would have cost him $75 is now only $74.

And the situation stays the same for the next 74 bids too. Either Sam gives up or Bob just throws in another bid. If Sam is stubborn enough, the auction eventually gets to $2.00 and Bob gets the MP3 for free and Sam wins by paying the $2.00. (Of course, the two of them are out $100 apiece for the bids.) This race becomes inevitable as soon as Bob passed the 25-bid point, where the difference between the list price and Bob's maximum price has already be spent.

But look at the effect on Sam! If the MP3 player was worth $65 to him, he would have been better off just quitting at the 25-bid point, if only he knew about Bob. True, Sam doesn't know about Bob, but after a few of these punishing contests, he'll start to figure out that something is wrong. And he won't want to play any more.

These races might become very common. All it takes is for several bidders to spend their way into the zones that the sunk cost covers all the difference between list and their personal valuations of the products. When the races are common, the low purchase prices that make penny auctions so desirable become correspondingly rare.

Of course, Swoopo could avoid this problem by setting the "list" price unreasonably high, so almost no one would every have enough expended bids to make it worthwhile to buy the product -- but that would undermine whatever value the policy might have.

Another way to soften the effect would be to allow partial credit. If you spend $40 on bids for this auction, you get a $20 credit. This isn't nearly as disruptive (if I am really analyzing the situation correctly), but may not be as attractive for other reasons.

Sunk cost

2009-07-21T11:57:00.000-07:00

Remember The Sting? There's a scene where Robert Redford eyes his nemesis, Robert Shaw, from a distance. "He's not as smart as he thinks he is," Redford says to buddy Paul Newman. Newman retorts, "Neither are we."

Washington Post columnist Mark Gimein isn't as smart as he thinks he is. Here's what he says about us poor fools who bid on penny auctions:

What makes [penny auctions] so fiendishly compelling is the tendency of people to think of the bids that they have already put in as a "sunk cost" -- money that they have already put toward buying the item. This is an illusion. The fact that you have already bid 200 times does not mean that your chance of winning on the 201st bid is any higher than it was at the very beginning.

That's a good story, but it isn't true. The money a bidder has already put into an auction is submerged, but not sunk. It served two purposes: first, it drove up the price of the auction, making it less attractive to other bidders. Second, and arguably more important, it demonstrated the bidder's seriousness. "Sure," you are telling the world, "you could jump in and overbid me, but you're just wasting your money. I'm here to win."

I'd like to play poker against Mr. Gimein. He isn't as smart as he thinks he is.

Of course, neither am I.

The price of virtue

2009-07-21T09:47:00.000-07:00

You might think that a "dollar auction" is just a more expensive penny auction, but it isn't, not exactly. The dollar auction was a parlor game invented by the economist Martin Shubik, working with John Nash, the crazy guy from A Beautiful Mind. It was a standard auction, except you paid whether you won or not. (The "merchandise" being auctioned off was a dollar bill, whence the name.)

When the auction was a nickel or so, the bidders thought they were getting a great deal and so they didn't drop out. And then as the bid-level approached "par" (what the merchandise was worth; in this case, a dollar), the bidders would start to realize that winning wasn't going to be such a great deal, but that losing would really suck. If the bidding stopped at 99¢, the winner only made one cent, but the the loser would lose 98¢! Once you started bidding, it was always in your interest to bid one more time.

Shubik wrote later, "Experience with the game has shown that it is possible to 'sell' a dollar bill for considerably more than a dollar. A total of payments between three and five dollars is not uncommon."

The part that interests me is not why the auction doesn't stop sooner (that's amusing, but not complicated), but why it stops at all. If there's an auction between Bob and Sam and the auction is hammered down in Bob's favor at $5.00, Sam must have just decided to lose $4.99, instead of making one more bid and "winning", thereby losing only $4.01 (since he would pay $5.01, but get a dollar as the prize).

Why did Sam do that, why did he walk away? What changed about the auction between the point where the bidding was at 50¢ and the point he finally quit?

Well, for one thing, Sam realized he was screwed. He had belatedly grasped the economics of the auction and decided to step off the merry-go-round. Of course, he could have achieved the same effect at less cost by just thinking through the consequences before he started, he just didn't. (There's an old saying that "Experience is the harshest teacher but a fool will have no other.")

But Sam learned something else, something he could have only learned from participating in the auction: he learned just how stupid and stubborn his opponent Bob was. Bob demonstrated that he was willing to lose any amount of money just in order to "win". Sam was wise enough to realize that fact and flexible enough to act on the realization. Sam's reward for the virtues of wisdom and flexibility was: he lost.

Swoopo Gets No Love from the Washington Post

2009-07-21T03:16:00.000-07:00

Last week the Washington Post had a column on Swoopo in which writer Mark Gimein was highly critical of the penny auction website, calling it, "...the crack cocaine of online shopping sites." Gimein found Swoopo while doing an online search for discounted laptops and after studying it, concluded that Swoopo is evil and is taking advantage of consumers who are unaware of the concept of "sunk cost" and enticed to bid more because of it.

Gimein cites several studies in behavioral economics and game theory, all of which are highly applicable to bid-fee auctions like the penny auctions found on Swoopo. However, instead of driving deeper into how users on penny auction sites interact, he concludes that these sites are evil.

Gimein writes, "And the bigger Swoopo gets, the worse it will be. The more people sign on to bid, the lower your chances become..." While this is true, Gimein fails to mention that there are now dozens of penny auction sites open to players in the US - click here for a good directory - and that many of these sites offer a similar bidding opportunity.

However, the reason why users tend to over-saturate Swoopo while there are better deals to be had on less popular sites is due to several factors which will be the title of a later post I intend to call The Penny Auction Paradox. In short, the more users, the more secure a site appears (due to "herd mentality"), but the higher the price for the auctioned item. Users are paying a premium for the security of knowing they are using a reliable website as deemed by their peers.

In conclusion, Gimein offers his gut reaction to an industry he spent very little time trying to understand. I felt very much the same way he did when I first saw Swoopo. My initial reaction was, "Wow, how can this stuff be going for so cheap," and my second reaction was, "Wow, Swoopo is making so much money." However, now I see there are many complexities to the industry that are not captured by either of these reactions nor in Gimein's article. Hopefully some of our posts here on Penny Auction Insider have started to shed light on the interesting and complex world of penny auctions. Some of what we have to say about penny auctions is positive and some of it is negative, but ultimately there are exciting issues surrounding penny auctions that we would like to explore further. Gimein is free to conclude that these sites are not a good deal for him, and I expect he will never bid on Swoopo, BidCactus or any of the other penny auction sites. However, there are people who are bidding and some of these people are walking away with incredible deals.

Something for nothing, nothing for something

2009-07-20T16:21:00.000-07:00

Like my co-blogger, I'm a big fan of Penny Auction Watch, and like him, I was amused by the win of a Honda Insight for $1.24. Amused but a little dismayed.

The truth is, a penny-auction site makes money so long as the average product goes for 2% of the the purchase price (given the usual arrangement of a 50¢ bid and a 1¢ increment). That is not a very high bar and it's bad for everybody (except the winner) when a site can't maintain even that standard. First of all, it sets up unrealistic expectation in unsophisticated users, and a more-realistic skepticism in the sophisticated ones.

Second, if a site gets itself into financial jeopardy (as the aptly named Rocky Bid seems likely to do), its investors might very well pull the plug. When that plug gets pulled, what do you think the people who have bought big bid-packs will get? Let's not always see the same hands. That's right, Bobby: nothing. Bupkis, zip, nada, niente. And that's bad for all penny auctions and all penny-auction bidders.

And I wonder what's going to happen in with this auction of Michael Jackson tickets. I'm guessing that the King of Ped-- oops, I mean the King of Pop, I'm guessing that the King of Pop is not going appear, so: does the winner get his bids back? Do all the other participants get their bids back? What about people who bought bid-packs just so they could participate?

Probably, the bidder who paid $8.59 for a pair of tickets worth $12,000 is not going just accept his money back. If I were him, I would be all about, "Give me the $12,000 refund that the auction house is getting from the promoter!"

Otherwise, some lawyers are going to be getting rich.

Another Penny Auction Blog

2009-07-19T21:39:00.001-07:00

Penny Auction Watch is a blog with a similar objective to ours: to cover the penny auction industry and provide participants with timely, interesting and objective news and advice. They've been around since late May have have put up lots of good posts since then. Check them out for a good overview of the penny auction universe of the last few months. I especially enjoyed their post about RockyBid's car auction that went for $1.24. I think they lost money on that one :). Penny Auction Watch has also exposed some unfair practices of a few penny auction sites, so this would be a good starting point if you are new to the world of penny auctions.

Updated Friday, July 24th 2009....

And now RockyBid is trying to swing their huge loss on the Honda in their favor, by letting people know via Google AdSense just that. It's funny because I'm sure anyone who doesn't know about the situation - that RockyBid really did sell a car for $1.24 (and lost over $20,000 in the process) - would think it was a HUGE scam. A scam like those - Work from Home! Make over $15,000 a month! Anyone can do it! It's so easy! Just come to our seminar! It only costs $200! - type of scams. Or those - free MacBook pro! just fill out our customer feedback survey! We promise we won't sign you up for hundreds of recurring fee services like fruit of the month club and automatically charge your credit card! - type scams. But it's not, someone really did get the deal of a lifetime on Rockybid - and I'm sure the executives over there were crying when that happened. Here is a video of the winner with the car

Acronyms that sound obscene but aren't

2009-07-17T18:29:00.000-07:00

If you hang around the Internet long enough -- and who doesn't? -- you'll eventually see the acronym IANAL.

Whatever you might be thinking, it just means "I Am Not A Lawyer".

And I am not a lawyer. My earlier post It isn't gambling addressed why a penny auction is not a game of chance and my co-blogger wrote about how large VC firms were investing in penny-auction sites and reasoned that they pay for good lawyers and wouldn't invest in anything that was likely to land them in jail.

It's not legal advice, though. I'm too cheap to pay for real legal research, so I looked around, yes, the Internet, and here's what the great state of California, where I am lucky enough to reside, has to say:

California law prohibits lotteries. A lottery is any scheme for the disposition of property by chance among persons who have paid or promised to pay any value for the chance of obtaining the property, with the understanding that it will be disposed of by chance. [emphasis added]

If I were a lawyer, I might think that since penny auctions lack the element of chance, they aren't lotteries.

But I Am Not A Lawyer.

Swoopo in the Mainstream News

2009-07-17T18:02:00.000-07:00

Better late than never: EU based Swoopo, one of the most, if not the most popular penny auction site on the web and GoBid.com (know less about this one) were in the San Jose Mercury News earlier this spring.

Not too much to note in this article; the most noteworthy point is probably that there was a news article about the penny auction sites. The writer interviews a few e-commerce experts and the Swoopo exec. and showcases a few arguments on the topic of penny auctions. 1. Are they gambling? and 2. Is it fair? I would love to talk to a lawyer about what explicit language governs gambling and what precedent has been set in similar cases, if any. However, given the number of penny auction companies I would say that at least some of them must have asked an expert. Also, venture capital firms do extensive research before making an investment so I must conclude that before August Capital plowed $10 million into Swoopo earlier this year they probably called a lawyer.

Game on! I think penny auctions must fall under the definition of entertainment shopping, which is not exactly rolling the dice or picking lucky numbers.

It isn't gambling

2009-07-17T17:51:00.000-07:00

You remember Kindergarten Cop, the scene where Arnold Schwarzenegger is arguing with a bunch of school-children about why he has a headache? "Maybe it's a tumor," one kid helpfully suggests. "It's not a tumor!" Schwarzenegger bellows.

I sometimes feel like that when talking about penny auctions with people who don't play them. I want to yell, "It's not gambling!"

And it isn't gambling.

Gambling means playing games of chance for money -- and in penny auctions, there's no element of chance. None. The outcome of the auction is strictly dictated by the actions of the players, the same as regular auctions, the same, for that matter, as chess.

Why do people sometimes complain that it feels like gambling? That it feels like there is a huge element of chance?

Two reasons. The first is, it depends a lot of factors that aren't random but that the bidders don't know: the number of other bidders, their state of mind, the actual value of the merchandise, and so on.

That factor isn't unusual. When you buy or sell a house (something I just did), there is a very similar set of question. What is the house really worth? How many potential buyers are out there? How much can they spend?

The other factor is game theory. Let me explain.

Say, you are in an ordinary auction. A laptop is on the block, the current bid is $400, you have to decide whether to bid or not. The question is pretty simple: is the laptop worth $401 to you? If it isn't, don't bid. If it is, bid -- you'll either win and get it, or someone will overbid and you have lost nothing.

But now imagine you are in a penny auction. There's a laptop selling for $40. Of course, a laptop is worth $40; even if you don't want a laptop, you could put it on Craig's List and make a bundle. Given that, you should definitely bid, shouldn't you?

Well, no, you might be overbid and then you're out a dollar -- indeed, you almost certainly will be overbid, because a laptop that is a good buy at $40 is probably still a good buy at $40.01. So you shouldn't bid.

But wait, the person who is waiting to outbid you is asking himself the same question -- and if he has the same question, he should get the same answer, and not bid. But if he isn't going to bid, then you should!

To make it worse, the value of winning decreases as the auction goes on. If you get a $400 laptop for $40, you've won the equivalent of $360; if the laptop goes for $40.01, you've only won $359.99, not quite as good a deal.

On the other hand, as the value of winning decreases, the chance of winning increases, because fewer and fewer people are willing to pay a dollar for a chance at the smaller amount.

On the other-other hand, if fewer people are willing to play, more people are willing to play, because they can reason that other players have been chased away. (Remember Yogi Berra saying about a local restaurant, ""Nobody goes there no more; it's too crowded!" Remember my saying, "Penny auctions are popular because they're unpopular.")

All these weird, contradictory influences make a penny auction, although exhilarating, very difficult to comprehend and almost impossible to win reliably.

But it isn't gambling.