Does the world really need another penny auction site?

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.
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The Expanding Penny Auction Universe: Part 2

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).
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Penny Auctions Under Siege

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.
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Understanding Ended Auction Prices

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.
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All The Penny Auction Traffic Data One Could Ever Want

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?).
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Penny Auction Traffic Data for August

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.


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The Penny Auction Universe is Expanding

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.
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