Swoopo: It's Brilliant And Evil And Gives Incredible Margins

From the Freakonomics blog at the Gray Lady, I learned about Swoopo.com. This is evil. Click on the link and see what the opening page looks like.

It appears that things are for auction for ridiculously cheap prices. There's two wrinkles, though. First, every bid you make costs you seventy-five cents. Second, every time someone makes a bid, it adds fifteen seconds to the auction clock. Put them together, and the result is a perfect psychological storm of sustained frenzy. The "price" stays very low until just a few seconds before the auction closes. Then there are a long series of bids from various people. By the end of it, Swoopo has made immensely more money from the bidding than they have from the actual sale.

They offer fun, high-demand merchandise. Flat-screen TV's, laptop computers, all new and right out of the box. An Apple MacBook that allegedly retails for $1,299 was offered in what they called a "penny auction." This means that each bid costs the bidder $.75 to make and raises the price by one cent. By the end, the actual sales price of the product was $40.82. So let's assume that Swoopo really paid that $1,299 for the product, which of course it didn't; it bought a bunch wholesale at a discount price for volume. But even assuming that they did pay this full retail price, Swoopo made $1,803.32 on the deal -- the selling price plus $.75 for each one-penny bid less the cost of goods sold. Even though the sales price for the MacBook was an apparently ludicrously-low price of less than forty-one dollars, the total income was more than $3,100. (If they got the computer for about half of its retail cost, their margin was about 475% on this sale.)

Another example -- Swoopo auctioned off $80 in cash. No product at all, Swoopo was simply offering to credit the winner's account for $80.00, as in four Andrew Jacksons. Each bid cost a dollar and jacked the price up by a nickel. The end price was $22.55. That means that there were 450 bids made before the auction actually closed. $450.00 (bidding fees) + $22.50 (price) - $80.00 (COGS) - $.05 (the starting price) = $392.50 in pure, sweet profit. Astonishing. $392.50 conjured up from the greed of Swoopo's customers. Again, that's just shy of a 500% margin.

They don't profit on every deal. I found an auction for $1,000 cash, at $.75 per fifteen-cent bid, but the winning price was $143.70. Each bid generated $.90 in income to Swoopo, so a final "price" of $143.70 really means income of $862.20. So they lost $137.80 on that auction. It looks to me like they need 1,112 bids, producing a total sale price of $166.80, to make a profit on "selling" $1,000.

But on another $1,000 cash auction, I saw two "bots" battling it out from somewhere around $54.00 to $158.55. That was about 600 bids in just under a minute -- and it cut Swoopo's risk on the auction to just under $50. The bidding had driven the clock back to nearly three hours, so I figured that would seal the profit for Swoopo -- the temptation here for some third party to come in at the last minute and start bidding up again would be great -- and sure enough, less than three minutes after it stalled out just shy of the break-even point, another bidder stepped in. Soon enough, it had been bidded up to over $200, meaning Swoopo would have a profit of at least $220 on the auction.**

Perhaps this is not so handsome a margin as the merchandise sales, but a profit nevertheless -- and it more than made up for the first auction that they lost money on. And the cash auctions are probably pretty good for generating traffic and interest in the site. Swoopo could make decent money, I concluded, auctioning nothing but the cash that its own customers put into the auctions. That would eliminate all product, all overhead, and all transaction costs, leaving nothing behind but pure profit.

And that's all assuming something like rational behavior on the part of the auction participants.

Here's a case of someone who bought a Wii console system for a bid price of $183.60, but along the way had to place 427 bids, thus paying $320.25 for the privilege of then spending an additional $183.60 to actually buy the product. Even at the top-dollar resale value listed for the product of $249.99, that's a net overspend. And you can find a new Wii system for a lot less than $249.99 with minimal searching.

Then, check out this auction on a souped-up XBox 360. The alleged retail price of the thing is $349.99. As of the time I prepared this post, it had just been bid up to $320.10, with a $12.90 shipping and handling surcharge, and there was about three hours built up on the auction's time. That means that even if you can't find it at Wal-Mart for less than $350, you're only saving seventeen dollars. And Wal-Mart sells this thing online for $299.92, with two games that may or may not suck. So now, the bidders have bumped the raw price on this thing up above the actual retail price. And Swoopo will be taking in not less than $1,933.50, from which it has to deduct the bulk wholesale cost of the thing (about $150) and the actual cost of shipping. That's almost a 1,300% margin.*

1,300% margins are well beyond the range of "obscene profit." Which is why it feels like they're taking advantage of their customers. But the real problem is that it seems a lot like gambling. In the U.S., most forms of internet gambling are illegal. (I don't think it should be, but that's how it is.)

I can't quite put my finger on why this ought to be illegal -- it is, after all, an auction, and that's a perfectly legal way of selling stuff, and there's no law against making an obscene product. You do get something in exchange for your $.75 bid -- the chance to buy something for a deep discount. But the chances are much greater that you'll spend a whole lot of money to buy something and then get nothing.

That's a risk that this shopper is unwilling to take. I'd prefer to actually get something in return for my money -- but it seems that a lot of people prefer to take a risk of getting nothing in exchange for the small chance of getting something at a deep discount. That's the essence of what makes Swoopo work. My question is whether it's so unfair a practice as to potentially violate the law.

Assuming not, then it's about the cleverest thing I've ever seen on the Intertubes. Once they've paid back their setup costs (creating and maintaining the algorithm for the automated auction, getting enough bandwidth and stable servers, and a little bit of advertising, which I may be giving them for free here) the only appreciable operating costs are the COGS and fulfillment, which pay for themselves with the cash flow and the S&H charges. And they have Google ads for other stuff on their site, so they're getting money there, too -- which may be enough to cover their operating expenses. They began operations in Germany and have expanded here into the U.S. and the UK and as far as I can tell, there's nothing to stop them from taking money from anywhere else in the world. I'd love to be involved in their Asian sites.

It's an engine for pure profit. Brilliant.

SEE ALSO FOLLOW-UP POST.

* UPDATE: The auction ended. The winning bidder agreed to pay $320.40 for the XBox, and along the way he submitted a total of 559 bids, for a transaction cost of $419.25. His $299.92 XBox therefore cost him a total of $739.65 plus shipping and handling. I'm beginning to think that this is a deceptive marketing practice and that this fellow has experienced actual harm because of it. There may be a claim under California Business & Professions Code § 17200 here.

** UPDATE: This auction was still going strong eight hours later the next day. It had been bid up to $417 $750.60 $854.25. By my calculations, that makes Swoopo's profit $1,502.00 $3,503.60 $4,125.50.