November 17, 2009

The best business idea I've come across

I recently came across a site that has a business concept so stunningly simple it is amazing nobody else has thought of it already

The site is called Swoopo and it is an auction site. Before you start telling me ‘ebay has cornered the market on auction sites’ let me tell you the differentiator for this company: Swoopo doesn't make money with the items it sells. It makes money selling bids themselves.

Let me explain.

On a site like ebay you choose your product, make a bid for it, and name your own price. At the end of the auction you pay the price you bid (assuming you are the winning bidder). It’s up to you to decide how much to bid in any given circumstances. If you bid 1000 times on an item and somebody bids higher, they win and it costs you nothing to participate. With Swoopo that concept is turned on it’s head. Swoopo decides how much each bid will be (usually a set increment from the current highest bid) but in order to participate you have to actually purchase bids from Swoopo themselves. The bids cost £.50 each although if you bulk buy you can get the price down to around £.44 per bid. There is no limit to the number of bids you can purchase and there is no limit to the number of times you can bid on an item (as long as you have sufficient bids left in your account).

But here’s the real beauty of the system - the ‘time limit’. Looking at ebay we see that each auction is time limited. It will end at a certain time in the future and the highest bidder registered at that time will win. This leads to the situation where canny bidders can wait until 1 second before the deadline and place a higher bid. Once the time expires there is no way another bidder can increase that bid price, so you win. Swoopo works on a timed basis too. Each auction has a countdown timer to show how much time is left in the auction. But every time someone bids, a number of seconds are added back onto the timer to allow you to make a competing bid. What this results in is a bidding war as the timer starts to run out with auctions being extended sometimes by hours and hours as frenzied folks make further bids.

And remember each bid you make is costing you £.50.

I was watching an auction recently. It was for a Nikon D90 12.3 MP DSLR Camera. The retail price on this (as quoted on Swoopo) was £829.99. The winning bid for this was £71.77, a massive saving of over £760. That’s a bargain in anybody’s book. Or so I thought. When I checked back into the bidding history I discovered 2 things. The Swoopo mandated bid amount was 1p (£.01). This means that every bid would increase the auction price by 1p. And the number of bids was 7177. So let’s put this into perspective. Swoopo, the organisation, had sold 7177 bids at a price of about £.50 each to people who had used them to purchase a camera worth £829.99. Or in other words Swoopo had made £2830 profit on that action (7177 *.5 +71.77 -829.99). What was more interesting was that the winning bidder had actually bid 1394 times for the camera. In other words he had spent £697 (1394 * £.5) making a bid of £71.77 on a camera costing £829.99. His profit was £61.22. But here’s the real kicker: That same camera is available on for £684.80 - £13 less than he/ she spent at auction to get it!

The business logic behind this is faultless. Bidding is push button so it is really, really easy to make the bid. Each bid increases the price by a nominal amount (1p, or 5p, or 20p) so the actual sum being risked appears small. The purchase of the bids is completely separate from the bidding itself which means that the pain of making, for example, 1394 bids at a cost of £697 is not felt during the auction itself. With time automatically extending and the ease of bidding it is extremely simple to keep running the price up without considering the consequence. I’ve watched auctions as they tick down to 5,4 and 3 seconds. The number of bids being added arbitrarily to beat another bidder is frightening. Because you can see who’s bidding against you it’s also easy to see what their bidding pattern is like. I watched one auction where a particular bidder would ALWAYS instantly up the bid against anyone who bid against him/her. At one point there were about 12 other bidders taking turns to make bids. Each time the price went up by a penny, this bidder would beat it. Over the course of five minutes of real time a saw this bidder make about 48 bids (£24) - all to increase the auction price from about £3.55 to a little under £5.00. At least with ebay if you are placing actual amounts of money rather than ‘bids’ then you get to see what your purchase is going to cost you. With Swoopo it can come as a shock to see that you’ve cost yourself almost £700 in bids for the right to pay £71.77 for a camera.

In the interests of fairness I must also point out that I saw one auction for a Nikon D5000 DSLR Camera   where the winning bidder made a single bid for this £669 camera and won. His auction price? £5.50. His savings - £663.

Ethically you may be able to question the business basis, but financially you can’t fault the business model.

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