[Infowarrior] - The Crack Cocaine of Auction Sites

[Richard Forno]

The Crack Cocaine of Auction Sites
By mark.gimein
Created 07/07/2009 - 5:11pm
Source URL: http://www.thebigmoney.com/articles/money-trail/2009/07/07/crack-cocaine-auction-sites

Swoopo.com is the most efficient, addictive way to separate people  
from their money.

Imagine for a second that you set out to come up with an online  
shopping site that would take advantage of everything we've come to  
know about consumer behavior to separate people from their money in as  
efficient a way as possible. What would you do? Well, you'd probably  
try to draw buyers in with bargain prices. You'd pit them against one  
another in an auction. You'd ask them to make snap decisions without  
taking much time to figure out just how much money they're spending.  
On top of that, you'd ask them for only very small amounts of money at  
any one time, letting payments of a few cents build up to hundreds of  
dollars.
Still trying to figure out how you'd put all that together? You can  
relax. Someone's already beaten you to it: the folks at Swoopo.com  
[3]. It's an online auction site that fiendishly plays on every  
irrational impulse buyers have to draw them in to what might be the  
crack cocaine of online shopping sites.

I discovered Swoopo, as many people do, through an online ad plugging  
its latest deal, a fancy desktop computer at more than 90 percent off.  
I don't actually need a new computer, but the words "90 percent off"  
have traditionally exerted a powerful pull on my family that no number  
of never-worn double-breasted suits has ever been totally able to  
alleviate. You say "90 percent off," and I click.

If you are already saying to yourself that surely there is a catch,  
you are right. Smarter people than me see a site that sells a MacBook  
Pro for $35.86 or a Nikon digital SLR for $16.03 and turn away,  
knowing that the bigger the "free lunch" sign is, the more it's going  
to wind up costing. Trust that impulse, because Swoopo, which bills  
itself as an "entertainment shopping" site, combines the addictiveness  
of auctions and the chance element of lotteries into what may be the  
most devious way to dig into your wallet yet devised.

At first glance, Swoopo.com—which started its life in Germany as a  
phone and TV-based auction site called Telebid [4], migrated to the  
Web as "Swoopo," and launched its U.S. site last year—looks like an  
auction site patterned on eBay [5] (EBAY), with prices for most items  
starting at a penny and rising as members "bid" up the price. Like  
Ebay, Swoopo has a full panoply of auction tools, such as  
comprehensive records of all the completed auctions and an electronic  
bidding system ("Bid Butler") that will put in last-second bids to  
keep you in the auction. Unlike eBay, however, on Swoopo you need to  
pay 60 cents each time you make a bid.

Sixty cents? Sure doesn't sound like much when getting a $1,000-plus  
camera or computer is at stake. Delve into this a bit, though, and you  
might be stunned at just what that small charge for each bid leads to.

Consider the MacBook Pro that Swoopo sold on Sunday for that $35.86  
[6]. Swoopo lists its suggested retail price at $1,799; judging by the  
specs, you can actually get a similar one online from Apple [7] (AAPL)  
for $1,349, but let's not quibble. Either way, it's a heck of a  
discount. But now look at what the bidding fee does. For each "bid"  
the price of the computer goes up by a penny and Swoopo collects 60  
cents. To get up to $35.86, it takes, yes, an incredible 3,585 bids,  
for each of which Swoopo gets its fee. That means that before selling  
this computer, Swoopo took in $2,151 in bidding fees. Yikes.

In essence, what your 60-cent bidding fee gets you at Swoopo is a  
ticket to a lottery, with a chance to get a high-end item at a  
ridiculously low price. With each bid the auction gets extended for a  
few seconds to keep it going as long as someone in the world is  
willing to take just one more shot. This can go on for a very, very  
long time. The winner of the MacBook Pro auction bid more than 750  
times, accumulating $469.80 in fees.

Some winners do wind up with good deals. A few, on the other hand,  
wind up paying almost as much in bid fees as the item they're angling  
for was worth in the first place. Meanwhile, the losers can shell out  
hundreds of dollars in bidding fees before throwing in the towel, and  
end up with nothing. What makes Swoopo so fiendishly addictive 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. A new bidder can come in at any  
time and at the cost of a mere 60 cents jump into the auction in which  
you've already spent more than 100 bucks. The money you've put in has  
gotten you no closer to the goal than a losing raffle ticket.

If this doesn't seem crazy to you yet, then maybe one more devilish  
bit will do it. Not only can you bid on computers, cameras, and other  
consumer products on Swoopo, but Swoopo also auctions off packs of  
Swoopo bids! Hilariously—or worryingly, depending on where you stand— 
those "Bid Packs" themselves sometimes wind up bringing in more in  
bidding fees than their face value. (That's not super-obvious: It can  
take a little math, but if you want to do that you can look at this  
pack of 75 bids [8]—a "$45 value"—on which Swoopo may have taken in  
more than $85 in bidding charges, plus the final $17.16 closing price.)

Some of the ideas behind Swoopo have already been explored in a  
theoretical way by game theorists—check out this description of the  
"Dollar Auction [9]," in which two players bidding on a dollar bill  
raise their bids by a penny at a time to stay in the game and end up  
paying more than a buck each. Other ideas behind Swoopo, like the  
reluctance of bidders to say goodbye to their "sunk cost," have been  
explored by economists such as Daniel Kahneman and Amos Tversky [10]— 
and have been found to draw bidders deeper into the game. Swoopo—which  
recently got backing from a prestigious venture capital firm [11] that  
should be ashamed of itself—plays off those insights to efficiently  
get people to make bad choices. It's the evil bastard child of game  
theory and behavioral economics.

The thing about Swoopo is that the devil here lies deep, deep in the  
details. Unless you're willing to do a bunch of math, it's easy not to  
notice that Swoopo is taking in a lot more for most of its high-ticket  
items than the price you'd pay in a store. Even after you've done the  
math, Swoopo can still seem oddly compelling. One more irrational  
impulse Swoopo caters to is an urge to believe that there must be some  
strategy that beats the system. As Swoopo's own business development  
director, Chris Bauman, told one blogger [12]: "Winning takes two  
things: money and patience. Every person has a strategy."

Indeed, he undoubtedly does. The problem is that, as with the gambling  
systems peddled by countless books, none of those strategies will  
actually work. Just remember that no matter how many times you bid,  
your chance of winning does not increase. And the bigger Swoopo gets,  
the worse it will be. The more people sign on to bid, the lower your  
chances become—and the more Swoopo collects in bidding charges. The  
only winning strategy is not to play in the first place.

Still not convinced? Try going to Swoopo and watching the end of one  
of their auctions. As I wrapped up this story, I kept my eye on one  
another MacBook [13]—a recently discontinued model that Swoopo says is  
worth $1,299 (though it's available for $1,099 from other sites). I  
thought that maybe I'd given Swoopo too hard a time and the MacBook  
Pro I'd started with was as bad as it got.

It's not. I kept setting down how much Swoopo had gotten in fees for  
this auction, but each time I'd finished calculating a number—$2,500,  
$2,600, $2,700—I'd turn back to my browser to find that the auction  
was still going, and Swoopo was still raking in fees for 60 cents a  
pop. Finally, I gave up when it became clear that Swoopo could make  
money faster than I could count it. As I wrote this sentence, Swoopo's  
bidding fees on this one auction had gotten over the $3,000 mark. And  
they were still rising fast.

© 2008-2009 Washington Post.Newsweek Interactive • All rights reserved.

Source URL: http://www.thebigmoney.com/articles/money-trail/2009/07/07/crack-cocaine-auction-sites
Links:
[1] http://www.thebigmoney.com/sites/default/files/090707_TBM_SwoopoArticle.jpg
[2] http://www.thebigmoney.com/sites/default/files/TBM_090708_SwoopoCover.jpg
[3] http://www.swoopo.com/
[4] http://www.10yetis.co.uk/releases/swoopo.html
[5] http://www.thebigmoney.com/search/quotemedia/ebay
[6] http://www.swoopo.com/auction/apple-macbook-pro-mb991ll-a-13-3-inch-la/192652.html
[7] http://www.thebigmoney.com/search/quotemedia/AAPL
[8] http://www.swoopo.com/auction/75-bids-voucher/195364.html
[9] http://en.wikipedia.org/wiki/Dollar_auction
[10] http://books.google.com/books?id=P5GsREMbUmAC&lpg=PP1&pg=PA276
[11] http://augustcapital.typepad.com/news/2009/04/august-capital-invests-in-swoopo.html
[12] http://www.gadgetell.com/tech/comment/gadgetell-interview-swoopo-speaks/
[13] http://www.swoopo.com/auction/apple-macbook-mb466ll-a-13-3-inch-laptop/194388.html
[14] http://www.thebigmoney.com/users/markgimein