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Analysis of the Penny Auction Model

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Posted by Paul Reilly at 5:17 pm on September 15, 2010 • Fun,General,Marketing

I’ve recently become aware of some sites growing in popularity that are collectively known as penny auction sites. Examples include Beezid, BidsTick and SwipeBids. Visit these sites and you’ll see Xboxes, macbooks and flat screen TVs selling for, well, pennies on the dollar.  Have I just let you in on the secret that allows you to afford all the gadgets you desire?  Not quite. But the owners of these websites sure hope that’s your initial thought.

These sites, opposed to eBay which uses an ‘English Auction‘ model (ascending price auction), are academically known as bidding-fee auctions. Although the items may only be selling for pennies on the dollar, bid up a ‘penny’ at a time, you have to purchase the ‘bids’ before you can user them. Typically each ‘bid’ costs between $0.60c and $0.90.  Big deal though right? I’ll pay a few dollars in bid fees and still get that macbook for $50! Right? Well, that would be true if you won every time you bid, and you didn’t bid very often, but, for the typical user, that’s certainly not the case.

Consider an Apple iPad that recently sold on Beezid for $18.02. It may seem like someone got quite a deal on that iPad, which retails for $499, but if each penny ‘bid’ actually cost the bidder approximately 75c, Beezid pocketed (.75*1802+18.02=) $1351.50 on the auction – a 174% profit!  Their huge profit margin on this sale means that plenty of bidders used up a bunch of pre-payed bids while bidding, but didn’t win.  As this scenario is common over all of the items on the site, the average user ends up losing much more than they gain. I can’t help but find comparisons with gambling – the house always wins – bid a few times and you can get lucky – bid lots of times and you’ll never end up on top.

Despite the fact that bidders have a huge disadvantage over the ‘house’, these sites are quite popular. The links are spreading virally and the users are having fun.  Ignorance is bliss, I guess.  Let me first say that I don’t approve of the penny auction model – I believe it preys on the ignorance of its users and collects a tidy profit in the process, and unlike casinos, you don’t even get free drinks. That said, I’ve wondered if comparisons and concepts can be borrowed from this model and used elsewhere.

I believe that some concepts can be reused in other ways, without necessarily ripping off your customers. There are several aspects of the penny auction process that are enticing to users:

  • Getting something you want without paying full market prices (or at least thinking so)
  • Interacting in a game-like atmosphere
  • Competing against others for a “prize”

These model enticements immediately made me think of social media implementations. I could see this model being used by organizations on Facebook, where users complete tasks for ‘bids,’ perhaps by sharing links with friends, filling out surveys, becoming a fan, etc. With the ‘bids’, which are really ‘points’ that they acquire, they can compete with others for rewards in an auction-like process. This interaction, if set up properly, could be an inexpensive way for organizations to market themselves.

FourSquare could be another way to use this model – the more check-ins that you have at a specific establishment, the more points you earn for future auctions – or the more different locations of a chain a user visits, etc – then users could bid their points for gift cards, free meals, products, etc.

Consumers certainly get excited about winning prizes – and will take extraordinary efforts to achieve them – by combining this behavior with the penny auction model, companies could generate terrific new buzz!

3 Comments

  1. […] This post was mentioned on Twitter by Paul Reilly, Unitz LLC. Unitz LLC said: Some quick thoughts I had on the penny auction model and social media usages http://is.gd/fcofa – let me know what you think! […]

    Pingback by Tweets that mention Analysis of the Penny Auction Model | U-notez -- Topsy.com at 5:52 pm on September 15, 2010

  2. This information is very helpful. Great!! Thanks so much.

    Comment by Joy Comes at 6:32 pm on September 15, 2010

  3. This is how it works. A user pays $0.50 for each time he or she wishes to submit a bid. Everytime time a user bids, the countdown on the main clock is refreshed by about 10 seconds. The original time on the clock depends on the value of the item. The higher the value of the item, the bigger the countdown. If users continue to bid, the time keeps refreshing, as the price of the item goes up by each bid, less and less people will bid on that item. If you end up being the last person to bid when the clock runs out, you win!

    Comment by penny auction strategy at 11:50 pm on July 31, 2011

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