Ebay Penny Auctions

[Adimar Poynter]

Latelast year, I encountered what may be nearly perfect evil in business plan form: Swoopo. What is Swoopo? It's a class of penny auction, where bidders pay for the privilege of bidding:[Penny auctions] offer new televisions, computers, game consoles, appliances, handbags, gold bars and more for starting prices of a penny to 15 cents, depending on the site.To "win" a product, shoppers must first buy a bundle of 10 to 700 bids for 60 cents to $1 each. Shoppers use one each time they place a virtual bid on a product. Each bid raises the price of the item by a penny to 15 cents, depending on the site. Some have automatic bidding functions similar to eBay.Doing the math and not getting carried away is important: The final price of a product that retails for $100 might be $29, but the total price paid could be much more, depending upon the number of bids used. If a shopper bids 10 times at $1 a bid, for instance, the total price paid would jump to $39. And, there is the real possibility of using all your bids without getting the product.Auction winners generally get their item for about 65 percent off retail but could save as much as 98 percent if there are few bidders.Since the sites make the bulk of their revenue from the purchase of bids, they profit most when they feature a product that elicits a bidding war.

One of Swoopo's investors recently contacted me via email, and I had to marvel at the size of the cojones you'd need to associate yourself with this kind of nastiness. Swoopo is evil beyond the likes of Saddam Hussein, The Balrog, OSB, Darth Vader, and Barbra Streisand -- combined.He wanted to talk to me on the phone about positioning, and staunchly maintained that there was no element of chance in a Swoopo "auction". Once I stopped laughing, I told him these were my terms:If you believe in Swoopo, then data speaks much louder than words.Let's conduct an experiment.Doesn't have to be you, personally. Take n dollars, and use those n dollars in whatever strategy it takes to win items (of MSRP $399 or higher) on Swoopo.If Swoopo isn't a game of chance or lottery, a skilled player should be able to win at least one item in this experiment, yes?I'd be happy to run this experiment and write about it on my blog. Just let me know what terms you think make sense.

I haven't heard from him since. (Now I'm curious if anyone is willing to take on this experiment, under the same terms.)Because Swoopo is, at its heart, thinly veiled gambling. The companies backing Swoopo and other Penny Auction sites are hoping unsophisticated regulatory agencies will buy the "It's not a game of chance" argument if it's wrapped in a lot of technical intarweb mumbo-jumbo they can't fully comprehend.But we're no government flacks. We're programmers, and many of us develop websites for a living. It's a bit tougher to pull the wool over our eyes. In Trying to Game Swoopo, Joshua Stein pulled out everything in his programmer's bag of tricks to win a Swoopo auction -- and, predictably, failed.With all of this data available, I concluded that there is no way to reliably win an auction on swoopo.com without using their bidbutler service. There are delays on their network/servers in processing manual bids, whether intentional or just due to bad design, that cause manual bids placed with 1 or 2 seconds remaining not to be cast. users of their bidbutler service have an unfair advantage in that their bids are placed on the server side and are not subject to these delays.Since it is not possible to reliably place manual bids, the only way to guarantee that an auction can be won (while still coming out ahead) is to use the site's bidbutler service with high ceilings on the number of bids and amount that one will let it bid up to. Those ceilings have to take into account the item's current price, and will be lower the longer an item is being bid on.

As Joshua's data shows, there is no way to win a Swoopo auction other than through sheer random chance -- that is, your client-side bid happens to wind its way through the umpteen internet routers between the server and your computer in time, ending up at the top of a queue with dozens or hundreds of other bids placed within a fraction of a second of each other. And what's worse, you may not have any chance at all, unless you place a server-side bet through their exploitatively expensive "bidbutler" service.As I said in my original post, the only winning strategy at Swoopo, or any other penny auction site, is not to play. On Swoopo, there are nothing but millions of losers -- and by that I mean they are gambling and losing millions of real dollars to the house. Which would be OK, I guess, if it was properly regulated as gambling. Swoopo and all these other penny auction sites should be regulated and classified as the online gambling sites in sheep's clothing they really are.Let's see what we can do to hasten this process along. Warn your friends and family. Complain to the Better Business Bureau and other regulatory agencies. And if you feel as strongly as I do about this, please write your congressmen/women and urge them to regulate these exploitative penny auctions.

In an online penny auction, participants purchase bids for a fee, with each bid placed on a particular item increasing the price of the item by a small increment (e.g., one penny) and extending the bidding period for that item by a few seconds. The last participant to place a bid before the bidding period ends pays the website the final price for the item. Unlike traditional online auction websites like eBay, all penny auction participants must pay to play. Thus, it is common for losing bidders to spend significant amounts of money, but receive nothing of value. In this sense, critics have likened penny auctions to gambling.

The Unlawful Internet Gambling Enforcement Act prohibits the transfer of funds for unlawful online gambling, so the potential classification of penny auctions as a form of gambling is concerning not only for penny auction operators, but for financial institutions as well. For example, Paypal has already begun denying service to penny auction websites, likely in an attempt to avoid liability under this statute.

In sum, considering the questionable legal status and business practices of penny auctions, consumers, investors, and financial institutions should approach these websites with caution. At our law firm, we assist clients in legal issues related to online penny auction websites. You may contact us in order to set up a free consultation.

While online penny auctions and traditional auction websites, like eBay, both occasionally offer a Buy-it-Now feature, they differ in terms of the time limit system, payment process, and entertainment value. In short, penny auctions are more intense versions of sites like eBay.

Traditional auctions, like those available on eBay, often drag the auction experience out to a week or more. When the time runs out, whoever bids highest wins. For instance, they may auction off an iPod for 1 week with a minimum bid rule of $20. However, there will be stiff competition to get such a low price on the item. After a whole week of everyone trying to outbid each other, the item may sell fairly high, close to the retail price, or even higher.

In traditional auctions, if you bid the highest amount by the time the clock runs out, you pay that amount plus taxes and the shipping and handling fees. So if you won an auction where you bid $5 on a book and taxes and shipping and handling fees added up to $3.50, in order to claim your item and receive the book you must pay $8.50.

The main difference between penny auctions and traditional auctions is that in penny auctions, you pay for the auction end price in addition to bids you have placed plus shipping and handling. For example:

The best penny auction sites couple the risk-free, Buy-it-Now option with an intense bidding experience with an unmatchable entertainment value. As opposed to traditional auctions which often use hidden fees to even out the seemingly low price, auction winners can save up to 90% with penny auctions.

Is anyone using auction style much? Do you have much luck with them?

I recently had a promo for free auction style only listings so I did a trial of 20 listings, 7 day length, no reserve, and minimum bid typically $4.99.

5 of them sold

1 had a minor bidding war but still ended up at only about half what I think I could get with BIN and a little more time.

One person bid and then cancelled it, plus the FVF fees are the same, and non immediate payment is pretty annoying to schedule around, so in my experience I don't really see the upside. (except perhaps for a one of a kind item that you really are not sure of the value)

Auctions work well for certain categories. I know they are still popular with vintage jewelry especially when they are sold in large estate lots. That is how I have aquired a lot of my stock. Also if you have unique, one of a kind, hard to find collectibles, it may cause a bidding war. But you need to research what people are looking for or is popular. But there also is a downside like you mentioned. Buyers may forget they bid, not pay on time or cancel.

Even though I sell collectibles, I almost never sell via the auction route. There are so many variables and I'd rather control the process and who the buyer is (unless they hit the BIN, of course, which rarely happens).

I have run a few auctions in the past six months and the items have sold for 50% or less of what I think I would have gotten. Of course, you're getting a big fat $0 having it just sit there in your store, so you have to also consider that.

My highest margin sales have very often been sourced via auctions. Never use them as a seller myself unless the item has sufficient scarcity that it makes up for the dwindling buyer activity these days.

In the niches I monitor I've consitently found that sellers sell profitably with auctions when the item is scarce and the geographic location of the item means there is a logistics cost advantage, ie an auction for a rare item in HK/China will draw more bidders due to the low cost of tracked shipping. I see plenty of sellers losing their proverbial shirts on auctions.

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