OT: How to make a bajillion dollars
It's pretty simple: buy the penny auction software that QuiBids* uses, get a hosting account somewhere, and go to town.
* or Swoopo, or BigDeal, or BidCactus… the list goes on and on and on…
The money these sites are making is absolutely mind-boggling. Let's take a recent auction (click to enlarge):
So the guy saved $556 and change. Pretty good for "doubleagent," whoever that person may be (more on this in a bit). But let's dig a bit deeper. He bid 214 times. At 60 cents a bid, that is $128.40 on top of the $243.44 he had to pay outright. QuiBids' loss so far: $427.16. Doesn't seem like a sound business model, right? (While they are probably buying enough that they are getting volume discounts, it can't be more than 5 or 10%.) Let's keep digging. Remember that the auction starts at one penny, and each bid increments the price by 1 penny. How many bids does it take to get the price up to $243.44? 24,344. This means that 24,130 times (24,344 – 214), some poor soul spent $0.60 bidding on a product he or she would not ultimately win. This is where the math gets interesting, and the revenue model starts to make a bit more sense. Before taking these losing bids into account, QuiBids was down by about $427. But then add the revenue from the bids: 24,130 * $0.60 = $14,478. So now QuiBids is UP by about $14,051. Let me repeat that profit value, so it is crystal clear:
So they sold a $799 iPad at an amazing profit margin of over 1,750%. No, that is not a misplaced decimal, and it did not take place during a period of hyperinflation. And while most people paid only a small portion of this, it is appalling that there were likely other users wasting just as many bids as "doubleagent" — but did not win. And this is just one product – they sell between 3 and 4 iPads every day, and hundreds – if not thousands – of other products. Let's do some speculative and conservative math on a typical daily income statement for QuiBids, with some assumptions:
- there are too many items to take a good catalog, but the retail prices of the auction items range from $10 gift cards to $2,000+ MacBook Pros. Let's say the average product retails for $250. I was going to say $300 (about half the cheapest iPad), but I'm adding a $50 fudge factor so that I don't have to bother with calculating transaction fees – which can vary widely depending on how people purchase their bids. I'm also allowing for a bulk volume discount.
- we can assume that the average product sells for 40% of the retail cost (which I think is modest) – this means the typical $250 product actually sells for $100 (and this means 10,000 bids took place).
- we'll stick to the single penny auctions – there are some that list at 2 cent seed and 2 cent increment, but they'll just make this math more cumbersome.
- let's assume a nice round number of 10,000 products sold per day – I'm sure it is more, but that will just make this more nauseating.
- we'll assume the dedicated hosting to handle the traffic is $3,000 a month. Probably over-shooting this a bit, but even at a ridiculous figure of $30,000 a month, I doubt it will figure in to the astronomical numbers.
So what do we have here, assuming a 30 day month, for an average day?
Product Sales: 10,000 products per day @ $100 = $1,000,000
Bid Sales: 10,000 products per day @ (10,000 * $0.60) = $60,000,000
Cost of Goods Sold: 10,000 products a day @ $250 = cost: $2,500,000
Expenses: Monthly hosting fee = cost: $3,000 / 30 = $100
Those numbers don't look huge:
Profit: $58,499,900 (2,340%)
But remember: that is one day. Let's blow that profit up over a year and just multiply everything by 365:
Obviously I've been generous about either the number of products they are selling, or the number of bids. If they are really selling 10,000 products a day and this many people are spending all this money on bids, then the economy is not in as bad a shape as everyone is making us believe. Even if I'm off by an order of magnitude, that is still a staggering amount of dough.
And just to add insult to injury, let's dig a little deeper still. The veil of privacy really prevents me from knowing who "doubleagent" is, and I respect that I probably shouldn't be able to figure it out. But if you watch one of these bidding wars going on in real time, you will notice a very peculiar thing: roughly 99% of the usernames are made up usernames, and the avatars are never real pictures. On most other sites like this that I've experienced, you get a good mix of "cool" and "real" usernames. It makes me wonder what percentage of the users in any bidding war are, in fact, real people making real decisions. I'm sure that setting up a large pool of shill bidders (and even fake winners) and having the software "compete" with real people is not that hard, and potentially drives the bids a lot higher than they would have gone naturally.
On eBay I've always wondered how many sellers set up a separate account merely for the purpose of bidding against their bidders, especially in auctions with a reserve. Of course in that case it can backfire in a few ways; if the shill bidder wins on QuiBids, then the iPad still belongs to them, and they can offer it up for auction again. So not only are they $14,051 to the good, they still have the product! All they've paid for are the hosting / bandwidth costs, and fractional transaction fees when they charge users' credit cards for more bids. Circling back to the privacy shield, this is certainly not easy to prove; but, you have to admit, it is not all that hard to envision, either.
I'm just as much for capitalism as the next guy – but this is the kind of thing that makes me wonder if socialism has it right after all. Or at least, these are the kind of people that give capitalism a bad name. I have no problem seeing how they convinced venture capital to front them some cash… especially given the figures above. You just have to figure out which (if not all) do not have any qualms helping you screw most of your customers.
All in all, I guess I'm not really adding anything of value to the discussion. I'm just amazed at the potential revenue involved here, and even more so that it is legal. And finally, maybe a bit jealous that I didn't think of this first – while my moral code would have ultimately prevented me from following through, it hurts to think that I could own my own island like these guys must by now.
You can read a lot more about this controversy here (and I forgive whoever sent that link in a reply to a tweet of mine from last month – I looked through my @mentions history and could not find the original pointer):
Not surprisingly, a few other people have talked about this also:
While obviously all of these articles are slanted against the penny auction model, there really aren't any articles out there in favor of the business (at least none that aren't obvious or clever plants).
I read a lot of negative stuff about penny bids, but decided to try Quibids, bidCactus, and swoopo, myself. Registration was easy, and in each of those I registered I purchased around $40 worth of bids. I watched for about 1/2 an hour on each, and then realized that all I had to do was to be aware of when the bidding started slowing down, and the bidders were either getting tired, running out of bids, or just becoming disinterested. Sure enough, in Quibuids, I won a $200, $50, $25, $10, $15, $10 gift cards, along with over 350 free bids. In bidCactus, I used the same tactic and won $100 Visa Giftcard, and a nintendo wii charge component, and in Swoopo I won 250 bidpack.
Now I see what you are talking about, but the smart and "Patient" penny auction bidder does their due diligence and investigates how to play and where to play before they "play".
I don't think this type of auction is bad, or negative, or anything is wrong with it. I think that the person that bids in these auctions just needs to set limits, do a little research, learn how to play and when to play, so they can play–win–and not complain that they lost their bids needlessly!
You're numbers are inaccurate! You aren't able to account for the number of bidders that use their cash bids towards the buy it now nor are you able to determine how many bidders are using bid vouchers won in bid auctions. Those bids have a discounted value and you wouldn't know what the individual bid value is. You are right about one thing… They are making a profit It's just not what you think it is…
Thanks for the great post. I discovered penny auctions back in 2009 and was immediately captivated by the business model. I realized that successful auction sites could rake in thousands. I also realized there was some potential for less than trustworthy penny auction sites to spring up. However, sites that use shill bidding tactics to inflate auction prices never win. Scam penny auctions are fairly easy to avoid, as long as users demand a clear fair bidding policy from a site BEFORE they participate.
My good and bad penny auction experiences led me to create the Penny Auction List, a carefully-filtered directory of penny auctions. In order for a penny auction to be featured, they have to prove their legitimacy by meeting a strict set of criteria.
If you or any of your readers are interested in penny auctions, check out the site – http://pennyauctionlist.com. Bigger sites make money, but smaller sites that try to start up usually fail because they can't get a large enough user base to be profitable. Quibids doesn't have that problem.
There are some "strategies" for penny auction success, but much of my success has come from researching each penny auction site carefully before participating.
Jordan, the Buy It Now price is (in all auctions I've checked) the retail price minus what you've spent in bids. If you get to the point where you're sick of the bidding war and just want the thing at retail price (and you have no motivation to do so before an item has any bids), you might do that instead of just going out to a store, because if you do the latter you don't get your bid money back. You might think, in that case, QuiBids breaks even, minus the costs associated with holding the auction, serving the traffic, and procuring / shipping the goods. But actually by that point they have made the money on all the other bidders who are walking away empty-handed. True, the profits are not as high as in my model described above, but in some cases they might even be higher, depending on how long an auction has gone on.
Zack, yep, that is an eBay tactic I have been cautious and curious about before as well. Typically I do not bid on auctions that start low but have a high reserve… seems too artificial for me.
Interesting read. I know several folks on eBay that will use the following practice to try and save some listing fees. (eBay charges a higher fee for reserve auctions than non-reserve auctions). They will contact a friend and provide the auction number and amount to run it up to with the understanding that if the auction doesn't go over that amount then the friend won't really have to buy it.
Thanks for the article. I had never heard of these sites and I found it quite interesting.
If they are truly bidding on their own products and aren't being up front about it, that would be fraud and they should be sued.
Otherwise, unless they're unclear about the process is some way, then I don't really see the problem with it as such. If they truly are making gobs and gobs of money, more businesses will adopt the model and the profits (and costs to consumers) will drop as there are more competitors, in the long run.
I do imagine that on net they're not coming out nearly so well (I can't imagine there's one guy mailing out 10,000 products each day, for instance). Also, one of the links you mentioned (and I have no idea if this info is accurate) claimed that QuiBids has a "buy it now" price for each item, and that auction "losers" can apply the amount they spent in bids towards that price, which could reduce the profit numbers pretty substantially (at least the margins).
DaveJ, you're right, and like unscrupulous users on eBay, I'm not sure how they calculate when to shill bid and when to hold off. In fact, I wonder how many items are truly being won by legitimate users; sure, that means more fake bids, but it also means they never actually take the loss for the product itself.
In any case, even if you cut their profit numbers by 90%… still an amazing return on investment.
Of course, if some (probably most) of the bids are fake then the profit per auction will be lower as they wouldn't get those transaction fees.
Thanks for an interesting read tonight.