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).