The third part of this three part series of impulse discount ecommerce companies is focused on pay to bid auctions such as BigDeal and Swoopo. These sites have really interesting business models. Basically how it works is that they put items up for sale in an auction format. In order to bid for an item, you need to buy tokens and each bid costs a token. Whether or not you win or lose the auction, the tokens are spent and are not refundable. However, the tokens you spent may be given back to you as credit to be applied to gift cards to popular retailers such as The Gap. This credit is limited so for example, you may only get to apply up to $25 of credit to a $100 gift card. My guess is that these retailers give these companies a 25% discount so it really doesn’t cost them anything in giving credits to gift card purchases. There are a whole bunch of interesting dynamics that happen because of one change in the economic model of the auction:
It’s not just about how much you are willing to pay but how much you are willing to lose.
Traditional auctions like Ebay pushes purchasers on how much they are willing to pay but adding the element of how much you are willing to lose adds another economic value to the process. By adding that additional element, these sites are able to capture an economic value that is often greater than the retail price. How often do sites like Ebay capture value that is above retail? Not often at all. On sites like BigDeal, it happens all the time. Here is a quick sample of the last 10 transactions (as of Dec. 16 at 6:30pm EDT) on BigDeal and the economics of those transactions:
| Last 10 Winning Bids on BigDeal.com | |||||
| Winning Bid | Retail Price | Savings | |||
| Olympus SLR Camera | $81.05 | $449.95 | 82% | Off | |
| Nintendo Wii | $90.93 | $199.99 | 55% | Off | |
| Wiii Resort Sports | $26.32 | $46.99 | 44% | Off | |
| Ipod Nano | $78.30 | $179.00 | 56% | Off | |
| Altec Lansing Speakers | $41.14 | $164.98 | 75% | Off | |
| Canon PowerShot | $32.23 | $294.95 | 89% | Off | |
| Kindle | $194.55 | $259.00 | 25% | Off | |
| TV/DVD Combo | $25.58 | $229.95 | 89% | Off | |
| Platronic Earset | $47.10 | $84.99 | 45% | Off | |
| Nokia Smartphone | $89.85 | $549.99 | 84% | Off | |
| Cannon Printer | $21.60 | $75.99 | 72% | Off | |
| $728.65 | $2,535.78 | 71% | Off | ||
| But that is not the full story. | |||||
| When you factor in the cost of the tokens, this is how much BigDeal really makes: | |||||
| Winning Bid | Cost of Tokens | Big Deal Receives | |||
| Olympus SLR Camera | $81.05 | $405.25 | $486.30 | 108% | of Retail Price |
| Nintendo Wii | $90.93 | $454.65 | $545.58 | 273% | of Retail Price |
| Wiii Resort Sports | $26.32 | $131.60 | $157.92 | 336% | of Retail Price |
| Ipod Nano | $78.30 | $391.50 | $469.80 | 262% | of Retail Price |
| Altec Lansing Speakers | $41.14 | $205.70 | $246.84 | 150% | of Retail Price |
| Canon PowerShot | $32.23 | $161.15 | $193.38 | 66% | of Retail Price |
| Kindle | $194.55 | $972.75 | $1,167.30 | 451% | of Retail Price |
| TV/DVD Combo | $25.58 | $127.90 | $153.48 | 67% | of Retail Price |
| Platronic Earset | $47.10 | $235.50 | $282.60 | 333% | of Retail Price |
| Nokia Smartphone | $89.85 | $449.25 | $539.10 | 98% | of Retail Price |
| Cannon Printer | $21.60 | $108.00 | $129.60 | 171% | of Retail Price |
| $728.65 | $3,643.25 | $4,371.90 | 172% | of Retail Price | |
When you use BigDeal, you first see what the winning bid was and you say to yourself “Wow! What a deal!”. You think BigDeal is getting the short end of the stick. Well, guess again! If you consider the cost of the tokens which are $.75 each which only allows you to bid up an incremental $.15; for every dollar that the bid price goes up, it costs the bidders $5.00 collectively! At the end of the day, the winning bidder is probably getting a very good deal but the losers of the auction are actually losing money. BigDeal captures the value of what the winning bidder is willing to pay but also what the losing bidders are willing to spend to try to get a great deal. That economic value is substantially greater than the actual retail price of the goods. Based on the last 10 transactions, BigDeal was able to capture 172% of the retail value of those goods from the combination of the winning bid price and cost of the tokens. Imagine if Ebay saw those economics! The trick to making this system work is to make it fairly difficult for the bidders to actually calculate how much they are risking per each session. On BigDeal, you are buying weird lots like 30 tokens for $22.50 and each bid increments by only $.15. They are trying to make it difficult for you to really know how much you are risking during your bidding process. At the end of the day, about 83% of the value is captured from the tokens. Bidders know they are risking money for each bid but most of the time they don’t really know how much they are spending to bid. Bidders are also factoring that they can get the value of the tokens back in the form of gift card credits which also reduces the cost of the token/bid to them. The economics then mulptiply because BigDeal captures the risk value across multiple bidders. So for an $100 item, if 10 bidders are willing to risk $20 to get it at half price, you will get a lot more value from the bidders that lose than the actual person that wins. The whole dynamic is brilliant!
These Pay for Bidding auction sites do an exceptional job of making the system very game like with the goal of the game being who can get the great deal. With the example from BigDeal, the last 10 deals were sold at a range from 25% off to 90% off; there is an excitement of getting the great deal for users. The sites allow you to track past winning bids for an item, what the track record is of the bidders involved and other information to allow users to develop strategies. Combining the great deal with a game like environment brings a greater entertainment value to this impulse buying experience. This is definitely not for everyone but for the risk taker/gambler that also like great deals – it is perfect!
Impulse Discount Ecommerce is starting to evolve to take many different forms. It is exciting to see what they come up with next!
Ah-ha 2.0 
Ben,
Really good series of posts on “new” ecommerce models. I’ve thought a lot about these 3 as well of late.
One point to think about with respect to the first two (private sales and group buying): I think a lot of the models’ success is being driven by the daily email that “pushes” the daily deals to consumers. People see these in their inbox every morning, some portion are intrigued by it and some portion of those end up converting. Without those emails, the companies would be a fraction of their current size since few people would remember to go to the site every day. Given this, as new competitors emerge, they risk crowding each other out. Once people have signed up for a few of these competing daily emails they are more and more likely to start treating them as spam, resulting in fewer eyeballs looking at the deals each day. At some point it becomes an all out fight for consumer attention every morning, perhaps through additional channels (e.g., mobile apps).
As for the third model, these things look like cash machines, at least initially. I have the feeling, however, that a large % of users are turned off by them after trying to win/buy something a couple of times. There doesnt seem to be a good, reliable strategy to win these things (e.g., sniping on eBay, since every bid increases the time left in the auction – this makes me wonder if anyone has looked at this model with an eye to develop optimal bidding strategies). This can make the whole process frustrating and unpredictable. At the same time, people who have a weakness for gambling may find this model irresistible. So while I think “ordinary” people that are after real deals will get turned off, its likely that the gambling portion of the market is big enough that these sites will still be very successful.
In any case, great posts.
David
David – great feedback. I agree the “fight for the inbox” will be that much more contentious as the space evolves. Who wins out? I am not sure. The sites that build a strong brand first will have an advantage because I think knowing about deals is like social currency. Not being “in the know” with the big names will have consumers going to the more well know brands first. However, if someone offers better deals or a better experience (e.g. Gilt sales always being sold out before you can buy) people will turn to alternatives because the value of the deal is probably the most important thing.
I actually believe that a service will be needed that is comparable to real time search or a Digg for all these “timely” deals. As more and more services are launched how will users know of the best deals and those that are best suited for them. This is an area that I have been thinking about lately.
Thanks again for reading and commenting! Please keep them coming.