Swoopo is an online entertainment auction (a.k.a. penny auction) where individuals purchase bids to place towards an item that’s up for sale. The cost of the bids are usually $0.75 and once placed they raise the price of the item by either $0.15 or $0.01 depending on the product. A 20-second countdown timer is reset by each time a new bid is placed and when the timer reaches zero, the last bidder wins. Like most online penny auction sites the winning bidder pays the final price of the auction which is usually at a great discount of the manufacturer’s retail price (MRP) for the item.
From an ecommerce business standpoint this “penny auction” style of selling is genius because it provides an opportunity for the auctioneer to make a very hefty profit. That is, if you consider that each bidder pays a fraction of the cost of the actual value of each bid (i.e. $0.75 /$0.15 bid) and hugely discounted items attract numerous bidders and feverish bidding wars. For example, the HDTV pictured below received $0.15 bid increments ($0.75/bid) until it reached its final sale price of $288.75. That means that 1925 bids were placed ($288.75/$0.15) and Swoopo made $1443.75 off the bids plus $288.75 from the final price that was paid for the item. Thus the total gross income received by Swoopo for the sale of this product was $1732.50. If you use the MRP that’s reported by Swoopo to calculate the net profit of this single item, not including any other expenses by Swoopo, you get a result of $432.51. At a calculated return on investment (ROI) of 33% ($432.51/$1299.99 x 100), it’s a very bountiful profit for Swoopo. Even more impressive is this 1 ounce gold bar that sold for $216.98 at $0.01 bid increments priced at $0.75 per bid. That turns out to be $15,470.14 in net profit and an ROI of 1,516%!
 HDTV Sold On Swoopo |
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 Gold Bar Sold On Swoopo |
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As you can see the potential profit margins are huge but they vary across items. Items that don’t attract many bidders fail to bring in profits, thereby making it even more important for penny auction sites like Swoopo to reap such high profits as those identified above. Thus, the greatest risk to such online penny auction sites is during the initial early deployment stage of the startup when traffic is low and therefore so are the number of bidders for a particular item.
Critics of this style of online auctions say they’re akin to gambling and some are even calling for government regulation. I, however, disagree as it is no different than any other online auction in that the highest bidder wins and by doing so must pay the final bid price for the item. The fact that non-winning bidders pay for bids has no bearing on the issue as those are paid upfront and are considered no different than common membership fees that many businesses charge for accessing their services. Moreover, the chances of placing the winning bid maybe no better than your chances at winning on eBay if you factor in the unfair advantage that some bidders obtain through their use of sniper bidding software. Unlike eBay, you don’t have to worry about whether or not the auction is a scam and you have a 100% chance of receiving the product after payment. That is, the condition of products are unquestionable as they are always brand new and they are provided by Swoopo, not anonymous persons whom may never ship your item once they receive payment.
The legality of these penny auctions may be questionable however as there is no obvious precedent that can be applied. But with the current staggering growth of Swoopo and its tremendously large profit margins, I’m quite certain someone is going to cry foul and press the issue. It wouldn’t surprise me to see eBay back this movement given eBay’s history of making poor business decisions and flagrant use of law suits used to strengthen their presence as the premier online auction provider. Especially since eBay is losing buyers and sellers, the popularity of this style of auctions is surging, and new competitors such as GoBid, BidCactus, ThePerfectBid, and Zoozle are entering the market every passing day.
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