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Online auctions
Mind the pennies
Aug 13th 2009 | SAN FRANCISCO
From The Economist print edition
The rapid spread of “entertainment shopping” spurs indignation
IT IS a familiar format: the stopwatch on the website counts down the time
remaining to make bids in the online auction. The price slowly ticks up.
Participants monitor the site, hoping to secure a great bargain. But there is
a twist: it is the website itself that provides the goods being sold, and the
prices only rise by a penny or two per bid. Each new bid, however, extends
the length of the auction by a few seconds. That means that competition is
fierce and protracted, but winning bids are often absurdly low, even by the
standards of online auctions: a flashy new television for $3, say, or a
laptop for $20. These enticing offers lure buyers, who must pay a fee of a
dollar or so to place each bid. This format, known as “entertainment
shopping”, has become so popular that it has spawned a host of websites.
Illustration by Claudio Munoz
“People will try it because they want to get a good deal,” says Lael Sturm,
a co-founder of one such site, GoBid.com. “But it’s the experience that
brings them back—they are in it for the thrill of winning.” GoBid, like most
of its rivals, is new. It launched officially in America in April. Swoopo, the most prominent site, was
founded in Germany in 2005 but in the past two years has expanded into Austria, Canada, Spain, Britain
and America. It plans to set up a South Korean website before the end of the year.
Swoopo has doubled its revenue every year for the past three, attracting 2.5m registered users along the
way. Last year it says it made a profit on revenue of €22m ($32m). But whereas it took about three
months for Swoopo’s first competitor to appear, now, says Gunnar Piening, the firm’s boss, “there is a
new one emerging every week.” The format is so popular that you can buy software online to launch a
penny-auction website.
Running a profitable penny auction is difficult, however. If auctions attract too many people, participants
may lose heart because there are too few winners. But small auctions can lead to low winning bids, and
thus less profit. The weight of competition adds to the pressure. And then there is the indignation that
penny auctions provoke. Last year one blogger declared that Swoopo was “about as close to pure, distilled
evil in a business plan as I’ve ever seen”.
Howard Hartenbaum, of August Capital, a venture fund that has invested in Swoopo, shrugs off the fuss.
He points out that Skype, another firm he backed, also caused some controversy. But he concedes that “if
the customer believes there is a problem, there is a problem”. So last month Swoopo began letting failed
bidders purchase the item they wanted at a discount equivalent to the amount they spent bidding. This
“Swoop it Now” feature should raise revenue, but will cut into margins. But “to be a substantial business,”
says Manfred Hasseler, Swoopo’s founder, “you have to make as many people happy as possible.”
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
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