Matt Stockton

mattstockton@gmail.com
Ridiculously Profitable Business Model

I was searching around yesterday for a Mac Book Pro, and made the ever-so tempting mistake of clicking on the following Google Ads Result, “86% off a Mac Book Pro?” – I am not stupid — I know that when things are too good to be true, they are not true — but somehow my curiosity overpowered my rationality, and I clicked the link. What I found was a site so devious, so tricky, so evil, yet so potentially profitable (and ‘I think’ legal), that I could only wish that I had thought of the business model first. The site is Swoopo.com – an auction site with an evil, evil twist that preys on human irrationality to make a ridiculous amount of money. Here is how it works:

This is a little complicated, but here’s an example. Lets say that I purchased 100 ‘bids’ for a total cost of $75 dollars. The Mac Book Pro auction that I am checking out has a current price of $100 and a current time left of 10 seconds. I decide to use one of my bids on the item, and now I am the ‘current winner’. Because of my bid, the price of the MBP has increased to $100 + $0.15 = $100.15, and the auction now is over in 10+20 = 30 seconds…of course, other people are going to ‘bid’ against me, but lets say I spend a few hours checking the auction, and use all my bids….and I am somehow, beyond my wildest imagination, the last bidder. I have won the auction! Now, if the final price of the computer is $300, and I have spent $75 on the 100 bids, then I have bought a MBP for $375. Sweet! So Swoopo must not be making too much money right??? Wrong. They have made money…a lot of money – In fact, on this auction for a Mac Book Pro, I calculate that they have made almost 20 thousand dollars

If you do the math on the above MBP auction…. * There have been 25,529 bids. This auction is a ‘penny auction’ meaning that each bid only increases the final cost of the item by a penny, so $255.29 indicates 25,529 bids. At 75 cents a pop, this is $19,146.75 * The final cost for the winner is $255.29 * Adding the two costs above, we are very close to a total profit of 20 thousand dollars!!!

But what’s that you say? The cost is spread across so many users that it doesn’t matter to any individual? One would hope so, but look at the poor winner of the auction. He has bid a total of 2872 times!! At 75 cents a pop, this is already over 2 grand for something that costs $1299 retail. To add insult to injury, he still has to shell out the $255.29 to purchase the computer.

So how does this business model work? How are people this stupid? And why didn’t I come up with this? Well, I can’t answer the last question, but I will try to answer the first two:

Although the business model may be new, the concept behind it is not. In fact, it is a published economic game / theory known as Dollar Auction. It exploits flaws in the calculations of expected value for a given game. At a high level, this model seems to work because

Anyway, that’s all I got on this site…what do you guys think? Should this be legal? Is it gambling? Are there any other sites out there that have wacky business models? I want to know about them!…I can’t say that I’m not jealous - the idea is simple and profitable - what else can you ask for?

I know what I am going to do next - search google for ‘economics irrational behavior’, and try to develop a business model around the results. Or maybe I’ll go back and re-read Nudge or Predictably Irrational, and see how to profit from human economical irrational decisions… is this an awful thought? Or is this just business as usual?