is run by evil geniuses

My college roommate once said “When you get deep into any subject, you learn that it quickly becomes a totally different subject.  Math becomes computer science, biology becomes chemistry, and chemistry becomes physics.”  I’ll add that pricing and marketing analytics quickly becomes behavioral economics.

I encourage anyone to spend a little time (but absolutely no money) at the auction site that’s making a splash in the media.  The somewhat crude and seedy design elements raised a scam flag in the back of my mind, but there were a few offsetting factors:

  1. The products included iPads, high-end cameras, even Home Depot gift cards.
  2. The site is being advertised on Sirius radio and other media.  Not a guarantee, of course, but at least not a take-the-money-and-run type of swindle.
  3. There was long purchasing history- poke around on the site and you can’t argue with the previous prices paid.

But after figuring out how they could sell a $600 Home Depot gift card for $30 made me believe that they are, in fact, evil geniuses.

The “genius” part comes from how the site brilliantly takes advantage of nearly every single trick in the behavioral psychology textbook.  Here’s just a few:

  1. It leverages sunk cost fallacies.  Users spend real cash to buy a package of “bids” for an auction. So if you’ve already bought bids, and are facing the decision of whether to continue bidding or not, odds are you will continue to throw them in.
  2. It’s “tilted” to keep you in the game.  They’ve created “bonus bids” which convert to actual bids at a rate of 5 to 1, but you only earn them by using actual paid-for bids.  So if you buy 100 bids and spend them in an auction, you suddenly have 20 more to throw at the next product.  Use those 20, and suddenly you have 4 more!
  3. It’s brutal on rookies.  At any given time you see outrageous deals on the front page and above the fold, closing in seconds that you can steal away with just the click of a button!   And a $200 gift card going for $34.12 is compelling, especially to those who weren’t anchored like those who have been bidding since it was at $3.90.
  4. They use price discrimination to hook new users.  “Cherry bid packs” are available only to new users which keeps out the existing user base, thereby lowering prices.
  5. It’s designed to move quickly to the action:  Nothing really happens until there’s only 20 seconds left.  This is advertised to every and all visitors, as the front page has top bids of $0.24 for $100 gift cards, with auctions closing every minute.
  6. Once into the 20 second period, it suddenly takes it’s own sweet time.  Each new bid resets the clock to 20 seconds, complete with a “going, going, gone” phase.  This cycle often lasts hours.
  7. The products are designed to have universal appeal- who couldn’t use an iPad, or know someone who would love a Best Buy gift card?
  8. You must pay attention.  This doesn’t allow ebay-style functionality in which one can set a bid and walk away- it puts the bidder in the action, and keeps users emotionally involved.  There is an auto-bid function, but it gives other users an opportunity to bid at each any every penny increment along the way up.

So what could be evil about selling products at over 90% off?  The “evil” part comes into play when looking at the business model.  It’s a sucker’s game- every win is funded by the myriad losers, or “none of us is as stupid as all of us.”   Bids are sold for about $0.60 each (though oddly, one can use bids to bid on sets of bids and get them cheaper).  So backing into the math, if they wanted to break even on a $699 iPad, they’d need users to burn 1,165 bids.  Auctions start at $0.01 and move resolutely by a penny per bid, means if the price gets to $11.65, they’re making money.  In fact, the last four $699 iPads went for $23.67, $143.22, $19.52, and $155.83.   That last one netted them over $9,000.  Genius.

Full Disclosure: I’m not a big auction-site user.  I’ll dabble when looking for something unique, antique, or used.  I poked around this site and bought a small pack of bids to see what the site was all about, got excited and bought another one, wrote this article and then closed the account.   I don’t expect to return.