Thoughts From The Cake Scraps

As I laid out in my last post, the hottest business trend of showing deep discounts just leverages the current sale-oriented culture.  While one can find these deals in nearly every email that passes through the inbox, it is not more plainly laid out then with GroupOn where stuff is simply 50% (ish) off all of the time.  Everything they are selling, every day of the week.

Rather than delve into whether or not GroupOn takes advantages of small businesses, I am going to stay focused on the business concept that drives GroupOn – discounts compel people to buy.  Sometimes they need the item and most of they time they don’t.  The thing is, the deal is just so darn good and the discount so darn large people are left asking themselves “how can I not buy this?”

The reality, of course, is that we’re still in the early phases of this broad based discount solution and businesses are still trying to figure out if there is a way to effectively use it as a marketing channel.  Regardless of how it turns out, this is clearly a marketing expense and, therefore, will come out of the marketing budget as part of the promotion cost.  Small businesses may not have the data or wherewithal to figure out the true cost, but my guess is that they will find out via word-of-mouth or their own P&L statements, even if they don’t have the gory details.  With this in mind, let’s focus on the major players only for the sake of discussion.

When a company runs a promotion as significant as a GroupOn, they are surly going to be tracking everything they can to figure out if it was a good deal or not.  Did the promotion drive enough incremental sales to cover, not only the cost paid to GroupOn and the cost of the goods/service provided, but also of the subsidized behavior (people who would have purchased anyway)?  That’s a lot to overcome.  The business benefit, for the moment, is more that it can help make a company look cool and interesting.  It may even draw people back into the brand that have been away for a bit.

Still, it is all a marketing expense.  It comes from a marketing budget.  And this is what people fail to realize.  A good that is on clearance is discounted because the business needs to move through the inventory and is, therefore, not a marketing expense.  The loss of margin dollars comes out of a different part of the budget.  The consumer is actually getting a deal here because the goods used to be sold at full price.

This is not the case with a deal like GroupOn (or LivingSocial).  Since these are marketing expenses, the cost of a marketing is built into the cost of the product.  That fact that you, as an individual, get the full price product for 50% off doesn’t change the fact that, in total, it didn’t cost the company anything.  They simply didn’t run a “Buy one get one” promo or a “Gift with purchase” promo.

What this means for the sustainability of this heavy coupon culture is that it will only continue to work so long as there are enough consumers willing to continue to buy the product without a marketing promotion.  My prediction is not that the discount culture will go away (although I am skeptical of the long-term viability of operations like GroupOn) but that you’ll see the same companies or the same types of companies use that type of promotion and that it will become stale.

For the moment I, as a consumer, would – and do -  jump on that discount train but my prediction is that it won’t last as it currently exists.  After more and more companies run those type of promotions we’ll start to see clear trends emerge.  As those trends become more solidified even the less advanced businesses will start to see that “business of selling product/service A are never featured” and there will be more whitepaper style publications on the success or failure of the promotions.

While not as overdone as Black Friday, as Black Friday has a good 20 year head start, I would keep an eye on this.  The simple truth is that a company cannot give away goods at 75% off (50% discount and then 25% to deal provider e.g. GroupOn) and not raise prices.  The promotion is simply too deep and too short lived (versus a longer buy one, get one) to last.  The math doesn’t work.  So get the the deals now, while business still have not “marked ’em up to mark ’em down” and don’t fully understand what the expected cost really will be.

And remember, the “deals” at Coach Outlets actually have a higher profit margin than the full price regular stores on 5th Ave.

Did you get a deal recently?

This has been a Thought From The Cake Scraps.

My posts with the most traffic are the ones that talk about these online ‘entertainment shopping’ sites.  They have come quite a way since I first blogged about them, but now you finally have a chance to strike back.

I first saw Off & Away in an article that TechCrunch wrote about.  It has the typical comments about it being a scam since you pay $1 for the bids that raise the auction price $0.25 and then the winner pays whatever the final cost of the room is.  Not sure if your bids are applied to paying the price of the room, but I assume not.

But here’s the thing: you want to lose.  Well, maybe you don’t want to lose, but there seems to be a nice loophole where this site, that many people call a scam, could actually save you money.  It all relies on the simple thing they did to not make it a complete rip-off: you can apply the money you spent on bids towards a hotel room.  Furthermore, it says right on the site that they have up to 50,000 partner hotels.  Clearly all of these are not as ludicrously priced as the $40,000 room they have up to launch the site.

So, if you know you want to go some place and you are willing to spend $200 on the room (for 1 night) buy $180 worth of bids.  Then, place the bids on the auction for the awesome room.  Let me state right away that you will probably not win.  But that doesn’t matter because of another gem they built into their business model:

“Apply up to 110% of your used bids towards a room at one of our 50,000 partner hotels.”

So, you don’t win the room you bid on but your $180 is now worth $198.  It may not seem like much, but 10% is 10%.  Not too shabby.  You spend less than you were going to spend and you have a shot at getting the awesome hotel room you bid on (if only a very small chance).

I will probably stick with a site like Priceline or HotWire for my hotel needs, as they are more of a sure thing.  But if you want to live a little and have minimum risk, this Off & Away thing may be something to check out.  Of course you might be better off just using a AAA discount…

So, do you think it is a scam?

This has been a Thought From The Cake Scraps.

From my previous post on Swoopo I generated a small bit of confusion because Swoopo has several types of auctions.  Here they are directly from the Swoopo site (though I rearranged them a bit for my comments):

Fixed Price Auction
If you win a Fixed Price Auction, you only pay the price indicated in the heading of the auction (plus delivery costs), regardless of the level the bidding reaches.

100% off
Where an auction is marked “100% off”, the winning bidder does not have to pay the final price. That’s right: the price is zero! You just need to pay the delivery charges.

These are basically the same thing and makes this site seem a bit more sleazy.  Here’s why.  With a fixed price auction or a 100% off auction you don’t pay the value of the auction, just the fixed price or nothing, respectively.  That seems straight forward until you think about it.  If they already know what they are selling it for (or that they are giving it away free) the users are basically just giving them money.  They are literally proclaiming “Here is something free, what will you pay me for it.”  Can you really even call that an auction if the bidders are not actually impacting the price?

Penny Auction
In a penny auction, the price rises by just one cent with each bid placed (whereas in a normal auction, it rises by 15 cents).

Well this is nice of them.  In case you were able to hold off yourself from bidding when the price went up 15 cents with each bid they have auctions where it only goes up a single penny.  Thus, you look at the price and want to jump right in not realizing just how much money Swoopo is going to take you and other fools like you for.

NailBiter Auction
During a NailBiter Auction, BidButlers aren’t allowed. Users may only place single bids by manually clicking or calling. Don’t walk away or you miss the next incredible deal!

This would be interesting except that the time goes up with each bid (see below).  So instead of a “NailBiter” you have a sit around all freaking day bidding and waiting for the thing to end.  Good times I’m sure.  Too bad I’ll miss it.

Open Auction
Anyone can bid on an open auction, even if they have already reached their eight auction limit. Open auctions do not count towards your auction limit. See ‘How many auctions can I win a month?’ for more information.

Wait, I can only win so many auctions in a given time period.  Doesn’t this sound a lot like what a casino can do if they think you have a gambling problem?

20-Second Auction
All auctions start as 20-second auctions. The countdown increases by a maximum of 20 seconds each time that a bid is placed.

15-Second Auction
You guessed it – with these the countdown increases by a maximum of 15 seconds with each bid placed.

10-Second Auction
You guessed it – with these the countdown increases by a maximum of 10 seconds with each bid placed.

Wow.  What variety.  It is like the Jelly Belly of auction sites.  Really guys, do we need a different line for each you guessed it – X second auction type.

I hope that clears things up a bit for people.  In my original post I did have my math with the winner having to pay for the final price of the auction.  While this isn’t always the case, it often times is.  I’m not going to waste my time looking around for exact examples, but if you want to Swoopo does feature a list of completed auctions.  Please remember what Thomas Tusser said: “A fool and his money are soon parted.”

This post digresses a bit from web analytics but the business concept of Swoopo is so brilliant – but not endorsed by myself – that I had to post on it.  Before I get into this post I want to make one thing clear:

DO NOT USE SWOOPO!  YOU WILL LOSE MONEY USING THIS SITE!

Now that I have made my position clear I can get into how brilliant this site is for making money at the expense of others.  It is not customer service oriented and it is probably not going to have a ton of repeat customers.  What it will have is a huge pocket book as long as P.T. Barnum’s phrase holds true: There’s a sucker born every minute.

First I will lay out for you how the site works.  It is a ‘auction’ site…sort of.  Swoopo sells bids for $1.  Each time you use a bid on an item the price is increased by $0.15 for that item.  So here is an example:

Person A buys 5 bids from Swoopo for $5 total.  Person A sees an auction for $1000 and places the first bid.  The auction is now at $0.15.  Person A now has a sunk cost of $1 (the cost of the bid they used).  There is no way to get that dollar back, win or lose.  If Person A wins they must pay the $0.15.

Person B also purchased $5 of bids.  Person B sees the same auction and places the second bid.  The auction price is now $0.30 (because each bid increases the cost by exactly 15 cents).  Person B now has a sunk cost of $1.  If Person B wins they must pay the $0.30.  Swoopo now has $2 in the bank and the auction is at 30 cents.

This can happen with as many users as there are suckers to start accounts.  Why are they suckers?  Because everybody that does not have the top spot just loses the money they spent on bids.  *Poof* Gone.  If you think this sounds a little like gambling or a complete scam you are not alone.  People get swept up into the auction and don’t want to get nothing for the money they spent on bids.  I think you will understand it better if I show you an example of people getting ripped off on the site.

Please note that while the math in the laptop example assumes that the winner has to pay for the item, Swoopo has different types of auctions which are described in my post on types of Swoopo auctions.

An auction for a laptop that says on the auction page, and I quote, “Worth up to $1,399.99″  The winning bidder, as stated on the site, placed 2020 bids.  That is $2,020!!  And the auction page proclaims “Savings: 0%”  when it really should read negative!  So Swoopo made like $600.  BUT WAIT!  The auction started at $0.00 and finished at $3,353.85.  Now read that again.  They were already up $600 from the winners bids alone.  The winner sucker still had to pay $3,353.85 because that was the price of the auction.  Okay, so Swoopo walks away with a cool $4,000 pure profit.  (Like a bad TV commercial) BUT WITH THERE’S MORE!  Remember that bids are placed in 15 cent increments.  That means that if the auction finished for $3,353.85 you take that divided by $0.15 which equals $22,359 in bids!!!!  That brings total profit to $22,359 (bids) + $3,353.85 (auction) -$1,399.99 (retail cost of laptop, probably not their cost) = $24,312.86

This is not to say that there are no good deals on Swoopo.  The auction for $1000 finished at $568.20.  The winner of that auction placed 218 bids ($218 dollars worth) for a savings of 78%.  Why is it 78%?  because it is a 100% off auction  – see my post on types of Swoopo auctions– meaning that you don’t have to pay the final value of the auction (how sketchy is that).  In theory, if no one else would have bid, you or I could have spent $1 on one bid and won the auction.  If we would have won the other guys $218 would have been for nothing.  Now keep in mind that if this were not a 100% off auction that the winner would also pay $568.20 in addition to the $218 for bids.  Total investment: $786.20.  Is that really worth the risk of getting nothing?  I think not.

There are 2 kickers that I have to throw in yet.

1. Every time a bid is placed the length of the auction increases.  Therefore if a bunch of people “snipe” it at the end, the auction can go from 5 seconds left to 20 min.  Yeah.
2. And in case you were worried about the one who got away, Swoopo provides a “BidButler” that auto bids for you up to your set amount when someone out bids you.  If you are going to spend $1 a bid, please don’t let some BidButler do it for you.  After all they don’t call it “entertainment shopping” for nothing.

All said and done this seems like a little bit of a scam, praying on people that either don’t get it or are stupid.  If one were to use this site the only smart thing to do would be to research what auctions of stuff goes for and then place a single bid when it gets to that price and hope you are not out bid.  Anything else is just a waste of money.  That is, of course, if you ignore the fact that everybody else who has bid gets nothing.  It is a combination of eBay and gambling – more gambling (in that you must pay to bid but if you don’t win you don’t get anything).  Think of betting on red in roulette, you only get something if you win otherwise it is gone.  At least if you win there others can win as well.  If it were Swoopo roulette if you won everybody else would lose.

It is just amazing – and yet totally understandable once you get the mechanics – that this site made money selling $1000.  $3788(bids) – $1000 (cost of item) = $2788 profit.

Paraphrased Swoopo business plan in short: find 10 people to give us $10 each and one of them will get this $20 gift card.  Repeat.  Official Song: I Get Money

What do you think?  Scam?  Brilliance? Awesomeness? Just another web site?

10/6 UPDATE: Check out my new post on PennyCave, a Swoopo look-a-like!