stupidity tax

The always wonderful Coding Horror has a post up about Swoopo, maybe the most perfect storm of variable reward gambling I have ever seen. Get this:

• Items come up for auction at $0.15!
  
• You place bids for $0.75, which raises the price by 0.15 cents and extends the auction by as much as 20 seconds.
  
• You have to prepurchase your bids in blocks of 30 or more.
  

You see the brilliance of this business plan, right?

Let's do the math.  

Bids cost $0.75 for $0.15 move, so for every dollar in the selling price, Swoopo makes five dollars minus the cost of the item.

So:

5 x (auction price) - (retail price) = profit

We'd like profit to be a function of the retail price, so let's build a nice, simple, model of generating profit equal to the retail price.  That gives us:

5 x (auction price) - (retail price) = (retail price)

So, a little algebra:

5 x (auction price) = 2 x (retail price)

(auction price)/(retail price) = discount % = 2/5 = 40%

See that?  At 40% of retail (assuming Swoopo pays retail, which they wouldn't need to) they make profit equal to the retail prices.  If the average is 80% of retail -- which is still enough of a discount for Swoopo to brag about -- they make three times the retail price on every sale!  Their front page currently has $8,000 in retail.  By time those auctions close, they'll generate $16,000 - $24,000 in profit.

Did I mention that you can use a "Bid Buttler" to automate your bids?

I wonder what percentage of their users buy more than one pack of bids, what the dwell time is, etc?  Google trends shows traffic to their site exploding, but still low in absolute numbers.

Sadly, this post will probably increase their traffic in some trivial way.