new type of internet auction sites - bid20.com

Recently a friend of mine mentioned about a new twist to internet auction sites - bid20.com. The site claims that you can win item at a very low price. Is it really true?

How does bid20 auction work? Here are some steps:

1) Buy N bids at the price specified. Each bid is prices > Rs 10, in bundles specified by bid20
2) Go to the item listing and bid one at a time when u r not the highest bidder
3) The last bidder will be the winning bidder. All the other bidders who had bid lost the money for the bids they've made.

What does the winner get?

Let us consider an item that has an MRP of Rs 1000, and assuming that each bid costs you Rs 10, here are some scenarios:
1) You are the only bidder. In this case, you'll only bid once and your cost is Rs 10, and you'll get the item for Rs 10. This is good for the buyer, and a loss for bid20. This is a very rare case.
2) When there are more than one bidder, say 20 bidders. During the bidding process let us say that each bidder bids an average of 10 bids, and you are the last and the winning bidder. In this case there are a total of 200 bids, which means the price realized by bid20 is Rs 2000, which is good for bid20. This is also good for the winner because the cost for the winner is only Rs 100 (10 bids x Rs 10). However, there are 19 bidders who lost an average of Rs 100 each, and are potentially not happy about the loss. (Note: they might recover this loss by winning another auction - gamble?)
3) Scenario same as 2. However, the winner steps in just before the auction close, and after 190 bids have come in. He has more resources to bid at because he is starting from zero and the others at an average had already bid more than 15 times. Thus, the late entrant bidder, and more importantly very sparse bidder or a bidder who spends his bids miserly, is going to benefit a lot because he needs to spend fewer bids to win the auction. Bid20 is still not at loss. The winner here will maximize his returns. However, the initial bidders will have maximum dissatisfaction.

Who is at a loss?

Often, people do not realize the potential for loss. Auctions bring out impulsive nature in the bidders. Many of them don't analyze or realize how go gain maximum out of minimum bids. Also, people are used to ebay style bidding where the bidding does not cost you, and  one has to pay only as a winner. However, in bid20 style auctions, people start losing money (except the winner) with every bid. This is where the potential for a loss exists.

Business Model for Bid20:
1) Bid20 benefits a lot because (a) it gets money upfront by selling the bids - whether the buyer spends the bids or not is not its concern (b) The price/bid can be adjusted by it at the time of selling the bids, which makes it realize the price of the item at the rate it decides.
2) It can make a loss if there are not many bids on that item. However, bid20 says that it reserves a right to cancel the auction - it can protect itself.

The only concern for this business model is the user dissatisfaction. Over a long run, users realize that they're losing money when they bid and they not being the winner. When people realize that winning is possible only if they enter the auction at the closing stages, each auction will see traffic at the last moment. However, there is a catch here. The auction can get indefinitely extended if bids are received within 15 seconds of the auction end. Thus, there is no right time to enter the auction unless you see lots of people had already bid on the item.

Conclusion: The bid20 model will work and will have a buzz factor until users realize what they're getting into, and realize that they are accumulating losses. Once the buzz factor fades away and user realization happens, the user participation will go down. The Nov'09-Feb'10 Alexa traffic plots indicate this trend. Bid20 can continue with their model by bringing in new users; however, retaining the users might be difficult in the current model. Some new aspect must be introduced into this model to make it work over a longer period.

Notes from internet Auction History: There were auction sites like ubid, yahoo-auction, etc., that had the concept of extending the life of auction when the bids happen within certain time frame of the end of the auction. All these auction sites had decline in traffic while ebay kept gaining share. The sellers were happy to have fixed-time auction because of better operation management, while the buyers were happy to set a maximum price and time for an auction, and spend less time for buying an item. May be, sites like bid20 must take some hints from the internet auction site performance history and reasons for their demise, and change the way they operate so that they can survive for longer periods.