When is a vertical a vertical? Is it when the first page of Google AdWords is taken by look a like companies? Is it when a competitor enters the market with a URL of http://www.doyouchoochookazoo.com? Could it be when we see a whole blog dedicated to covering the entities? Perhaps it is when we see the vertical being advertised in flogs and fake news sites? Maybe it’s when those who used to do acai do this now. Similarly, when do you know if a vertical has its challenges? Is it when one of them has an entire page dedicated to why so many people are misinformed or that one of the companies prominently proclaims themselves to be the first BBB Accredited Business? If that’s the case, then this vertical is definitely a vertical. Although, what to call this vertical is up for debate. Crack? Legalized Gambling?
Lots of questions. One answer – penny auctions. Like certain parts of mobile, it’s a business that found its first foothold in Europe and has since migrated. The concept is simple, clever, and dangerously addictive. Call it a video game instead of an auction and think of it like an arcade machine counting down asking you if you want to continue. That’s really how it works. To stay in the auction, you need to pay and pay and pay. Unlike traditional fixed auctions, time is variable, and when the timer gets close to zero, each bid adds additional time. That’s the first distinction – bidding as a means for keeping an auction going. The second is the real kicker. Paying to bid.
Watching a women’s purse on auction at the low cost bid site – for10cents.com. As the name implies, their penny bids cost ten cents versus the $.50 to $.75 average cost. In a 90 minute span, the bids went from $23.00 to more than $53.00. Ten dollars is 1000 pennies. At $.10 per bid, that’s $100 dollars per each $10 in bid price. At $53.00, they’ve made $530 dollars. Most interestingly, are the bidders. It’s been between two people for at least the last 2000 bids ($20), roughly $100 each highlighting the first rule of penny auctions. You can and probably will pay more than you ever thought, even when you win. The winner may end up paying $150 + $60 + $25 (bids + est. winning price + shipping), ultimately saving little, let alone how much second place spent.
We weren’t joking when we said that we’ve seen penny auction sites advertised via fake news sites. The now largest of the penny auction sites runs an enormous amount of traffic using fake news, and not surprisingly, one of the competitors has taken the approach as well. Ironically, one of the news clips that plays on the fake news site is a legitimate segment talking about the company being advertised. Generally, the news clips talk about the general product, e.g., acai, while the site promotes a particular brand. It’s rare to see supporting evidence for the actual product. And, if you’re wondering how they are doing, we can only surmise very well, given the chart below.
Going through the numbers, you can start to see how a customer is worth a lot of money. They don’t need to win to be of value. They just need to play. That’s why CPA’s for these deals look a lot like those for the continuity programs. Like all up and coming verticals, the question is scale and longevity. For a change, some of the language used in the ads is real. People are “buying” products for very low prices. Eventually we’ll see disclaimers necessary regarding the bidding but not right away. The real challenge will be twofold, a) that they get classified as gambling, and b) inventory sources start to frown on them, which so far is still infrequent. As to the first point, one of the sites tries to share why the business model is unlike gambling, but with each point, e.g., there aren’t “any special rules or strategies that ‘favor the house’,” you can come up with easy counter objections.
Adam Galinsky, a professor of management and organizations at Kellogg, says, “The clear, rational decision is that you should not take part in this,” and, “The reason these things are so powerful are because they combine a number of different psychological processes into one situation… You have the endowment effect, rivalry and competition, time pressure, small increments—especially when people start from lower increments—and then you have the fact that individually, people are getting good deals on most of these cases. It’s just collectively, they’re getting a bad deal.” Does it make us think cynically, “Sounds like the perfect offer for the affiliate space after all?”
Oh yeah, the purse? It went for $78.98 ~$799. Not bad for a $300 retail product.
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