Article

Turning retail into a game

"Entertainment shopping" can be fun for shoppers and profitable for retailers, but it can also ignite controversy.

March 8, 2010 by James Bickers — Editor, Networld Alliance

Late last month, online retailer Overstock.com launched its shopping app for iPhones and Droid phones. One of the central features of the app is the Lott-O game, a virtual scratch-off card that serves up a different discount code every 24 hours.

"We have an opportunity to give (shoppers) something fun and engaging," said Stormy Simon, senior vice president of marketing and customer care for Overstock. "There's a winner every time. And it's fun to scratch off the ticket."

A number of online retailers are experimenting with unusual hybrids of shopping and entertainment, turning to arcane auction models and cerebral concepts like game theory and the "sunk cost fallacy." Those retailers give shoppers the possibility of scoring a great deal, but they are also generating significant controversy.

Shopping, or a "skill-based game"?

In a session at last week's NRF Retail Innovation & Marketing Conference on "extreme retail," discussion turned to the "penny auction" site Swoopo. Launched in late 2005, Swoopo lets customers get some amazing deals on products by making them pay for the act of bidding, rather than the ending price.

Bidders on the site purchase bids in blocks of 40, 75, 150 or more. Each bid costs 60 cents. Items start at near-zero prices; whenever a user "spends" a bid, the price goes up and time is added to the clock. Many auctions are penny auctions, meaning that each bid raises the price by a single cent. Most of the action takes place at the end of the auction, and when time runs out without any additional bids being placed, the last bidder gets the product.

For instance, a penny auction for a MacBook Pro ended Monday afternoon at the closing price of $54.33. The winning bidder had placed 148 bids, for a total cost of $88.80. But it took 5,432 bids to get to the end of the auction, and at 60 cents per bid, Swoopo swept up $3,000 on a laptop that retails for about $1,500. To put it simply: In an eBay auction only the winner pays, but with Swoopo, even the losers pay.

That smacks of gambling to an awful lot of people – one professor in the U.K. has proposed that the site should be regulated by that country's Gambling Commission – but Swoopo's CEO Frank Han disagrees .

"We think of Swoopo as a skill-based game," he said. "It's a game where there's a high degree of strategy in a multiplayer environment. No doubt, the fundamental proposition is that there is an item available at a low cost, and people compete for it. But no, we don't think of ourselves as a gambling proposition."

Swoopo's business model is a modified version of the "dollar auction," a game theory exercise in which someone auctions off $1 to the highest bidder – but the second highest bidder also has to pay, and gets nothing in return. That results in some particularly bloody bidding as the bids approach $1, and bidders often end up paying more than $1 for the prize, in pursuit of their "sunk costs." Swoopo takes it one very large leap further, in that it's not just the top two bidders that are out money, but rather all of them are.

In fact, the site used to auction cash – a December 2008 auction for $80 ended with the "winning bidder" paying $194.25. Han, whose resume includes founding eToys and a stint running the online side of Home Shopping Network, strenuously insists that the company no longer auctions cash, and says he is "moving aggressively in a direction to really take Swoopo to the next level in terms of transparency and service."

Han wouldn't disclose any numbers about how the site is doing, only that Swoopo has conducted "hundreds of thousands of auctions" over the past five years. The company also has a lot of new competition: the blog Penny Auction Watch lists more than two dozen imitators.

Elliot Moskow, CEO and founder of another innovative auction site, Pricefalls.com, is critical of the penny auction model.

"It does allow the end-buyer who wins the product to get a great deal, but the majority of shoppers that use Swoopo are not making the best decision," he said. "It's a little unfair for the everyday shopper. They can lose out on a considerable amount of money without purchasing a product."

Pricefalls is built on the Dutch auction model, in which a product starts at the highest price and it gradually drops until someone chimes in to claim it. Each product has a "price floor," the minimum amount that the seller will accept, which assures that sellers never take a loss on their products.

"If we get mentioned in the same breath (as Swoopo), it's because we both have unique models," Moskow said. "However, our model has been around for centuries. It's a game-theoretical model that is very well known in academia, and it's known for equal or higher revenues than the ascending price auction."

Another key difference: Pricefalls is a marketplace for third parties that want to sell product, where all product on Swoopo is sourced and fulfilled by the company itself.

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