Recently I came to know of this website called swoopo.com which auctions various products. However, it’s quite different from eBay. There are many websites and articles that talk about it’s legitimacy (I agree it’s legitimate), I would like to talk about the math behind it and then the tax implications.
Take this completed auction for example. The winner got it at a savings of 79%. Wow, that sounds great, isn’t it? And there is no scam here. The winner indeed got it for only 21% of the product. However, that doesn’t mean that swoopo.com made a huge loss on the product. Infact, you would see in a moment that it made a lot of money.
Let’s study their savings widget which says
Worth up to: $1,299.00
Placed bids (250): $187.50
FreeBids (0): $0.00
Final price: $79.31
First, all the auctions start with a product price of $0. Each bid costs $0.75 to the bidder (yes, this is one of the differences between eBay and Swoopo). Each bid also increases the product price by $0.01 (in normal bids by $0.15). So, that means, for the final price to be $79.31, there have to be 7931 bids (= $79.31/$0.01). This translates to $5948.25 (= 7931*0.75). Plus, the final price of $79.31. So, a total of $6,027.56. Essentially, Swoopo got $6K for a product worth $1.3K (infact, the $1,299 they mention is the recommended retail price and we all know that by doing comparison shopping we can find the products at much lower prices).
Wait, then what do they mean by “Placed bids (250): $187.50”? Why only 250 bids? Well, that’s right. Those are the bids of only the winner. So, the winner essentially spent $187.50 in bidding and finally another $79.31 to buy the product. So, in total $266.81.
So, this is a very good deal for both the winner and the website. What about the rest? Well, they did their bidding and lost some money. Individually it might be a small amount, but collectively it’s a lot.
Now, rather than doing the elaborate calculations, I will give a simple formula.
The amount that the website makes is always equal to
Final Price * (1 + Bid Price / Raise-Price).
So, for penny auctions it is
Final Price * (1 + 0.75 / 0.01) = 76 * Final Price!
And for normal auctions, it is 6 * Final Price.
One interesting thing to note from the above is, the more bidding happens, it’s only the website that keeps benefiting from it as they make (N*Final Price – Actual Product Price). I think this is different from lottery, where the prize money goes up with more bidding.
Now lastly, I want to talk about tax implications. Unlike eBay, since in Swoopo people are paying for the bids, it’s essentially like gambling. I am not a tax expert, but searching on the web indicated that if someone made 79% savings by this type of auctions, are they expected to report their savings as tax? If someone wins in one auction and loses in another, can they offset the loses against the gains?