Wednesday, April 6, 2011

The get an iPad for $24 business model

Recently, there has been a number of companies that advertise things such as an iPad for $24, a vacation to Hawaii for $300 etc. etc. Quibids and OffAndAway are some of them. But behind these offers lies an amazing business model. Let's look at an example:

A site starts with an iPad being sold at $0.01. Every time that someone bids on the iPad, they get charged $1 for the bid, and it adds $0.01 to the price of the iPad, and adds 10 seconds on the clock.

Typically, once the site has enough users, there are a lot of people waiting for those last 10 seconds and a chance to win the iPad for like 95% off. So lets assume that happens. iPad sold for $25. The site loses a lot of money, right?

Consider how much money the site gets for the bid. To raise the price from $0.01, to $25, there had to be 2499 bids! That means people spent $2499. So the site gets $2499 plus $24.99. What is the gross margin on this thing? Even if the iPad was $500, the gross margin was 80%!

But what about the downside? What if people do not bid much? There is a significant downside, but the point is that the site can monitor this closely and start closing out items that do not sell.

So the key question is, how long does it take to people to figure out the problem with the business model, and that their chances for winning the iPad are slim? Time will tell.

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