This guest post is written by Jim Muehlhausen, author of The 51 Fatal Business Errors and How to Avoid Them.  Jim’s current focus is business model innovation and can be found at his blog

Swoopo.com seems to be a mash-up of Black Friday meets the Lottery plus eBay.  This ingenious business model allows Swoopo to sell a $699 iPad for $3653?

Swoopo’s business model is genius on many levels.  The model is not a technology play but a psychology play.  Swoopo.com plays to buyer’s psychological need for the “thrill of victory” buying a product for significantly less than retail.  Much like a dollar lottery ticket, losing bidders artificially subsidize the low winning price with their $0.60 bids.  This amount is deminimis so many people write this cost off to “aw shucks.”  Add in the frenzy of an auction and we have a web version of the annual Black Friday consumer stampede.

Kudos to Swoopo for taking the low-cost business model to the next level.  Let’s restate that, consumers do not actually get low-cost, they perceive to get it.  Although a model requiring the payment of money to save money might seem counter-intuitive, Swoopo is pulling it off.  Here are a couple examples how Swoopo.com works.

Auction #319533 iPad 64GB WiFi (Retail price at Best Buy $699)
Auction Sale Price $59.93
Winner placed 181 bids $108.60
Total Price Paid $168.53 (savings $530.47)
Non-winner bids cost $3487.20
Total to Swoopo.com $3655.73

At $.01 per bid, 5,993 bids at $0.60 each were placed, plus $59.93 winning cash bid, for a whopping $3655.73 total sales price.  This auction makes me feel so stupid.  Silly me, I went to the store and bought an iPad for $699.  What was I thinking?  I could have had one for $59.93.  But wait, who bid $59.92?  They won nothing.  Let’ assume 50 people were duking it out for this iPad and that they placed an equal number of bids.  I know, this is not the case, but let’s run the math.  This computes to 120 bids at a cost of $72 each.  So 49 of the 50 bidders paid $72 to NOT win an iPad.

Sure, the winner pays only a fraction of retail.  If you lose, you pay $72 to subsidize the cheap purchase of the winner.  Let’s face it, there are not many business models which sell readily available retail items for five times more than all other outlets.

Swoopo.com has leveraged the dynamics of buyer psychology and basic human emotion into a powerful business model.  It will be interesting to observe this site in a few years to see if this model is simply a fad or the next eBay.

The lottery business model works because large numbers of people pay deminimus sums to win very large prizes.  For Swoopo to work in the long run, I suspect the same will be true.  Effectively, losing bidders artificially subsidize the low winning price.  If this is spread over many bidders so it does not cost $50 to lose, the model will work.  However, if people grow frustrated of paying to lose, the model is doomed because the cost spreading will diminish.

What’s the lesson for us?  Swoopo.com shows that playing to buyer psychology can create an easy to sell, profitable product.  Too many small businesses create a product which they CAN create and then try to figure out a way to sell it.  Swoopo figured out what the market was hungry for, and then created a product for it.  We should learn from Swoopo’s success and find ways to deliver products and services the market wants rather than force the market to want what we give it.