05.01
A recent Atlanta startup has started to become really popular. Wavee is a penny auction site where you can win a lot of cool merchandise for dirt cheap prices (a Nikon Coolpix worth $184.99 for 20 cents as shown below). The catch? There is indeed one. To be able to bid, you need to purchase credits which cost $0.75/credit.
Sounds like a deal doesn’t it. Wavee advertises between 70-99% discounts on the final bid price (vs. the retail cost of the item). How does Wavee make money? Well, my rather inquisitive nature led me to figure out the math behind Wavee.
My goal is to figure out the relationship between the Value of an item and the final selling bid at the break even point.
The total revenue (which at break even point will be equal to the retail price of the item) from the sale of a product is the revenue from bids ($0.75 * number of bids) and final selling bid ($.01 * number of bids). The gets the total revenue from a sale to be $0.76 * number of bids.
Since the final selling bid is $0.01 * number of bids (hence, number of bids = 100 * final selling bid), the total revenue can be written as 76 * final selling bid. So, we come to the conclusion that Wavee breaks even when the final selling bid is 1/76th the value of the item. This equates to final selling bid having a 98.68% discount on the value of the item.
So, you can see that Wavee makes a profit whenever they sell a product at a 98.68% discount or less. Sounds like a deal for both the startup and the buyer. Check them out and have some fun.
Note: This analysis is done with only the sale of the item in perspective. You got to keep in mind that there are other expenses for the company such as development costs and employee salaries. Wavee also provides 5 free credits to each new account and also gives reward credits which are not accounted for. But the basic idea remains the same. If the winner of the auction is not a total idiot, he is definitely going to make a saving on his purchase; and as long as Wavee has enough users bidding, they will make a profit too.
I just tried this out, and even with a small user base it’s kind of silly. Everyone just waits until the last 5-seconds and starts hitting bid now. It’s almost like a lottery. If the site ever gets a decent mass of users you will always lose on average.
I’m watching two people bid now for $225 credits. People are essentially spending real money in the hopes of winning fake money. It is quite possibly the dumbest thing I’ve ever seen. The bid is over $5 now. Kind of amazing that people have spent over $400 in real money for a chance to win some fake money. It’s gambling.
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