Reverse Auctions – Are You Bidding Or Gambling?

by bobandanna on May 28, 2012

The new ‘reverse auctions’ are attracting people who believe they are legitimate businesses rather than just more opportunities to fleece the unsuspecting.

Let’s take a look at a regular auction like eBay first, using an example of a pair of Levi Designer Jeans that retails for $150.

(Before you laugh, click on the jeans pic below!)

Let’s assume that the seller bought the jeans for $50 and put them up for auction. The high bid was $100, so the buyer got a good deal at $50 below retail. The seller got a good deal, making $50 over his $50 cost.

And what did the losing bidders pay? Nothing! So they neither won nor lost anything, and that’s the way most auctions work. Everybody wins and has some fun in the process.

In the ‘reverse auction’, bidders pay a fee just to become part of the game, and then buy ‘bidding credits’ at 80 cents each or so.

The jeans are placed on the auction block at $150 and the bidding begins at a cost of 80 cents per bid. Each time a bid is placed, the price goes down by 25 cents. The winner is the one who places the last bid and reduces the price to zero.

If you watch the auction carefully, you can reduce the price to zero at the end by bidding many times. For example, you could reduce the price from $5 to zero with 20 bids, and you get a $150 pair of jeans for just 20 x 80 cents = $16.00 What a deal! And good deals are what the  reverse auctioneers will advertise!

But hold on here … let’s take a look up the magician’s sleeve …

Let’s say the reverse auctioneers paid $50 for the jeans and started them at $150. Reducing that price to zero would require 150/0.25 = 600 bids at a cost of 80 cents each. That means revenue to the company of 600 x 0.80 = $480!

If those bids were made by just ten people who paid just $10 to join the program, that’s another $100 in dubious revenue to the company for a total of 480 + 100 = $580. Subtract the cost of the jeans, and we are left with $530 profit to the company!

Wait a minute! Let’s be fair! We have to pay commissions to the reps! In a regular auction or in a regular sale of a pair of jeans in a store, the commission would be paid out of the difference between the store’s cost of $50 and the selling price of $100. Let’s assume a generous payout of $30 out of that $50 profit, i.e 30% of the selling price – a commission any MLMer would be happy to receive. The company or store would keep $20 for its overhead and profit.

If the reverse auctioneer pays out the same $30, he will appear to be generous, and everyone will appear to be happy. But wait a minute here … The reverse auctioneer has actually collected $580, paid out $50 for the jeans and $30 in commissions, and gets to keep not $20, but $500!

A clever move for the company, but where did that money come from? Could it be up the other sleeve?

In a regular auction, those who do not buy the item do not pay. In the reverse auction, many people pay for the right to bid, and receive NOTHING! In this case, many people may have used up their credits at 80 cents each and received nothing in return. In this case, the company has collected an extra $500 directly from the pockets of their members who have received nothing in return.

There must be a good name for collecting money and giving nothing in return. Oh yes, we remember now – FRAUD!

The reverse auction is like gambling at a casino. As long as you know you are at a casino and you will be spending your money for nothing, no problem! If you are comfortable earning commissions from money paid for nothing, this may be the deal for you. Just don’t let anyone try to convince you that it is a legitimate business opportunity!

To hear us discuss this business plan with Richard Dennis, listen to Business Models – Manure Without The Spreader.

To learn more about how to avoid a casino in company’s clothing, just download this Free MLM Report.

Bob and Anna Bassett
Skype bobbassett

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