Hipmunk Changes Travel’s Business Model

by Jim Muehlhausen

It is always an interesting debate- what is a business model change and what is not?  The new travel site hipmunk.com is attempting to re-invent internet flight search.  Founder Adam Goldstein has created a site which displays flights visually vs. a text format.

Using Orbitz to aggregate flights, Hipmunk is starting with an additional layer of cost.  The site is easy to use.  Airlines are color coded.  The user can easily see departure times, connection cities, and cost.  The visual format is definitely a significant improvement over competitors.  However, is this format simply and innovation or a new business model?  how long will it take for competitors like Expedia.com to copy the visual format? 

Techcrunch said, "When you see the results you'll never want to see flight results in any other format," It's one of those 'that's so obvious why didn't I think of that' moments."  It may take a year, but you can bet you will see this format as the default on most travel sites.

So where does this leave Hipmunk’s business model?  It appears that Hipmunk has a one to two year window to grab market share before its innovation can be knocked off.  Then Hipmunk is left with a business model with lower margins than its competitors.

In order to solve this issue with their business model, Hipmunk has three good options:

1)    Become their own aggregator.  Cutting Orbitz’ profit margin out of their cost structure puts Hipmunk on an equal playing field with the other competitors such as Expedia, Travelocity, Priceline, and Kayak.

2)    Sell.  Hipmunk’s technology breakthrough is attractive to competitors.  By purchasing the technology, a competitor could eliminate the inevitable upcoming cost to match Hipmunks interface plus grab Hipmunks market share.

3)    Expand the graphical interface to other areas.  Hotels are the most obvious area for expansion.  Current sites already have some form of visual presentation for hotels in a selected area.  Perhaps Hipmunk’s expanded business model could include a visual representation of the hotel combined with all of the places you plan to visit so you could better choose a central location?

Kudos to Hipmunk for their innovative business model.  Let’s hope that Hipmunk can continue to out-innovate the competition.

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Swoopo.com Sells iPad for $17,739

by Jim Muehlhausen

To better understand the Swoopo.com business model, let’s review a previous post, Swoopo’s Innovative Business Model.  In a nutshell, you buy $0.01 bids on Swoopo for $0.60.  Then you bid on iPads, TVs, Gold bars, etc.  You might win an iPad for $35, but Swoopo has sold 3500 $0.60 bids for the privilege of “winning” the iPad for $35. 

Now, Swoopo has taken the business model to the next level.  Here is my favorite Swoopo.com auction, 750 Swoopo.com bids ($0.60 each) worth $450.

Auction 319106 http://www.swoopo.com/auction/750-bids-voucher/319106.html

Auction Sale Price                                                   $37.05

Placed bids by winner (1206)                                  $723.60

Fair Market Value                                                    $450.00

Price Overpaid                                                         $273.60

Effective cost/bid (3705 total bids @ $.60)   $2.96

In our previous blog post, you saw an iPad sold for $59.93 or 5,993 bids costing $0.60 per bid.  However, if the person buying the iPad used the bids similarly priced to the ones won at the auction above, the effective sales price of the iPad would be a mind-blowing $17,739.28 ($2.96 per bid times 5,993 bids).

One has to wonder if Swoopo keeps a performance metric called Effective Sales Price in Excess of Fair Market Value?   To this end, I have some alternative tag lines for Swoopo:

  • Profiting from consumers inability to do math
  • It costs less when you only spend credits
  • iPad lottery
  • Thanks for subsidizing my cheap electronics
  • I could never throw that quarter on the plate at the carnival, but I can spend $1200 to win a $300 gadget

I have nothing against Swoopo.  To the contrary, I believe they are business model geniuses.  It’s the incessant consumer desire for a “good deal” which is the issue, not Swoopo’s business model.  Swoopo’s business model is nothing but a modified lottery.  Until consumers realize that lotteries are a math disability tax, Swoopo’s business model will continue to thrive.

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Swoopo.com's Innovative Business Model

by Jim Muehlhausen

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 $3,653?

According to Swoopo.com,

We are an internet company with a unique, worldwide business model. We are the creators of “Entertainment Shopping“ on the internet, and, one of the first companies to combine e-commerce and entertainment. All of our auctions are buzzing from the first to the last second. Every user can get top of the range, brand-name products for extraordinarily low prices.

Here is how the business model works: our online customers buy “bids” in advance. They cost $0.60 each and are sold in packs of 40, 75, 150, 400 or 1000. Bidders have the choice of placing single bids, or, using an electronic bid assistant called the “BidButler”. Every bid placed, increases the price of the product by 12 cents and the auction countdown by up to 20 seconds. To help keep track of the money spent on bidding, each auction displays the amount spent on bids by the customer and how much the bidder would save overall, if they won the auction at that moment.

The ‘last bidder standing’ when the countdown reaches zero, wins the auction – usually at a very low price; winners save, on average, 65% when compared to the recommended retail price.

Swoopo has taken the consumers insatiable desire to get a great deal and simply made them pay for the privilege.  Bargain hungry consumers feel like they are saving money, and perhaps they are.  Well, at least the winner of the auction is saving.  I wonder what the fully loaded average sales price of an iPhone on Swoopo is vs. one sold at Wal-Mart?  That is, let’s add up all the $0.60 bid purchasers who did not win and add them to the total.

Swoopo’s business model is genius on many levels.  The business 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 deminimus so many people write the 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.  Although a business 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 Example:
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

As you can see, if you are lucky enough to win, you almost always buy for a fraction of retail.  On the other hand, 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 business model is simply a fad or the next eBay.

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’s 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.

One has to wonder if this business model has sustainability.  When will those 49 people get back in line at Swoopo for another trip through the spanking machine?  On the one hand, people do it for the lottery all the time.  On the other hand, it has to be frustrating to win nothing and pay for it.

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 so it does not cost $50 to lose, the business model will work.  However, if people grow frustrated of paying to lose, the business model is doomed because the cost spreading will diminish.

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New York Yankees redefined Baseball’s Business Model

As the sports world mourns the loss of George Steinbrenner, let us reflect on just how much he changed the business model of professional sports.  When George Steinbrenner purchased the New York Yankees from CBS for $10 million in 1973, the team was a mess.  Today, the Yankee’s business model and club is valued at [...]

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The Great Business Model Shootout

The Business Model Institute is proud to present the 2010 Business Model Shootout.  We will be comparing and assessing business models from some of the world’s best companies.  We will compare: Apple Business Model vs. Intel Business Model and IBM Business Model Burger King Business Model vs. McDonalds’ Business Model and Starbucks Business Model GM [...]

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Nestle Purina’s Sales Model

One of the eight vital areas of a business model is creating proven sales and marketing process.  I heard an interesting story from a former Nestle Purina sales superstar.  She told me that Purina required all major account reps to spend every Friday planning.  At first glance, this seemed extreme.  I am a fan of [...]

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Starbuck’s $16 Billion Business Model Dilemma?

One has to wonder if the once-vaunted Starbucks business model is in decay.  For many years, Starbucks has relied on the overall customer experience as their defacto advertising.  Now, Starbucks is engaged in an old-fashioned television, radio, and newspaper media blitz. In 2007, Starbucks experienced its first-ever store traffic decline.  In response, Starbucks lowered prices [...]

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Wal-Mart’s Evil Business Model?

There is a large segment of the population who believe Wal-Mart is evil.  They kill small retailers to create low paying jobs and the like.  However, I read something interesting in The Wal-Mart Effect by Charles Fishman.  In this book, Fishman describes how Wal-Mart single-handedly eliminated wasteful packaging of deodorant.  During the early 1990s, metal [...]

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Panera Bread’s Business Model Secret

The Freemium business model is sweeping the technology world.  The simplest explanation of the Freemium business model is giving away a lite version of the product at no charge.  In many freemium business models, approximately ten percent of the free users upgrade to a more robust paid version.  The free version is typically a low-risk [...]

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McDonald’s Business Model Ten Times Better than Hardee’s?

In late February, THL Partners agreed to take CKE Restaurants (CKR) private in a transaction worth $694 million. CKE operates both Hardees and Carl’s Jr Restaurants. As you can see from the chart below, CKE operates about 3100 locations whereas McDonalds (MCD) operates nearly 32,000. My first impression of the CKE deal was, “Wow, that [...]

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