As our nationwide economic turbulence continues, discount Web sites are proliferating. They don't rely on the typical economic mechanisms to get their customers deals—they're not about razor-thin margins, or closeouts, or liquidation. Instead, they use the power of the crowd to make things cheaper.
It's not a new idea, but in the years that the concept has been been around, it's never proven workable; well-heeled startups like Mercata—backed by MSFT principal Paul Allen and beneficiary of a $100-mllion IPO—shut down in January 2001 after the site burned through its capital and couldn't get more investors. But this recession might just be bad enough that customers are readjusting their ideas of what constitutes a reasonable price—and what they'll do for a shot at one.
Today, according to its Twitter profile, another contender will launch: eSwarm. The idea works like this: users form a critical mass that wants to buy one particular good, service, or financial product, and sellers compete for the business of the group. It's pretty much the standard-fare group sales model, but this might be the economic milieu sites like Mercata didn't know they were waiting for. [Edit: ESwarm has informed us that its business model is changing. They will relaunch on August 8th. See the end of this article for a description of their new site model.]
A more fun iteration of the group-sales model is Groupon, and it does what it sounds like: it sells discount coupons for food, clothes, gyms, bars, sports tickets, Zipcar memberships, and about a hundred other deal varietals. Here's the secret sauce: the coupons boast really aggressive discounts, and are only valuable if enough people buy them (if that critical mass isn't met, you don't pay a dime). Essentially, the site leverages a guaranteed customer base to a local business, which in turn offers the site a special deal.
Groupon started in the Chicago market—its founder is an enterprising first-year UChicago dropout—but has since expanded into six other markets, including Boston, New York, D.C., San Fran, Atlanta, and L.A., with more to come.
To get a better idea of how it works, check out their video, embedded below.
Another site that uses the power of the crowd to get good deals—to more destructive effect—is Swoopo. The site has lately reached an explosion in popularity; it's been called the "crack cocaine of auction sites" by Slate's financial page, the Big Money, and it has earned equal parts scorn and amazement from consumer advocates. That's because figuring out the way it actually works is an opaque exercise in combinatorics. But first, let's start with what you get.
Log onto Swoopo, and you'll see high-ticket items—laptops, cameras, TVs—selling for absurdly low prices. A $1700 MacBook Pro I watched late into the night last night ended up selling for about $155, but many sell for just pennies on the dollar. These are brand new goods, and the site is legit. How is this possible?
For every bid you make, the price of the auction jumps just one cent, but you, the bidder, are charged $0.60. Additionally, there's no finite end date to an auction; every time a bid is registered, the auction gets extended for a few seconds, turning the ordeal into an endurance marathon. Sixty cents might not sound like a high price for a bid, but Swoopo auctions only end after thousands of bids, meaning that often times the winning bidder will have sunk several hundred dollars into site fees. Obviously, there are bidders in second, third and fourth place that sunk almost as much, and hence the crack comparison: the more you bid, the more financial imperative you have to win. Swoopo ends up collecting up to five times the MSRP of the MacBook thanks to all those bids, enabling it to give the actual item away for a pittance. Where eSwarm and Groupon harness the combined buying power of you and your fellow users, Swoopo pits you against your peers—but the deals are pretty good, even if antisocially gotten.
If you're willing to give these a try, start with Groupon—it's more straightforward concept will ensure you don't burn money without misunderstanding what you're getting into, since Swoopo requires you to pre-purchase packs of bids before you can start to gamble. Enjoy the frugality.
** From eSwarm, their updated business model:
"Based out of Boulder, CO, eSwarm has built and will continue to develop the world’s simplest piece of technology that allows friends and other like-minded people to have conversations that matter. We believe there is an opportunity to take what forums and other social networking technologies are already doing and make it better and more organized.
A swarm is a group of friends and other like-minded people having a conversation that matters. Swarms mimic human behavior. Like many conversations, some swarms start because they are simply looking to talk about a topic or interest. Other swarms start for a very specific reason, like to influence something to happen. Conversations on eSwarm give you a voice on the world’s best public sounding board.
Coming soon to eSwarm are "eSwarm Deals". By simply participating in a conversation and having a dialogue, you will see premium offers only available to people using eSwarm. These offers could be deals on specific products or services or maybe just a link to relevant information. As opposed to banner ads that flood across other websites, eSwarm Deals are screened by us and they will be a true benefit to you from participating in conversations on eSwarm."