Dear Doug Aley and the Off & Away team,

Doug Aley presents at PhoCusWright Travel Innovation Summit 2010

Congrats on your launch! All in all, I think it’s a great implementation of the original Swoopo/BigDeal concept for travel. I especially like the focus on suites and how that provides marketing and RevPAR benefit to suppliers, and how it creates interest, excitement and differentiation for consumers. Man, I wish I had thought of that twist. Brilliant.

As I understand it, the model is as follows:

• Site visitors see suites for sale for what looks like ridiculous prices. For example, one recent auction closed at $384.80 for 2 nights at the Terranea Resort in LA that might otherwise have cost $3700!
• To bid in auctions, site visitors have to buy bid packs of bid tickets. Each bid ticket can be used once to bid for an auction.
• Each bid ticket cost $1 and increments the auction price by $0.10 each time it bids.
• Each time you bid, the auction gets extended by 20 seconds, thus allowing more people to bid higher.
• The auction ends when one bidder is left standing and the other bidders have given up.
• If I bid, say, 20 times, I spent $20 for those bid tickets. But never fear, the $20 can be used as credits for purchases of hotel nights via your affiliate deal with Expedia. But these credits can be used for 30 days only.

How much did Off & Away make on this auction?  Well, each bid increments the price by $0.10 and the auction closed at $384.80.  So that means $3848.00 was spent collectively by all your bidders to bid on this auction.  Let’s say the actual price you paid Terranea for the room was $1900, or 50% off the actual Best Available Rate for the room.  Terranea should have no problem giving this to you because those suites are running at low occupancy anyway, and the whole luxury (and independent) market has been soft recently because of the AIG effect, consumer frugality, etc.  Let’s further assume that you get 70% breakage on the losing bids.  Those people in theory have the right to redeem their bid spend on hotel purchases but since there is a 30 day expiration date on the credits, most people will probably just forget and lose their credit.  So you made about $1400 (70% of the remaining margin) on this auction.

Just like the gaming industry (I mean Las Vegas, not Xbox), you are delivering entertainment to consumers who–during the process of using their money in games of chance–get the thrill of the potential win, even though most will end up losing their money and not even redeeming it for hotel night stays after the auction is done.

After I lost $50 “researching” your business (I mean, enjoying the thrill of entertainment shopping in the travel vertical) I reflected a bit on why human behavior will drive the success of this business.  It probably confers evolutionary advantage in our species that individual human beings will look at a risky situation and not assess that risk correctly. But we as a species benefits from this miscalculation of risk, because even though individuals make do irrational things, there will be some winners, and the winners will ultimately benefit those around them.  Think about primitive man on the savannas of East Africa, fashioning a new kind of spear that he (or she) thought would give him advantage in hunting down a lion.  Well, most likely, many of these optimistic hunting entrepreneurs died trying to devise methods for lion hunting.  But eventually, someone succeeded, and the knowledge of this method then diffused through the rest of the community and conferred advantage on the group as a whole.

This evolutionary attribute of our specials is now being exploited for fun and profit in selling hotel rooms!

If people analyzed the data (which you are doing a great job providing on in a transparent fashion) they probably would conclude that the likelihood of winning an auction is low relative to the money being spent.  In other words, the odds are stacked toward the House, just like Las Vegas.  But we’re hard-wired to try, especially in difficult times.  It’s awesome that your demographics are upper income and frequent travelers.  These are not down-and-out problem gamblers gambling away their welfare checks.  But even affluent people need to feel the thrill of a game of chance where you might just get a great deal and the bragging rights that come alongside it.

Congrats again on this nice implementation of the Swoopo concept.  As you start scaling the business, I’d think in terms of point-of-origin based marketing, customizing your emails and Facebook messages to me based on my location and what might be a good getaway for me to take (e.g. easy to fly to LA for a weekend, not so easy to fly to Miami), and exploring ways to stimulate repeat purchase among the large number of one time players who lose an auction and then never come back.  For example, BigDeal gives away free bids to people via unanticipated thank you campaigns in email, that give me some incentive to come back.  From what I understand, churn is the biggest issue with this model.

Again, nicely implemented!  Congratulations on launching this business.