@Hitflip – An Analysis of Economic Uprise and Failure

Since about 2 or 3 years, I’m registered on the german media-articles-exchange-platform Hitflip. Its a website where you can exchange media of all types, first and foremost videos and games, but also books and music CDs. There’s a certain virtual currency called “flips” to manage the exchanges, that you get by giving stuff away (or buying from Hitflip) and that you can use to get stuff from other people.

Hitflips Profits Skyrocket

Where we have a currency, and goods, we have a market. This is where Hitflip’s profit began – they created a market, and they can print the virtual money. This seems to be enough to rule the world. Imagine the possibilities: They could have expanded away from only exchanging media to all regular goods to become the second rise of eBay – with their own virtual currency where anyone is dependent on. Or they could have expanded to become a fully blown ClickAndPay clone.

Hitflip has a certain idea, of what things should cost.

But Hipflip wasn’t very creative to come to more profit. To be straight: they were just greedy. To be able to sell their virtual flips (they really wanted that!), they need to be sure that you can get something with those flips. This is the first time they failed badly. On a market, the price is always dependent on suppy and demand. They just cannot tell people, what their stuff is worth.

To not to give up a whole lot of money on this market, you (as Hitflips customer) will try to get things cheap (low amount of flips) and give things away for much more of this currency – its the natural way of approaching a market. This is the first factor that drove flip-prices to rise. If I got Super Mario Bros for 30 flips, I want to have at least 31 flips if I give it away.

The second factor is Hitflips greed. Instead of just having the profit of selling the flips to new members, they took 1 Euro for each transaction, and later rose this to 2 Euros for each transaction where a certain amount of flips changed the owner. This lead to me not wanting 31 flips for my Super Mario Bros, but 35. Oh, and lets not forget that I have to pay for the postage, so I’ll even want 40 flips for my game. Prices were spiraling up.

Image that todayI can pay 1 flip for 1 Euro and that a new Heavy Rain (PS3) costs 199 flips and God of War 3 (PS3) costs 289 flips. Usual other games with lower populatity like … say … the  nearly three year old Tekken 6 (PS3) cost 119 flips. On other markets, there are lower values. The popular (but now also quite old) Resident Evil 4 (Wii) costs 35 flips – and 10€ if you buy it somewhere else.

Hitflip forces lower prices for goods

Now for the reason I’m writing this post. About one year ago, they tripled all flips, for whatever reason. I guess they hoped that people would still put in their trading goods cheap, but of course everyone was now tripling the prices. A plain, meaningless fail. Then, they stocked up the pricing for each transaction that was above a certain flip-limit – hoping that this would keep prices below this limit. Which (of course) wasn’t the case. They just made me want 45 flips instead of 40 for the item I got with 30 flips, as transaction got even more expensive.

Yesterday, Hitflip began to use an automatic check for “too high prices” and took items, that were “too expensive”, in a pause-mode. I just put em active again, as what else should I have done? Next day, same thing. So they try to tell us, how high the market price of a flip is? They must have lost their minds! (Hint: later I’ll give you the solution they should use, as I like Hitflip … as it basically works).

Dear Hitflip: Why can’t all this work?

Three things:

1. Because there’s a certain amount of flips flying around. If everyone would just lower their “too high” prices, the cheaper items would gain in value and the more popular items would loose value. And I don’t want that, I got some good games lying around here!

2. Hitflip is printing money every time they give out flips for free (as when you begin on the platform or get an affiliate bonus for bringing someone on the platform) of for money (as when you buy flips). Printing money leads to loss of value of this currency. So, flips will be worth less over time … its just the way things are.

3. When everyone can better buy God of War 3 for 45€ and exchange it on Hitflip rather than buying 280 flips for 280€, it should be clear for Hitflip that noone will buy their flips anymore. Their flips aren’t worth 1€ and never will be, no matter how hard they try.

Dear Hitflip: Its hard, but not that hard

You have to accept reality. Don’t try to dictate the market. The market will correct itself. What you can do to sell flips again – and make new members happy?

1. You have metrics, how much an item is worth if I buy a new one, and you can find out how much people want on your platform for this item. Make an approximation over 10000 items of different categories and calculate the real value of a flip in €. Take into account the “age” and “condition” of that items. Put that estimation online, so every member (including the new ones) can transparently see that. Do that calculation every day or every hour, as the market might change.

2. Now that everyone knows, how much value a flip really has, make it possible to get flips by paying you that exact exchange rate plus a (very small) transaction fee (that might diminish for higher amounts of flips purchased). People WILL buy them, as they’re priced fairly. This might lead to people rising prices even much higher in the first few weeks, as much more virtual money will enter the market – but in the end you have no other options.

3. There will be grief. You must  pause all items of existing members, so they can adapt to the new market. As their flips aren’t worth the same anymore, I would advise you to grant them “real money” on their accounts according to how much flips they had as exchange for the lost value.  Say someone has 100 flips and the real value of a flip is only 0,25€ This would mean they can do a lot of transactions for free, but at least they don’t sue you for robbery.

4. Take away that higher fee for exchanging higher priced articles. It will only distort the market and let people take much higher prices than necessary.

Final thoughts

If you like Hitflip as I do, you know that something has to change. Please make them read this article. They have a german blog and they’re on Twitter. Dear Hitflip, please let me know what you think. If you want to hire me as a consultant, go for it. But don’t try to tell me that you understood that you have a (pretty free) market there and that you know how to handle it well.