It doesn’t quite add up, at least that how it seems to me.

I’ll explain. There are a number of places on the internet where you can exchange your unwanted CDs, DVDs, or other items, for others that you might like better. A while back I wrote a brief review of hitflip, a cd swapping site. I didn’t much like it. Someone commented to my post that SwapShop is much better. I tried it and found it was true: SwapShop is a better deal for users. The main reason is that while hitflip charges you a fee for each item you acquire (currently 79 pence), SwapShop is a free service. Furthermore, on my brief inspection SwapShop has better “stock”, the stock being items that users have posted as available. I’ve also seen the site recommended elsewhere, such as on the money site fool.co.uk. I like SwapShop and have made several successful trades.

However, there is something curious about the business model behind these sites, especially the fee-free SwapShop. A quick word of explanation. These sites do not really manage swaps, which would be inefficient. Instead, you exchange your items for credits, received when another user confirms receipt of an item you sent. These credits can then be used to “purchase” items from other users. But what happens if you would like to acquire an item, but do not have sufficient credits? Easy, you buy credits from the site:

If the item you want costs more than the Swap Points you have, you can wait to send more items to build up a larger number of points to spend, or you can buy points by going to the Account tab. Swap Points can be purchased for £1 each via PayPal.

This gives the the company running SwapShop some income, to supplement what it can get from Google AdSense and Amazon affiliate links. It’s not just SwapShop; other sites have a similar arrangement including PeerFlix (see here) and the aforementioned hitflip (see here).

Sounds reasonable – or does it? The success of the site, and the value of your credits, depends on the availability of items you want. In other words, it needs a balance between items offered and items received. But if somebody buys credits, that person acquires an item without contributing to the stock of available items. Put another way, and please correct me if I am wrong, the company selling credits is in effect selling stock that belongs to its users.

Consider a simple case. Let’s say the site is just starting, and ten people each offer a CD. They start browsing the CDs on the site, when an eleventh person comes along and buys all ten using purchased credits. Result: ten unhappy people, with credits but nothing to spend them on.

Provided the site is busy, this effect might not be noticed for some time, especially if users are happy to maintain accounts that are in credit. I’m puzzled though: other things being equal, isn’t this inevitably going to dilute the value of the site, potentially leaving users with valueless credits?

Other things might not be equal. For example, the company could counter this effect by purchasing stock with its income, and offering it in exchange for credits, or there might be other safeguards I’m not aware of.

If I’m right, selling credits for cash is a doubtful practice on this kind of site, unless users can also cash in credits (they can’t on SwapShop). A better approach would be to run it on a community basis, or get by on per-transaction fees, or let the advertisers pay for everything.

Isn’t my question about the business model at least a reasonable one? I can’t find it covered in the help page.

I put my concerns to Paul McDonnell, founder of SwapShop. He confirmed that money paid for credits is “a contribution towards the cost of running the site”. Isn’t that in effect selling items that belong to other people? “It’s a drop in the ocean, a tiny amount of money,” he told me, emphasizing that it was primarily for topping up credits for items you cannot quite afford. “It’s a benefit to the users. It’s just not an issue.” What would happen if, over time, this leakage resulted in a shortage of items to acquire? “I can’t imagine it happening,” he said. He referred to a recent questionnaire completed by thousands of users, none of whom raised the issue.

Point taken; McDonnell seems a decent guy and SwapShop users seem happy. Still, the nagging concern won’t go away.

Update

Here’s what Ian Wright at Hitflip told in an email reply to my query:

We are already monitoring the proportion of flips vs. worth of available items in our system via several internal reports. If an inflation of flips will be evident, we will buy items and insert them on hitflip.

Hmmm, it would interesting to know what those internal reports say, and what proportion would trigger the injections of items into the system. Still, it’s good that the problem has been considered. Hitflip is theoretically in a stronger position than Swapshop, since it has fee income.