How to Spend Money Wisely » Shopping

How Do Penny Auction Sites Work?

You can get a MacBook Pro for $70! With penny auction sites, prices start at a single cent, and you can possibly buy expensive electronics for low, low prices. At least that’s what the adverts tell you. Unfortunately, the reality of these penny auction sites is that they are making loads of money for the site owners – and you have a slim chance of actually getting a good deal.

Pay Per Bid

It’s important to understand that penny auction sites aren’t making money on selling items dirt cheap. They’re making money on individual bids. When you participate in a penny auction, you pay per bid. In most cases, bids cost between 30 cents and 60 cents apiece. You buy a certain amount of bids to begin. So, you might be able to buy 100 bids at 45 cents apiece. That’s $45.
Each time you bid, your bid count is reduced. And, thanks to the way penny auctions are run, it is pretty easy to breeze through 100 bids – without winning anything. Each auction is set up to take a certain amount of time. However, in some cases new bids can add a few more seconds to the auction. That means that it’s impossible to know exactly when an auction will finish (no waiting until the final seconds to swoop in an win like you can do on eBay).
With thousands of bidders, and no way to determine when the auction will actually end, the chances of you actually winning something are pretty low. But you still pay for every single bid you place. And that’s where the site owners make their money. It’s not unusual for thousands of bids to be placed by hundreds of people before an auction ends. So, if a $1,800 MacBook Pro garners 5,000 45-cent bids, that’s $2,250. It doesn’t matter that the laptop sold for $70. The auctioneers already made a profit.

Buying at “Retail” Price

Of course, if you lose the auction (and there’s a good chance you will lose), most auction sites offer you the chance to purchase the item at “retail,” minus the cost of your bids. So, if you bid 50 times and lost out on the $1,800 MacBook pro, you will have $22.50 applied to your purchase. Plus, you will have to pay shipping. In many cases, there is a markup for items bought on auction sites. You might be better off just shopping around for a better deal in town, or at a more traditional online retailer.

Addicting Nature of Online Auctions

Online auctions can be addicting as well. It’s a lot of fun to place bids, and see if you can score a great deal. Even if you don’t win, the thrill of the process can be addicting – along with the hope that this time you’ll win. It is very similar to gambling in a lot of ways.
If you aren’t careful, it’s easy to click away your bids, and then need to buy more. You can spend hundreds – and even thousands – of dollars without winning anything. And, if you finally do win something, your great deal is likely to be completely negated by the large amounts of money you have already spent.

Comments

  1. Money Beagle

    The allure of getting something for a huge discount draws people in, but the more people drawn in, the less chance you have so much that, as you point out, it’s not even worth trying for the most part.

  2. Amanda

    I’ve been a penny auction bidder since march of 2009 and launched the penny auction blog and community PennyAuctionWatch.com shortly afterwards. There are many pitfalls that bidders and site owners need to watch out for. I’ve seen many sites try to make a go of it only to close some losing hundreds of thousands of dollars. If bidders are not careful they could lose quite a bit, more risk than reward in some cases. It’s important to research a site before a bidder tries it out as I have found many sites that have engaged in shady tactics, i.e. Shill bidding, never shipping items out, false advertising, etc.

  3. Clare @Youngandthrifty

    This sounds like a nightmare for a frugal shopper with an addictive personality. The promise of a deal coupled with the thrill of the auction is a recipe for disaster.

  4. William Jones

    About 3 years ago, I tried one of these sites out as it was the first time I had ever heard of them and they intrigued me. I bought a few dollars worth of bids and ended up winning an auction for an additional 500 bids. Turns out that this is one of the few auctions they’d actually let a “real” user win. I started to bid on some items here and there, mostly electronics, and started to notice some patterns. Firstly, there were about 4-5 usernames that came up again and again, constantly winning items. I grew suspicious and ended up formulating a new strategy. On a basic ipod nano, I tracked the last 10 or so that had sold on the website and came up with an average final sale price range for them. I then focus ALL of my remaining bids on a single apple ipod and drove the price up WAY higher than any of the past 10 identical items had sold for. Little to my surprise, i was outbid and the moment i ran out of bids, the next bid won the item. How convenient was it that the winner of this auction was one of those 4-5 repeat users that won most of the items. Unreal. I am convinced that the site i used was a scam. I contacted them and threatened lawsuits, reporting to BBB etc. No use. Lost less than $100 overall, so I’ll live, but live and learn. Even if there are some out there operating under a legitimate business model with no fake bids etc, i would still avoid them all like the plague.

  5. Cliff Stevenson

    Figured there was something up with these sites….just didn’t understand the mechanics. @William’s comment is especially concerning.

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