Penny Auctions Websites: Facts to consider before bidding
The facts behind the penny auction craze:
As you watch television or browse the internet, you have seen them. “Get this television for a dollar!” “Buy these expensive items for 80%, 90, even 99% off!” “Pay only pennies for your favorite items!” In fact, there is probably a Google ad somewhere on this page promoting one of these opportunities.
Penny auction sites have grown in popularity over the last few years. While you may have your own opinion on their validity and usefulness, this new way to buy represents an interesting opportunity to get a very expensive luxury item for pocket change. However, you should know a few things about this one-cent paradox of consumerism before you sign up and start bidding.
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How the auctions work:
Before I go into this process, I want to let you know that these are not the same as Ebay penny auctions, which are far different from this process. Dedicated penny auction sites operate under the premise that items will start at a low price, and sell for a buyer set price, which really amounts to pennies on the dollar. An $800 television or $50,000 automobile will start at a one cent auction and then bidders will increase their bids (usually by a small increment, and in many cases a single penny) anytime during the auction timeframe.
Many auctions last a few days, but some “flash auctions” will only be active for a few hours. As the times ticks down, bidders eyes will widen as they see their dream car about to sell for only a couple hundred dollars. The most common format is that every bid during the last few minutes will add time to the auction clock.
Eventually, a single bidder will have the winning bid placed when the time expires, and they will be the winner of an item at well over 90% off the retail price. It sounds like a dream. Who wouldn’t want to get a new flat screen or convertible for such a cheap price? However, this picture is only a small portion of how these auction sites really work.
How the auctions REALLY work:
In reality, these penny auction sites do have the potential to give you a great prize for a great price, in that “maybe if the stars align on February 29th while I wish on a five leaf clover I just found” kind of way. Here are some problems for you if you start investing time in these one-cent sites.
You will not really pay a penny, ever. Even if the winning bid for an item is a penny, that is not the amount you will pay. Many of these sites operate in one of two ways, you either pay for a membership, or you buy bids in packs, with a single bid usually costing between ten and fifty cents, or a combination of the two. Then you will pay the actual item’s ending price. If your penny bid for an item is $85.63, you still have to pay that amount for the item; after all, it was an auction. Finally, you will have the potential for taxes on your item depending on its value. While you still have the potential for a great deal, it is impossible to get anything from these sites out the door for a single penny.
You have a very small chance of ever winning. The advertisements for these sites make it sound like you are just walking through a digital showroom with closeout price tags. Here is the only way you will actually win a penny auction: You have to place your bid exactly ten seconds before every other bidder runs out of bid credits or decides to stop bidding. If 500 people are all going after an item, you might think that you have a 1/500 chance of winning a vacation or a car. In actuality, you have to factor in that each of those 500 people may have 1000 bids each and you have to hope that every single one of them runs out of bids before you do, and then you have to hope that none of them has time to buy any more bids before the auction ends. This is assuming that no new bidders jump in near the end of the auction, which just so happens to be the most active time. The competitions to keep your hand on the car, and even the lottery itself have far fewer constantly changing variables than these auctions. I do not know about you, but I would prefer to go needle hunting in a hay-filled barn before going up against those odds.
Auctions can last for an incredibly long time. The final ten seconds of a penny auction for a sought after item can literally last for weeks. Bidders will let the clock run to :01 and then another ten seconds are added to the clock. This process will continue for minutes, and hours, and days on end. Your hope is that fatigue will set in among your competition and you will emerge the victor. Of course when you factor in time zones, and the fact that you could be competing with someone who actually got to sleep the night before, your chances continue to dwindle. The only way you could fully commit it by not having a job or taking days off to glue yourself in front of a computer for a few days. To be honest, this phenomenon will occur every Black Friday, people will take time off or waste days of their lives sitting and waiting for a deal. If that time were spent earning money, you likely would come out having made more than you would have saved on the item. Then you can take that income and buy the item you want anyway, without the neurotic outbreak-inducing ordeal that is the penny auction.
Loopholes and frauds can erase your chances completely. There is some debate as to the morality of some of these auction sites. One possible issue is shill bidding. This occurs when the auction site will pay or have an employee bid to keep an auction going longer. Another issue is the auto bidder. These can come from cheating bidders or from the site itself, and it means that a computer program will automatically bid just before the listing ends to ensure that it doesn’t sell for too low of a price. Another concern is that a winner will never actually receive anything. The site could claim that you didn’t place the bid, you cheated, or any other number of reasons. It is just like that guy who loses a bet but never really intends to pay it, and you can be left disappointed. Of course these may or may not actually happen on these auction site, but it is something to be aware of when bidding.
You mean you didn't win the one cent Corvette?
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How they make money:
I started to think to myself and wonder, “how do these sites make this worth their while?” If they are actually sending out televisions for pocket change there has to be another angle to this process and I do believe that I have figured it out. Let us run the numbers for an $800 television. Assume that the site actually paid that amount to get the TV. Maybe 300 members paid a membership of $5.00 for the month and bid on the TV. The auction commences and every bid placed costs the bidders fifty cents. For this example, we will say that the auction’s ending price was $39.55, which equates to 3,955 bids at one penny each. Remember that every bid brought in $.50 for the company. Additionally, the company will receive the $39.55 ending price of the auctions. So here is how much the website brings in revenue for a TV they paid $800 for:
Membership fees: $5.00 * 300 members = $1,500.00
Auction fees: 3,955 bids * .50 each = $1,977.50
Final Selling Price = $39.55
Total profit = $3,517.05 - $800 cost = $2,717.05
This is a simplified version of this process, but it holds up no matter what is being sold. If a car penny auction for a brand new Mustang ends at $1,456.00, the amount brought in just for the cost of bids is $72,800, which is more than the cost of the car. This is without including membership fees for the thousands of members many of these sites have.
My personal favorite is when these sites put up an auction for a pack of bids. Bidders have a chance to purchase more bids at a discount. They might list a 100 bid pack that will only sell for $13.47, which sounds like a tiny amount of income, but that is equal to a revenue of $673.50 just from the bids at $.50 each. They have essentially made money out of nothing, and they will run dozens of these types of auctions every day. They are selling chances for you to have a chance to win something.
It isn’t quite as bad as it sounds for every site and every situation. Some penny auction sites offer free membership. Others give you free bids to get started. However, this is just as if a casino were to give you a few free spins to get you hooked. Even if they don’t charge for a membership, they are still making a ridiculous amount of money from having so many bidders wasting time paying fifty cents at a time to have a chance at that dirt cheap Ipod.
Take this hub for what you will, but I want it to serve as a warning to those who think these auction sites are worth your time, companies that understand scale pricing really are taking you for a ride. By only having bidders shell out a few dollars at a time it does not make a difference to the individual, but the seller is bringing in millions using this process. It is no wonder that penny auction sites keep sprouting up like weeds on the internet lawn. Use your judgment and recognize these “buying opportunities” as what they really are. You will be better off buying a raffle ticket, and save your pennies for another day…