The deal with penny auction sites…

I’ve been seeing more and more advertising for penny auction sites lately.  You know the ones, you’ve seen the commercials where someone wins an iPad for $12 or a cell phone for $9.   They usually have some overly excited woman professing how she won a table full of stuff, mostly electronics, for just $50 or something ridiculous.  They’re a pet peeve of mine since, for the most part, they take advantage of people, especially those who become addicted to gambling and auctions.

How is that possible that you get items for that cheap?  It’s not.  Well, to be fair, I shouldn’t say it’s not possible… it’s possible you can hit a slot machine on one pull of the lever, it’s possible you’ll win the lottery, and it’s possible you might spend just $12 for an iPad on one of these sites.  Of course, your odds are pretty much the same for all of those.

How can a site possibly make money giving away iPads for $50 or $100?  (assuming you’re lucky enough to actually win an auction at that low of a price… those disclaimers stating that those prices on the commercials are not typical are there for a reason)

First, you have to buy your bids, with each bid costing 60 cents (may vary from site to site)  So in order to bid 50 times, that will cost you $30…. 500 times will be $300, etc.

They call these penny auctions for a reason. Items increment by just a penny for each bid.  If an item is at $5.50, you can’t put a bid in for $6.00, you would bid and the price would be $5.51.    Now each time a bid is placed, the time is also extended.  So there’s no jumping in at the last-minute to snag a cheap price.  As soon as you bid, the time increases, if another bid comes in a penny more than you, the time goes up again.

Now here’s the beautiful part for the website.  Let’s say an iPad is currently going for $30.  That means that 3000 bids have been placed at $0.60 each, or a total of $1800 has been spent already and the auction isn’t even over.  If the iPad finally sells for $100, that means the site makes $6000 PLUS the $100 selling price for a total of $6100 on an item that costs maybe $500 in bulk.

If by some miracle you only placed the final bid, you could walk away with an iPad for $100.60 which would obviously be a great deal.   Everyone else who spent the $6000 walks away with nothing.  There’s the key… if you’re already into an item for $50 are you going to stop bidding for another 60 cents and lose that $50?  Probably not.  That’s what drives the price up and with each penny, the website makes another small fortune… because at the end of the day, only one person is walking away with the item.

To make you feel better, the sites often allow you to buy bids at a discount, or if you lose the auction, you can get your bids back by purchasing the item for the “buy now” price which is usually at little or no discount to an item in the open market.  The point there being that they still make money since they’ve purchased items in bulk and at a discount and then you still have bids that you have to use at some point on another item.

Is what they’re doing illegal?  No, they disclose everything they’re doing and how it works if you read all the fine print.  The problem is that sites like this tend to take advantage of people who either don’t read, don’t understand, or have issues that cause them to become addicted to bidding or winning.

My advice, stick with the rule, if it’s too good to be true, it probably is.