Pitfalls of Penny Auctions
Flat-screen TVs for $48? iPads for $9? A $50 Gap gift card for 60 cents? Penny auctions have been growing in popularity, advertising on the Internet and TV with promises of killer deals and unbelievable steals. It’s true that these sites, which allow consumers to buy bundles of bids then wager on consumer goods with the hopes of winning them for pennies on the dollar, can be a great source of entertainment—and occasionally a great bargain. But experts say that the bottom line is buyer beware.
“If you want to do it, do it for fun,” says Tony Giorgianni, associate editor for Consumer Reports, who recently investigated penny auctions. “While there certainly are some great deals to be had, for every person who gets a great deal, there are many others who are spending money for essentially nothing.”
Since penny auctions’ 2008 inception in Germany as “entertainment shopping,” there have been government and consumer advocate investigations and criticisms. The Better Business Bureau reports complaints in the thousands, and in May, the Federal Trade Commission sued the owner of three penny auction sites for bilking customers out of $450 million.
How they work
Penny auctions work like this: Customers register on the site and use a credit card or PayPal to buy a bundle of bids, which are usually priced between 50 cents and $1 per bid. Then participants are free to bid on any of the dozens of products up for auction: electronics, gift cards or appliances. Each auction has an end time, and the highest bidder wins when the clock stops.
For example, if you were to make 20 bids for a KitchenAid standing mixer, which you eventually win on your $50 bid after paying 50 cents per bid, your final cost would be $60 (plus shipping). That is $10 for the bids, plus the $50 winning price. On the other hand, if you made 20 bids on the mixer but did not win, you would be out $10—the price of the bids. Some sites including QuiBids credit the bids you spend toward the final winning price, but for auctions won by other bidders, you lose all bids.
These sites make their money mainly from the bids purchased, which create the savings for the winner. A Consumer Reports story cited a $650 stereo receiver that sold for $57.74 on QuiBid. Because each bid increased the price by 1 cent, the 5,774 60-cent bids brought the site $3,464.40.
Most observers and critics agree this model is not unlike other forms of gambling—after all, you lose all chips wagered at the craps table unless you win. And like other forms of gambling, the house always wins.
Shopping or gambling?
Amanda Lee, who runs the blog and forum Penny Auction Watch, says that some penny auction aficionados insist on elaborate tactics that can be learned to outsmart these sites, but she is dubious. “A lot of people argue that this is not gambling because there is a lot of skill involved, but these sites really are unpredictable,” Lee says. “I’ve spent hours trying to win and eventually do lose.” Additionally, some less reputable sites have been known to employ technology that jacks up prices and outbids real human bidders.
Some more established sites offer a “buy now” feature—not unlike eBay’s option in which you can purchase an item for a listed price, no bidding involved. These can be a good deal but not always, says Penny Auction Intelligence blogger Louis-Marius Gendreau who is preparing to launch his own auction called Winzee.com. Gendreau recommends researching the product price on Amazon and Google—just as you would any retail website. Consumer Reports found the “buy it now” prices on penny auctions typically higher than other retailers.
Deal or no deal?
Gendreau’s top tips, however, are to pursue less popular items like smaller electronics and avoid the hottest brands like Apple and Bose. “The single biggest mistake people make is to jump on a dream auction item like an iPad or a plasma TV,” he says. “The competition on these items is horrendous, but the lesser-known brands are good bargains and ripe for the picking.” Gendreau has run statistics on thousands of penny auction transactions and says that the average product savings is 69.5 percent, while the average savings is a whopping 88.8 percent on products made by Logitech, the maker of affordable computer accessories like keyboards and webcams.
One major risk is investing in bids on an auction site that then goes under, never to ship won items or honor bids purchased. Lee says 150 penny auction sites have shut down in the past two years. She suggests reading over a site’s legal documents to get a sense of whether it is a legitimate business, and to run a Google search to see if others endorse or complain about the site. Both Gendreau and Giorgianni point to Lee’s Penny Auction Watch blog as the go-to source for information on the industry.
Another way to hedge against shaky sites is to be conservative about the number of bids you buy in advance, Gendreau says. That way you are not left holding unusable bids should a site suddenly disappear.
Manage risk and reward
Experts suggest these tips for maximizing penny auction fun and profit:
Set a budget. It is easy to get sucked into the gamble in an effort to make back the bids you spent only to win (or worse, lose!) by spending more than an item is worth—or more than you can afford.
Avoid addiction by setting a time limit to penny auction playing.
“You might have fun but you really need to understand what the limits are and have really low expectations to protect yourself,” Giorgianni says.