Why Penny Auction Websites are Garbage

by Kevin on November 23, 2011

Penny auction websites promote themselves as an easy, entertaining, and inexpensive way to get your hands on popular consumer items (usually electronics). The first time I ran across a penny auction website was a few years ago. I came across a link and was credited with 100 free bids to try out the service. In just a short period of time I realized how impossible it would be to ever win anything on one of these sites, and figured the surge of new sites popping up would die off rather quickly.

It appears I think too highly of my fellow consumers! Penny bid and auction websites have exploded and you now see ads on major television networks like ESPN.

I’m baffled.

Are Penny Auction Sites a Scam?

I really┬ádon’t like penny auction websites. I think they are a waste of money and are dishonestly marketed to consumers. However, I can’t go to the point of calling them a scam… but it is darn close. I think why will become clear.

How Do Penny Auctions Work?

To better understand why you should avoid penny auction websites, you need to understand how they work. There are always ways to tweak the model, but in general users buy packs of bids at a known, upfront cost. The cost of a single bid might be 10 or 50 cents. Those bids are worth a set amount, usually a penny. (That means the auction company just made a massive profit on the price of the bids). Users log on to the site and use their purchased bids to drive up the price of the item. Eventually the price is settled and the winner buys the item at the end price.

How are Penny Auctions Different Than eBay and Other Auctions?

There are three significant differences between these websites and other types of popular auctions (such as eBay).

Your Bids Aren’t Free

At other auctions your bids are free. You only pay for the items you win. With penny auction sites you have to buy your bids. You’re giving money to the auction site and you have no guarantee that you are going to win anything. This revenue is used by the company to pay for the items that someone wins. At the end of the day, the price you’re paying is really subsidized by the users that also bid for the item and lost.

Users Can’t Bid What They Want

With eBay auctions if you find an item you really want, you could raise the price from $50 to $100 if you needed to. Your bids would automatically increase if someone else bids against you. With penny auction sites the bids go up at a set level that cannot be changed. The only way to drive up the price of the item is to use more bids — which provides revenue to the auction site.

Every Bid Extends the Auction

With eBay auctions there is a set end time for the auction. As a bidder you cannot extend the auction. The seller can’t extend the auction. The end time is set in stone and if the reserve price is met, the item will sell. The ever increasing time on the clock for the auction does two things: it makes users bid multiple times on an item (which provides more revenue to the company) and can lead to bidder discouragement to continue. Those two may seem to be mutually exclusive, but let’s say you’re been bidding on an item for an hour. You only have so much time in the day, so you’ve bid as many times as you can. The price keeps going up, and the auction keeps getting extended. At some point you have to throw in the towel — and abandon all those bids you “invested” in the item — which means you need to buy more bids in the future to bid on a similar item at some point in the future.

Final Thoughts

With all of the above factors taken into consideration, I can’t recommend these types of sites to anyone. Granted, someone has to win that auction that you have been following and submitting your bids to, but the odds of you being the winner are slim. That’s why this type of auction is often called “entertainment bidding” which is short for gambling.

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