The truth about penny auctions
Q. Lately I've been seeing online ads for incredibly inexpensive gadgets. I'm talking about iPads and SLRs for less than $200. The site in the ads is called QuiBids. I've also seen similar ads for BidHere and a few others. The deals look fantastic, but I'm sure there's a catch. How can these sites offer such cheap products?
-Jim from Lexington, KY
A. These ads are all over the Internet, Jim. They promise the hottest gadgets at rock-bottom prices. But, as with many things online, they're not really quite what they seem. So you're smart to be skeptical.
The sites you mentioned run so-called penny auctions. What a cute name. It almost sounds like you're going to get the bargain of a lifetime. Penny auction sites have blossomed in the last few years. There are now more than a hundred of them online.
Let me explain how these auctions work. The site has an item that it is auctioning. The bidding starts at $0. Every bid only adds one or two cents to the price of the item. So you can have a hundred bids and still have a $1 item.
That's why you'll see ads for $50 iPads or $200 Macbooks. Even with thousands of bidders, the final price can be very low. As you might suspect, plenty of people are drawn to these sites.
Unfortunately, penny auctions aren't quite so cut-and-dried. There are several catches you should know about.
The first catch is that bids aren't free. Depending on the site, you'll pay between $.50 and $1 per bid. If you bid 20 times, you just paid the site $10 or $20.
Some sites are up-front about this charge. Other sites hide the bid fee behind chips or tokens. You don't really consider what you're spending.
Sites also differ in what happens after the bid. Many sites keep all the bid fees. Other sites let you apply some of the fees to future auctions. For example, you may be able to apply 20 percent of your bid fees to offset future bids. Sound nice? It's really just a trick to get you to come back and drop more cash.
You might also get a credit toward buying the object you were bidding on. Of course, you will be paying much more than you would elsewhere.
The second catch is the bidding process. There is no set time limit on the auctions. Whenever someone bids, it adds 15 seconds to the auction time.
That makes it easier to get caught in an unending bidding frenzy. What's the big deal, though? You're only bidding pennies, right? Oops, go back and look at the first catch again.
The third catch is that winning an auction doesn't win you the item. You've simply won the opportunity to buy the item at the auction's ending price. Typically, nothing you've put into the auction so far goes toward the purchase.
Here's an example. Let's say you have the final bid on an iPad 2 16GB Wi-Fi (retail $500). The closing bid price is $50. That means there were 5,000 bids at one penny per bid.
Let's say the bid fee was $1 per bid. First of all, the auction house just made $5,000. That's an important thing to keep in mind. These sites earn thousands from a single item.
Now let's say you bid 300 times in the auction, which isn't unreasonable. You've paid $300 in bid fees. To get the iPad, you now have to pay the $50 final purchase price.
That's a total cost of $350. Congratulations, you saved $150 on your iPad. That isn't quite the deal you were initially expecting, was it?
However, $150 is $150, right? That's still some savings. Doesn't that make it worth it?
Not really. The odds of actually winning are slim. It's like joining a high-stakes poker game. Expect to lose a lot of money before you win.
You may eventually win big, but you're going to lose money first. You just have to hope it balances out in the end.
It doesn't help that there are a lot of penny auction pros around. They have years of penny auction experience. They're like professional card sharks when it comes to bidding.
Plus, remember how I mentioned a bidding frenzy? What if you had unthinkingly made 500 bids on the iPad? Your total cost for the auction would have been $550. You'd be paying $50 over the iPad's retail price. Even winners can come out losers on these sites.
That's why many people compare penny auctions to gambling. It pushes the same buttons in your brain. People with addictive, risk-taking personalities should steer clear.
In fact, I recommend everyone steer clear of penny auctions. The overall risks aren't worth the eventual rewards. You will ultimately end up disappointed. You're better off spending your time searching price-comparison sites for the best deal.