For the past few years Penny Auction sites have become relatively popular. You may have seen advertisements for them on websites through Google ads, or even commercials on television. In most cases they claim you can get merchandise at a fraction of the MSRP price. I won’t tell you whether or not you should participate on any of these sites, but I do want to make sure you understand how they work so that you are not misled or left disappointed.

Note: We’ve hidden the names of the bidders in the images.

How they work

Penny Auctions may vary from site to site, but the general idea is as follows. You sign up on a website and purchase “bids” which can be used in the auctions. The price of a bid varies depending on the website, but is usually somewhere between $0.50 – $1.00. When an auction starts, the purchase price of the item starts at $0.00. Users place a bid on an item they would like to win. When they do, a countdown clock begins. If someone else places a bid, then the clock restarts and the purchase price increases by a nominal amount. However, if nobody else bids on the item before time is up, the last person to bid wins the item. The winner must pay the final purchase price in order to “win” the item in the auction.

Let’s look at an example

For the following example, we decided to watch a penny auction for a Kodak PlaySport waterproof camera on the site BidHere. Below is a screenshot of the auction after it ended. We’ve added a few notes in blue.

#1 – As you can see in the image, the purchase price increases by $0.01 for every bid. The timer resets every 15 seconds providing someone has placed a bid.

#2 – This particular auction ended with the winner placing 76 bids in total

#3 – The statistic which claims the winner saved 98% off the MSRP.

Analysis – The House

First let’s break down how the house makes money. If the purchase price starts at $0.00 and increases by $0.01 for every bid placed, that means that there were 326 bids made in total. On this particular site, bids cost $0.70 each. Therefore:

326 bids x $0.70 = $228.20

Therefore the house made $228.20 on a product which is supposed to retail for $179.00. Let’s not forget that they purchased the merchandise at a lower price than what they sell it for, so I’d say they did pretty well for themselves. There may be times when the house loses money on an item, but more often than not, they are making good money. It is not uncommon for the house to make 2 times the MSRP on popular items.

Analysis – The bidders

There are two types of bidders: The person who wins the item, and those who do not.

The Winner

As we can see in the reference image (#2), the winner bid 76 times.

76 bids x $0.70 = $53.20

Therefore the final cost of the item (not including shipping if applicable) was $56.46 ($53.20 for the bids + the $3.26 final purchase price).

Paying $56.46 for a camera which retails for $179.00 is a great deal, but a far cry from the 98% discount advertised. In actuality, the winner saved  69%. Still a good deal, but intentionally misleading.

The Losers

While we can see there are 7 different people listed in the Bid History, it’s not clear how many different people bid on this item over the entire course of the auction. At bare minimum there were 6 other people bidding on the item, but chances are there were many more.

At any rate, the take away here is that while one person may have gotten a great deal on an item, there were many other people who paid money and got nothing in return.

Is it gambling?

While penny auction sites will argue they are not gambling sites, I have to disagree. In a regular auction, whether online or offline, you do not lose any money if someone beats your bid. This is not the case with Penny Auctions as you can lose money and have nothing to show for it. They may offer other incentives such as “credits towards future auctions”, but how is this any different than frequent player rewards at a casino?

One saving grace for Penny Auctions is that on certain auctions, you can put your losing bids towards the price of the item. Using the auction above as an example, if you spend $50 trying to win the item, but are unsuccessful, you can pay an additional $129 to buy the camera ($50 + $129 = MSRP of $179). Please be cautious however as this option is not available on all sites or auctions. Do your research before getting involved.

I thought I would also mention that the Better Business Bureau named Penny Auctions as one the Top Sales Scam of 2011.

Sales scams are as old as humanity, but the Internet has introduced a whole new way to rip people off. Penny auctions are very popular because it seems like you can get something useful – cameras, computers, etc. – for way below retail. But you pay a small fee for each bid (usually 50₵ to $1.00) and if you aren’t the winner, you lose that bid money. Winners often are not even the top bidder, just the last bidder when time runs out. Although not all penny auction sites are scams, some are being investigated as online gambling. BBB recommends you treat them the same way you would legal gambling in a casino – know exactly how the bidding works, set a limit for yourself, and be prepared to walk away before you go over that limit. – BBB 

The Verdict

While most Penny Auctions appear to be legitimate and not a scam, they are intentionally misleading in order to gain more customers. If you are looking for some entertainment in which you might win some merchandise, then feel free to dive in. If you go in expecting it to be easy, or expecting to be able to purchase an item at a discounted price, you will most likely be disappointed.