We’ve all seen the ads where someone just won an auction for an iPad at a price of $32.87 some 90% below the MSRP.

And many folks just raised an eyebrow thinking there must be some kind of a catch.

There both is and isn’t a “catch”. Let me explain how a Penny Auction works.

The Auction site presents an item (in this example an iPad). They will show a retail value ($399) and a start time for the auction.

When the Auction starts it will begin with a bid of $0.01 and each ensuing bid will increase by a penny and only by one penny. At the beginning of the auction there is a timer and with each new bid the timer “resets”. In most auctions the timer is set for five minutes at the beginning of the auction and resets after each new bid. As certain milestones are reached ($1, $2, $5 and so on) the timer reduces the wait time according to how the auction site has chosen to set this up. It varies greatly but usually once the bidding has reached a few dollars the timer will be somewhere around a minute or less.

The Auction is over when the timer expires without any new bids. Theoretically it is possible to be the opening bid (ie. $0.01), and after five minutes “win the item” for $0.01. Of course, that means that no one else placed a bid on the item. This is a rare occurrence, but I have seen Auctions end on less than $0.10.

Now in order to participate in the Auction you would need to purchase “credits” or “bids” (or whatever the auction site wants to call them) from the Auction site. Usually the more credits you buy the less expensive they are. On some sites you can buy credits for as little as $0.29 each. On another site they might be $0.99 each. And If you choose to buy credits “one at a time” they can cost as much as $1.99! The Auction site makes it’s money selling the credits. The final “winning” price usually is enough to cover shipping which is why most Auctions sites ship for free.

So to figure out how much this cost the “winner” and how much the Auction site made on the sale, let’s use the example from the beginning (iPad won at $32.87).

First the winning bid was $32.87 which means the winner still has to pay the Auction house $32.87 so they might have a little left over from the S&H costs they chose to absorb.

This also means that there were 3,287 “bids” made which means 3,287 credits were purchased and spent. If we presume for a moment that everyone bought at the “lowest” possible price for credits that would mean the auction site collected $953.23 (3,287 x $0.29).

More than twice the retail price of the item. Looks like a rip off, eh?

But wait! The “winner” did not place every bid. He or she only placed “some” of the bids. Other people bid and came up empty. It is possible that the winner actually got a good deal. How?

Well let’s take the retail price of the iPad, $399.00 and subtract the final winning bid amount $32.87 which the winner pays in cash (credit card, PayPal or whatnot) and then divide that by our lowest credit price of $0.29. That results in 1262 credits. As long as the winner spent less than 1262 credits he or she at least didn’t spend more than they would have at full retail. In reality a really smart bidder wouldn’t spend more than 500 credits to insure they got their prize at a suitable discount.

Unfortunately everyone else bidding lost everything they spent on credits as they usually get nothing to show for it.

What the auction site counts on is “auction fever” (it’s a real thing look it up) afflicting a good sized group and to have lots of people trying to “win” an auction by only spending a few (ie 10 or less) credits.

What you as an auction participant want to do is avoid getting caught up in auction fever and operate from a sound strategy to win auctions at a reasonable cost. The smart bidder knows what they are willing to pay for an item and set aside only that many credits to “bid” on an item. Then win or lose they move on, always factoring in previous losses.

It does have a learning curve, and if you aren’t careful that curve could be expensive. In my next post in this forum I’ll go over some of the strategies and traps that you can use or avoid.

If you have a question… ask!

Hi David...I want to thank you for this post as it is something that I have heard of, but have never done ..in a way it sounds like it would attract people who are more "gamblers" in spirit and a bit of a risk.

Thank you, David. That is probably the best explanation I have seen anywhere.

David,

Quote:
Hi David...I want to thank you for this post as it is something that I have heard of, but have never done ..in a way it sounds like it would attract people who are more "gamblers" in spirit and a bit of a risk.

Knowing what you are doing sounds like a plan ( duh!) but how can you tell if the auction is being run properly and ethically? that is my question for the day :-)

Diane

Yes, Diane it is something for those with a bit of a "Maverick" kind of spirit.
As far as knowing if a site is being run with integrity... of course there are all the usual sources, FB, Twitter, et al. see what people say about the site; that should cover the basics of product delivery and payment processing, customer service and the like.
As is possible with any auction (including ebay) shills are a possibility but nigh on impossible to prove their existence. With penny auctions though they aren't as significant a problem because the money is in the number of paying bids not the end price of the item. I suppose some really greedy folks could try to keep a dying auction alive by faking bids, but in the long run they make so much selling the credits that the occasional item going for less than their cost is easily absorbed. Most high demand items generate anywhere for full retail to two or three times full retail in the cost of the credits spent to bid.
One sign of a "good" auction house is the granting of "free credits" to start. Some will give 10 to 15 just for signing up, others "match" your first purchase (just like gambling sites are known to do) up to a certain amount. I know of one that even offers "training auctions" and free credits where newbies are only bidding against newbies.
I don't spend a lot of time on any Auction sites. But since I work with a site that has penny auctions as a feature I thought it appropriate to learn what I could about the genre.