Are Penny Auctions a Scam?

by on Jul.17, 2011, under technology, thoughts

If you haven’t heard, someone was lucky enough to buy a Chevy Camero for only $5.28. Now, if you actually read the article, you’ll notice a very important detail: this car was bought off a “penny auction” site. These sites, like, are becoming more and more popular. Recently, I’ve had a couple of my friends ask me my opinion on these sites: are they a scam? It certainly sounds too good to be true. But, I will give this sites credit: real people do win real items from these sites. In this sense, these sites are not a scam.

So, how exactly do these sites operate? How can anyone run a profitable business by selling $1,000 products for about $20? The answer isn’t generous owners. While we might like to think that there are people that generous in this world, it’s simply not a sustainable business model. Click through to the rest of the post, and I’ll do my best to explain how these sites work, and why you shouldn’t (or maybe should) waste your time.

Where’s the Profit?

The first, and obvious, question when dealing with a site like this is where’s the profit? How do you create a site that sells items for pennies on the dollar, and still make money? It’s a simple trick, really, but most people will participate without even realizing what’s going on. The trick is in what happens when a bid is placed. When a bid is placed, a couple things happen:

  1. The bidder loses some money. For sake of argument, we’ll say $0.80. Bids are purchased in “bid packs”. More on this later.
  2. The price of the item increases by $0.01.
  3. The time to the end of the bid gets reset to anywhere from 10-20 seconds remaining.

Whoever wins the item then pays the final price of the item. Now, let’s see this in action: let’s say there’s a 16 GB WiFi-only iPad2 up for bid (retails for $499). The bidding starts at $0, and someone eventually decides to bid, boosting the price up to $0.01. BUT, what also happens is that bidder loses one of their “bids”, which costs about $0.80. Finally, the time remaining is set to 20 seconds. After 15 seconds (there are 5 seconds remaining on the bid timer), another person bids. The price is set at $0.02, this bidder loses a “bid”, and the remaining time is set to 20 seconds. This process continues until the price of the item gets to… $18.47, the bid timer runs out, and the winning bidder pays $18.47 for the iPad2. WOW! What a steal! But, let’s look at how much money the website actually gets.

Remember that each bid costs the bidder $0.80. If the iPad2 sold for $18.47, that means there were 1,847 bids placed. Let’s do some math: 1847*0.80=$1,477.60! But wait, there’s also the $18.47 paid as the final bid price. That brings the total amount of money the site raked in for this iPad2 $1,496.07. If the bidding site bought the iPad2 at the retail price of $499, that means the site made a profit of $997.07! That’s a $1,000 profit margin for oneitem. Sites like this sell multiple items in a day. That means huge profit margins, for little work.

What are these “Bid Packs”?

When you sign up for a site like Quibids, before you can start bidding, you’ll be forced to buy your bids, as outlined above. When signing up for Quibids, you must buy a “starter bid pack” for $60 which gets you 100 bids (quibids charges $0.60/bid, other sites vary). From this point, regardless of whether you win anything or not, you’ve spent $60. You could easily spend all 100 of your bids without winning any items, which means you’re out $60 and have nothing to show for it. If you finally do win an auction… congratulations! How much have you spent buying bids? Chances are, you’ve spent more than just the $60 on the initial bid pack. Again, that’s ifyou win anything at all.

Unfortunately, I don’t have the $60 to spend on nothing right now, so I can’t tell what the bid pack options are after the initial buy-in.

So why isn’t it a scam?

It’s not a scam because QuiBids is very open about all of this. Most people just don’t read all this information. Additionally, it’s difficult to tell that you’re losing money when you’re just bidding, and, at that, only losing $0.60 each time. By making the amount of money you lose each time you bid a trivially small amount, QuiBids is able to trick you into not realizing that you’re actually losing money and getting nothing. This certainly sounds like a scam! Again, though, people actually dowin items off these sites, and they’re all very open about how this whole process works.

How can I beat the system?

Note:The following is complete speculation and guesswork on my part. I take no responsibility for your actions following reading this. This is an outside view of the process, and I could very easily be very wrong in this matter.

The trick to beating a site like QuiBids is simple, but lengthy: study. Find an item you want, and look for similar items on the site. Spend a month or two studying these items and figuring out how much they sell for. With that information, you should be all site. When the item you want is up for bidding. Don’t bid until the item gets close to the average price you’ve found in the past month or two, and then bid to win. If you study enough and save your bids, I figure you should be able to win an item. Granted, you’ll spend $60 on the bid pack, then another $20-$50 for the item, so you’re still looking at around $100. But, for an item that costs $600-$2,000, this is still a steal! I figure a strategy like this should make you a winner. Most people try to get in on the ground floor of these auctions, and hope they can get it cheap. The trick would be to save your bids until the end, then bid to win.

Should I risk it?

This is a tricky question, and the answer is most likely no. Odds are, you’re going to waste a lot of time bidding and get nothing in return. If you have the patience to try my method outlined above, and can afford to spare $60, I would say go for it! Best case scenario, you can get some item you’d like incredibly cheap. Worst case, you’ve already said you have $60 to spare if things don’t work out. For the average Joe, however, I would say it’s not worth your time. Stick to paying full price for items you really want, or you’ll end up losing money without gaining anything.

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