A penny auction is a special kind of online auction that allows sellers of expensive items to offer them for pennies on the dollar and still make a profit. Imagine the opportunity to buy a guitar worth thousands of dollars for under 20 bucks, a new digital camera for under $5.00, or a used car for $15.00. Penny auction fanatics claim that such deals are not just possible, but plentiful and commonplace on the many auction websites they use to find their next big steal. Promises like these often shock and bewilder newcomers, their brains struggling to find reasons not to start placing bids. As a result, penny auctions are a polarizing phenomenon – people either love them or think they’re just the latest online scam. Today we will explore the world of penny auctions in an attempt to uncover the truth – Are these “too good to be true” prices are the real deal, or nothing more than a fool’s gamble?

How Does a Penny Auction Work?

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A quick visit to popular penny auction website Swoopo displays big screen televisions, video game systems, even solid bars of silver and platinum, all listed for prices ranging from a few cents to around $100.00. As you gaze upon these gleaming new electronics being sold for such paltry sums, it can be hard to resist leaping out of your seat and wildly grabbing for your credit card. But how is it possible for anyone to take such a monstrous loss on the sale of auction items and still remain in business?

The key is that penny auctions charge bidders every time they place a bid. These charges generally cost between $0.50 – $1.00 per bid, and are paid straight to the auctioneer for the simple privilege of bidding on the item. In this way, the real money is made on the bids, not on the eventual price of the item. Even though the actual bid might only be for a cent, the seller makes significantly more with the fee included.

Who Benefits From Penny Auctions ?

In theory, both the seller and one bidder could benefit equally from a penny auction. Because the bidder only bids $0.01, but is charged a bidding fee each time, the end result should be a low purchasing cost for the buyer, and a high earning for the seller. To illustrate this concept, lets say you list a used car for a starting bid of $0.01 and charge $1.00 per bid. If you can attract 1,000 bidders, and each one bids about 10 times, you just made $10,000 and the winning bidder won a car for around $100.00 (although the other 999 bidders would have lost the money they paid for their bids).

This is how the idealized penny auction works. Unfortunately, there are more than a few dangers to look out for that can make these gambles a dangerous game.

Bidding Bots

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With so many penny auction websites vying for your business, it can be hard to tell which ones, if any, to trust. A serious form of fraud that can have you spending far more than you expected is known as a bid bot. Bid bots are computer programs disguised as a human bidders that automatically bid on behalf of the website. You may be seconds away from winning an auction when all of a sudden another user places a bid, keeping the clock going and forcing you to enter a bid war with him in order to stay in first place. Though the bidder appears to be just another a human user, it may actually be a bot programmed by the website to extend the length of the auction and force people to keep bidding (and spending money) if they want to win. For a user it is very difficult to tell if a Penny Auction site is using a bid bot or employing another type of shill bidder. We’ve seen numerous bot reports on sites like Quibids, Beezid and Swipebids.

Non-Delivery Of Winnings

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Building a basic penny auction website is not difficult, making it simple for new websites to spring up and try to make a fortune with this business model. Unfortunately, new website rarely attract huge numbers of users right out of the gate. What can sometimes happen on a new penny auction site is that only a few people will lackadaisically bid on an item or two, and without much competition, will win an extremely expensive item for a few dollars. After a week or two of this, the new website, which is often ran by a part-time entrepreneur in their spare time, suddenly owes 50 people big screen plasma televisions and has barely made enough money to cover a single one. Not surprisingly, these websites quickly close up shop and disappear, and winners never see their prizes.

Tips to Stay Safe from Bad Penny Auctions

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With so many warnings about penny auctions and the possibility of getting ripped-off, it is important to keep in mind these tips to avoid getting scammed:

• Perform a gut-check–if a penny auction site, or any other site is offering deals too good to be true, they probably are, and you should stay clear.
• Do your research before using any penny auction site and read the experiences of other consumers (Sitejabber is good place to start).
• Beware of fake penny auction review sites–many of the blogs and other sites dedicated to providing “information” on penny auctions are in fact making money by referring customers to the penny auction sites themselves and cannot be relied upon.
• If you choose to use a penny auction site be prepared to gamble away your money, just as you might on a trip to the slot machines in Las Vegas (except these slot machines don’t even have the courtesy to list their odds). And keep track of how much you have spent on bidding and make sure you don’t come too close to the actual price of the item. Some bidding wars get heated and it can be hard to give up once you have been going back and forth. Keep in mind that if you spend more than the price of the item, you aren’t getting a deal at all.

For more information on penny auctions visit our infographic detailing how they work.