Penny auctions are something that we are starting to see more and more of online. They’ve taken a model similar to eBay and adapted it into a process that allows people to walk away with high-ticket items for a fraction of the cost.
However, unlike ebay if you make an unsuccessful bid it still costs you money to make that bid, so there is a great deal of luck and timing involved. You have to pay the final bid price if you win too.
The sites have come under a fair amount of criticism in recent times because of the way the business model works, and it seems as though anyone can set one up, but we wanted to get to the bottom of it and see for ourselves whether they actually offer any value or if they are a total scam.
How do Penny Auctions Work?
The whole idea behind these auctions is to allow people to bid in one penny increments on a range of high ticket items which then go to the final bidder often for a fraction of the regular retail price. The bidders will need to pay a small non-refundable amount for each bid that they make so the penny auction site makes their money from each bid rather than from the product on sale.
Every time a bid is placed the auction is extended. The extension time will vary for each item that is up for sale, but it’s usually around 5-10 seconds, which allows new buyers to jump in and place their bids. You can’t set a maximum bid, you can only pay the next increment, which is always a penny. Eventually, the price of the item will get to a point where no one else is willing to bid higher.
The winner of the auction is the person to place the last bid. They will then pay the final price shown for that item, plus the fee for any bids that they have made in the build up to winning it. Any bids made by losing parties will be kept by the penny auction site.
Let’s assume that there is an iPad on the auction site with a retail value of £1,000. The item eventually sells for just £60, but each bid costs £1 to make. Remember, the price increases by 1p each time.
This would mean that there were 6,000 bids made in that auction, netting the auction house £6,000 plus the £60 paid for the iPad by the winner. That’s £6,060 income overall with a profit of £5,060 if the iPad cost them £1000.
Let’s assume that the winning bidder made 200 bids to get to the winning price for the iPad. This means it would cost them £200 in bids, plus the £60 for the final price, which would equal £260 in total. This would save them £740 instead of buying the iPad in the shop.
The remaining bidders who lost out on the item would not receive anything and would have paid for the liberty of bidding on this item.
Are They too Good to be True?
This is a tough question to answer really and it can depend on what side of the coin you are looking at.
It does appear as though people are able to walk out of these auctions with some incredible deals on the face of it. You often see things like PlayStation 4’s going for just a couple of pounds, and then iPhone’s for less than £50. Both of these products are worth hundreds.
The thing that you don’t see are the number of bids that people make. If something has sold for £2 then this means that there have been 200 bids because 200 x 1p is £2. The price for each bid may change from site to site, but at £1 per bid you are looking at £200 worth of bids, what we don’t know is how many people shared that cost.
Some items can cost up to £10 per bid though, which is where the problems start to develop. Especially if those bids only boost the auction price by a penny each time which is sometimes the case; the cost of each bid is not necessarily represented in the price of the item.
In the example that we gave above, you saw that the company would be walking away with just over £5,000 profit from a £1,000 iPad. Is this fair? You would have to say no, in fact you would argue this is extortionate, but it does allow someone to get in and buy these items for cheap, and everyone knew the score.
At most sites you are able to buy bids a bit like a top-up card for your phone. You can spend say £30 on 300 bids and then use them throughout the site on any of the items that are up for sale, with some items costing maybe 1 bid each time and others costing 5 bids. This is often how the products are able to drive such large number of bids and why people generally aren’t seeing the true value of their bid as they are just represented as digits.
Who Governs These Sites?
The UK Gambling Commission have gone on record and stated that they feel as though this is not gambling, even though they are aware of these sites and are monitoring them to make sure that they aren’t pushing the boundaries. They suggest that anyone who is thinking of setting one up should contact a lawyer before doing so, which basically means that they’ve nothing to do with the gambling industry at this time.
We can definitely see reasons for these types of sites to be classed as gambling, or to at least have some sort of regulatory body involved given the obscene sums of money that the sites make as a mark-up on each product. One website described them as “printing money” and we would have to agree with this.
Some of the sites do have information about “responsible bidding” so they must realise that they are on shaky ground and that these types of auctions can get highly addictive for some people. No doubt there are people who have spent lots of money bidding for products that they have not won, or maybe even products that they have won but overspent on because they got into a bidding war.
The penny auctions themselves argue that it works in a similar way to the likes of eBay, but this is just not true. With eBay you can bid as much or as little as you want, and if you don’t win the product then you don’t lose any money. Yes, you can still get carried away with your bids and pay more than you initially wanted to, but at least you would have the product at the end of it. With penny auctions you can spend a huge sum of money and not win anything at all.
This is where the concept is likened to that of gambling and where people need to be careful.
There is little doubt that these penny auction sites are popular. You only need to spend a few minutes watching them to see bids literally flooding in for popular items such as electronics and tech.
It also seems that people are able to grab some bargains as well, picking up products much more cheaply than they could anywhere else.
What we don’t like is the fact that the inner workings and overall costs are not very transparent. A lot of the marketing highlights things like a car being won for £5, or an iPad for just £2, but it doesn’t include the number of bids that have been made, the cost of those bids, and then overall amount of money that has been taken. This feels deceptive.
The concept itself could actually work. Allowing people to pay a small fee to be in with the chance of winning things that they otherwise couldn’t afford is not a bad thing. The problem is the obscene amounts of money these companies are making on each product – flogging something worth £1000 but getting over £6000 for it just doesn’t sit right.
For this sector to tidy itself up and become trustworthy it needs regulation, and we think this should come from the UK Gambling Commission. The fact that you can invest money and come away with nothing is gambling in our book, and they need to get things on a more level playing field to keep the public safe from exploitation.