Penny Auction Sites and Better Options to Save on Online Purchases

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Penny Auction Sites and Better Options to Save on Online Purchases

Advertising dramatic deals on coveted items, penny auctions sites promise online consumers the chance to win big and score their most desired products instantly and on the cheap. Consumer advocacy groups are emphasizing that element of “chance” on these sites, however, and are warning bidders to learn the facts and be aware of what their bids may really be costing them.

Government agencies and spurned former bidders alike have compared the pay-to-bid sites to gambling, with Consumer Reports likening the forums to the Wild West. They warn not to be fooled by the “penny” labeling, as these sites run more like high stakes casino tables than low-risk, low-yield penny slot machines, often leaving bidders with nothing to show for their efforts but an empty pocketbook.

Penny Auction Functioning and Marketing

A multitude of auction sites exist on the web, with QuiBids.com and BidCactus.com among the largest. While at first glance, these sites may appear to be following in auction giant eBay’s footsteps, there is a major differentiating factor: where eBay lets users place bids for free, penny auction sites charge users per bid, meaning that, just like in a casino, you have to pay to play.

Sites sell bids in packages, charging different rates per size of package. Auction site beezid.com, for example, sells bids in packages of 30, 50, 100, 200, 500 or 1,000, with bid prices ranging from $0.55 to $0.90 per bid. The price per bid on most sites comes to about $0.50 to $1.00 per bid.

Each time a user places a bid on an item, the price of that item goes up, usually by a penny. With many sites offering items starting at $0 or an otherwise much decreased price from retail, the price of the item stays fairly low, even with thousands of bidders competing.

Auctions are timed and bidders watch the clock, as the last user to place a bid before time runs out wins the opportunity to buy the item at the auction price. Every time a new bid is placed, however, the time is extended, and users must keep bidding to have a chance at winning.

Different sites have used various tactics of reeling in customers, the biggest of which is the promise of unbelievable deals on electronics, jewelry, gift cards, toys and other in-demand items. Offering discounts of up to 95% off retail prices, sites count on the numbers to speak for themselves, and highlight recent winners as examples of the savings potential.

BidsTick.com features video testimonials from auction winners lauding their prizes and praising the site. One such winner, “Sam,” speaks of winning a bid and getting a Casio Baby-G watch for just $0.16, and tells viewers that the site is “really great.”

Both QuiBids and BidCactus clutter their homepages with not only current auction deals available, but also with running video featuring carefully edited “news” snippets that highlight the deals and entertainment value of penny auction sites. The partial segments further serve to publicize the sites as hot new commodities, and do not show whatever information may follow broadcasters’ initial taglines.

Risky Bidding

Emphasizing the entertainment factor and winning potential may entice some consumers, but it also highlights the dangers of using penny auctions to scout out better deals.

The reason that many shoppers find competing to outbid others fun is the same reason that gamblers spend hours on end (not to mention hundreds, even thousands, of dollars) in casinos: the compulsion to win at all costs.

Sometimes, this compulsion can lead those more prone to addiction to frantically bid, even when the bidding price has gone beyond the retail price. Consumer Reports notes that some bidders bid well beyond the retail price of an item just to gain notoriety as someone who will not give up, thereby intimidating other bidders.

As the Consumer Reports case study demonstrates, however, sometimes even the most compulsive bidders do not win, leaving them in the hole for the money they spent on bids with no prize to show for it.

This highlights the biggest risk consumers face when using penny auction sites versus a free bidding site like eBay. Whether or not you win the auction, you still have to pay for the bids you placed, meaning that while it is possible to score a great deal if luck is on your side, it is more likely that you will lose money on wasted bids.

The Federal Trade Commission issued an alert on penny auctions in 2011, warning that because auctions move at such a fast pace, it is easy for bidders to lose track of how much money they are actually spending. The fact that new bids add time to the clock also makes it hard to know exactly when the auction will end, making the chances of being the last bidder even lower.

Yahoo News writer Becky Worley described her own experience with a penny auction site, recounting that although she tried to make her bids as the timer neared closest to zero, another user was always able to outbid her, most likely by using the site’s automated bid setting. Even after subscribing for the auto-bid setting herself, however, Worley did not win her auction, losing $20 worth of bids in 24 seconds.

The FTC’s report cites additional risks on auction sites, such as the use of shills to keep bidding going and drive up prices. Higher bids mean more profit for the auction site, after all.

Romeo Juhasz of GiftCardsandSurveys.com explains the findings of the FTC report in more detail.

“The main concerns with these sites are that they have zero transparency and the seller is the site itself. Unlike ebay where ebay is only the controlling party, on penny auction sites you are buying from the actual auctioneer. One has to have a great trust in them to believe that they are doing everything fairly and not just trying to squeeze out as much money as possible from every user.

Unfortunately suspicious activities were found when bidding amounts just seemed unreal. Many users reported unexplainable behavior from other ‘bidders’ e.g. seeing $50 worth of bids coming from a specific ‘user’ towards an item that only costs $30.

Since these cases remained unexplained it is quite clear that some sort of unfair manipulation took place from the penny auction sites. In times when people can easily spread complaints on social media, these cases obviously didn’t remain silent and bad press started go around.

The main problem with these penny auction sites is that unless they are making an obvious scam like the one mentioned above, it is basically impossible to check if they are practicing legitimate business or not,” says Juhasz.

Juhasz’s last point is criticial – with little to no transparency, it’s impossible for users to know if penny auctions sites are practicing manipulative techniques. This partially explains why the search keyword “penny auction scams” gets approximately 3,600 Google search enquiries per month according to Google Keyword Tool data.

As Mike Butcher points out in his TechCrunch article, just like a casino keeps all unsuccessful bets, penny auction sites make their profits from the bids of unsuccessful users. Butcher calls the business model essentially a “license to print money.”

Saving face

In an effort to combat negative publicity, some sites are now offering options to make sure the experience is not a total loss for those who don’t win.

Aside from offering limited free bids to new users, some sites, like QuiBids, allow auction participants who do not win to purchase the item for its full retail price minus the total price of the bids they placed for the item. Other sites, such as ArrowOutlet, only allow users to put a portion of each spent bid toward purchasing the item for full retail price, according to Consumer Reports. And some sites still operate on the premise that all bids are lost once the auction ends.

These efforts seem to be helping penny auction sites retain shoppers. “Despite the criticism that these sites receive – some fair and some unfair – they still remain relatively popular. This popularity results from clever advertising, the thrill of winning an item for cheap, and the more recent addition of a Buy it Now option (some sites have added this feature to make the bidding ‘risk-free’),” says Josh Waldron, author of the book Penny Wise: The Complete Guide to Saving Money with Online Penny Auctions and founder of the website pennyauctionlist.com.

Waldron also notes that the continued success of penny auction sites can be partially attributed to their users’ own level of luck, skill and practicality. “Users who win auctions early in their bidding career become hooked on the concept. Users who lose their first auction attempts often write off the sites as scams. Penny auctions sites can be addicting for users who learn the strategies it takes to be successful,” says Waldron.

Penny auction site improvements, however, are not full solutions for shoppers. While having the option to buy at the standard rate while recouping lost bid money seems like a fair resolution, not all companies list the lowest possible “retail” prices for items, making buying at full price on these sites not the most cost-effective option.

Consumer Reports found that Amazon often had much better deals on items that were offered on auction sites, citing that a television offered at a full retail price of $1,763.52 on QuiBids was found on Amazon for $1,179, with free shipping to boot.

Avoiding Getting Burned

The Better Business Bureau named penny auction sites their Top Sales Scam of 2011, and recommended that the best defense against getting hosed is to be informed. The agency suggested reading up on how individual sites work, as not all have the same policies.

Another noted strategy is one recommended for many casino-goers: set limits on how much you are willing to spend and force yourself to walk away after reaching that cap.

The FTC encourages consumers to only use sites that have established reputations for being forthright about all costs, and that offer secure payment options and actual phone support.

Perhaps the best defense, however, is to avoid penny auction sites altogether and look for other ways to save money online. Daily deal sites provide deep discounts on limited time offers, with Groupon Goods, Living Social and AmazonLocal offering up to half off hot items and services. While many of these deal services require participants to register online, almost all are free to use.

Ina Steiner, an analyst at EcommerceBytes, suggests other auction websites for the bidding addicted. “Proxibid and LiveAuctioneers have real, licensed auctioneers overseeing the bidding,” says Steiner. “The experience offers the closest feeling of attending a real-life auction that you’ll find online. Bidders only pay a fee, called a buyer’s premium, if they win an auction,” states Steiner.

Another study from Consumer Reports suggests using price comparison search engines to find the cheapest going rate for your desired goods. The report found PriceGrabber.com to be one the best comparison tools, as it not only found the most items at the lowest price, but also calculated shipping and sales tax and offered email price alerts when lower prices appeared.

Consider making the most of your credit card rewards or using cash back websites to score deep discounts too. Check out NerdWallet’s introduction to rewards malls if you’re unsure of what we’re talking about, and once you’re ready to shop head over to our discounts tool to compare rates at your favorite programs.

Stacking rewards mall bonuses with some of the regular characters – sitewide sales, category discounts, or promotions like free shipping – can save you quite a bit of cash. While these tactics may not satisfy the rush of placing the winning bid on an ultra-discounted item, they will almost always end up saving users more money on a regular basis, without risk of losing any in the process.

Original image from Shutterstock.