Penny auctions, which promise winners fantastic products at
knockdown prices, are not always what they seem.
The true cost of buying is always higher than the winning bid
price because you have to pay for each bid you make and you're
never quite sure when the auction will end.
In this week's issue, we explain how penny auctions work and
reveal the tricks some of the operators use to get their hands
on your money.
As always, we also recommend you check out the most popular
articles from our other sites during the past week:
Why Penny Auctions Don't Always Deliver a Bargain
When you're looking online for electronic products at bargain
prices, you've almost certainly come across those penny
auctions ads that seem to offer unbelievable value -- like
your favorite laptop or camera for just $20 or $30.
But there's a catch. In order to buy at that price, you have
to win the auction. And in order to win the auction you have
to pay to bid. If you don't win, you lost the money you laid
out for each bid you made.
That, says the Federal Trades Commission (FTC), makes penny
auctions more like lotteries than regular auction sites.
Still, you might say, as long as you know the risks, it's okay
However, even then not all penny auction sites are what they
Some operate questionable tactics to lure people into playing,
while others have gained reputations for poor product quality
and late, or non-existent, delivery.
How Penny Auctions Work
Usually the item that's put up for sale is provided by the
auction site operator. The price starts at or near zero and
the price increases by 1 cent per bid.
However, in order to make a bid, you have to own a bid credit.
Each bid credit costs between $0.50 and $1 and you have to buy
them in advance, usually in packages of around 100, after
registering with the site.
So, to keep it simple, if a bid costs, say, $1 a time, a
package of 100 bid credits will set you back $100 and each
time you bid and up the auction price by a penny, it costs you $1.
That means from the penny bid auction's point of view, an item
that "sold" for $20 will actually have required 2,000 bids
(the number of cents in $20). So the site operators have
already made $2,000 from the bid credits they sold!
Just to make things a little trickier, the auction deadline
gets pushed back or is totally reset each time a penny bid is
made, so you never actually know when the auction is going to
You can put in a bid when there are just five seconds to go,
thinking you're going to win, but the clock gets reset, other
bidders jump back in, and off you go again.
In a way, you're bidding against the clock. You could use up
your whole $100 credit package, caught up in auction fever,
and not win a thing.
No wonder that some people have compared penny auctions to
gambling, though the industry itself disputes this and prefers
to call them "entertainment shopping" or "retail
Now let's take a close look at some of the activities that go
on behind the scenes -- though we're not suggesting all penny
auctions operate this way...
Penny Auctions Scams and Tricks
To get their hands on your money, some of the less reputable
penny auction sites engage in dubious or downright illegal
practices that include the following:
* Using third parties to advertise products for sale at
unbelievably low prices on classified ad sites like
Craigslist, and then telling would-be buyers the item is sold.
The advertiser then claims he bought the item on a penny
auction site and directs the callers to visit it.
If the caller then buys a credit package on the auction site,
the Craigslist "advertiser" collects a hefty commission.
* Using shills and automated bidding systems to push up
prices, keeping the bidding going and constantly resetting the
* Charging a registration fee, thus getting your credit card
number and then automatically charging the card for bid
Often, operators have a statement on their site warning that
this will happen but then they hide it away in barely
Sometimes, they lure bidders by offering free bids, but,
again, they get your credit card number and charge an
additional credit package to it.
Again, there may or may not be an obscure statement about this
somewhere on the site.
* Not making it clear that if you do win the auction, you
still have to pay the winning bid amount plus shipping
(perhaps at inflated prices) and sometimes even a transaction
* Failing to send out the item to the winner, or seriously
* Sending out an item that's different from the one which
you bid on -- usually lower quality or totally different.
* Running bogus testimonials from supposedly happy, winning
bidders, both on their sites and in penny auction ads.
* Falsely claiming to be registered with and highly rated by
the Better Business Bureau.
* Simply using the site as a front for phishing for your
credit card number, shipping address and other personal
How to Avoid Penny Auction Scams
By one estimate, there are now about 100 penny auctions
operating online and some of them have gone out of their way
to distance themselves from the less reputable sites.
But it's often difficult to know who's legit and who isn't.
So, first, know that the odds are against you winning and that
some people consider it a form of gambling.
In that case, you should only ever play with money you can
afford to lose.
And be aware of how much the site operator is making from bid
credits sold for each item.
What they're doing may be perfectly legal but it helps that
you keep a sensible perspective on what's actually happening.
Second, the FTC has issued a consumer alert which details how
these auctions operate and how to avoid some of the pitfalls.
Read it at:
Link hidden: Login to view
Finally, always check out what others are saying online about
any site you're planning to use -- but beware of those phony
Better to do a search with the name of the site followed by
the word "scam" and see what comes up.
After all, life has enough uncertainties without penny
auctions adding to them!
Internet Scambusters Newsletter #469