Why Penny Auctions Don’t Always Deliver a Bargain

9 penny auctions scams and tricks that could cost you dearly: Internet Scambusters #469

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.

Let’s check out today’s…

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 to play.

However, even then not all penny auction sites are what they seem.

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 end.

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 entertainment.”

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 clock.
  • Charging a registration fee, thus getting your credit card number and then automatically charging the card for bid credits.Often, operators have a statement on their site warning that this will happen but then they hide it away in barely comprehensible print.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 fee.
  • Failing to send out the item to the winner, or seriously delaying shipping.
  • 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 details.

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: Online Penny Auctions: Nothing for Something?

Finally, always check out what others are saying online about any site you’re planning to use — but beware of those phony testimonials.

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!

That’s all for today — we’ll see you next week.