Penny Auction Sites Could Cost a Chunk of Change

Candice Choi, AP Personal Finance Writer

NEW YORK (AP) — An iPad for $88.07? An Xbox for $15.33? Sold!

The television commercials for online penny auctions may have viewers fantasizing about scoring the latest tech gadgets at eye-popping discounts. But they could be in store for a big letdown.

The issue is that penny auctions aren't as straightforward as the name might sound. Unlike traditional auctions, participants have to pay to bid on an item.
Every bid they place also adds more time to the auction clock. Those twists inject a gaming element into the shopping experience that some say confuses participants about how much they're really spending.

"It's not a typical auction where consumers can bid and pay only if they win," notes Becky Maier, a spokeswoman for the Better Business Bureau of Western Pennsylvania. "They're paying to play."

One class-action lawsuit against a major penny auction site alleges the auctions are akin to a casino or lottery because the overwhelming majority of customers end up losing money.

The industry was virtually nonexistent just two years ago, but has grown to about 135 sites today, according to the research firm Technology Briefing Centers Inc.

The Better Business Bureau says penny auctions first came on its radar in 2009. The group issued consumer alerts on the sites shortly afterward as a result of an unusually high volume of complaints.

Before signing up for one of these sites, here's what consumers need to know.

How They Work

To start bidding on an item, penny auction sites require users to buy a package of bids. Each bid typically costs 25 cents to $1, so a pack of 100 bids may cost $25 to $100.

The setup could make it seem like participants are only bidding a penny at a time, even though the bids actually cost much more. Every bid also puts another 10 seconds or so on the auction clock, meaning there's a risk of getting caught up in the thrill of a bidding showdown.

To break down the economics of a sale, consider a flat-screen TV that ends with a winning bid of $100. If the final bidder placed 20 bids during the auction, the total cost would be $120 — $20 for the bids (assuming each bid costs $1) plus $100 for the TV.

Even after tacking on a shipping fee, that's a steal and the winning bidder comes out looking like a shopping genius. But everyone else who took part in the auction is left lighter in the wallet with nothing to show for it.

"It's only enjoyable if you win," says Zachary Schwartz, a 24-year-old from Markle, Ind.

Schwartz decided to give Beezid.com a try about a year ago. He started bidding on an iPad but quit after the price reached $100. He used up about $80 in bids over the next few days without winning anything. He hasn't gone on the site since.

Schwartz placed a complaint with the Better Business Bureau and ultimately received a refund from Beezid.com.

Another site, QuiBids.com, notes that it tries to soften the blow for disappointed bidders. The site has a "buy now" feature that lets users buy an item for its retail price. The amount they spent bidding is credited toward the purchase.

So how can the sites afford to give such steep discounts? Consider an item that sells for $100. Bidding starts at $0, so users would need to have placed 10,000 bids to drive up the price by a penny at a time. If a bid costs $1, the site would have raked in $10,000 on the sale. That's not including the $100 the winner has to pay for the item.