Are Penny Auction Sites Seen on TV For Real?

If you’ve been the least bit captivated by the mystery of missing Malaysian Airlines Flight 370, you’ve undoubtedly tuned into to CNN to get the latest updates (or speculation) about its fate. 

If so, you’ve certainly seen commercials for penny auction sites such as DealDash.com and Gankit.com where — they say — you can buy an iPad for $37 or a 55-inch TV for less than $30. The ads promise you can save up to 99 percent on tech products, athletic gear, household gadgets and a variety of brand-name goods.
 
Can you really? Maybe.

(MORE: No Guarantees at Penny Auction Sites)
 
99 Percent Off Retail Price?

There could be some amazing bargains for a few lucky shoppers who have the time, are willing to take a chance and have learned how these sites work. But for most online shoppers, penny auction sites are money-losing pits that could be penny dreadful.
 
As penny-auction guru Amanda Lee wrote on her site, PennyAuctionWatch.com: “You are almost likely to lose money if you try penny auctions, there’s no doubt about that.” (Lee learned from personal experience and launched her site to monitor the industry and expose abuses.)
 
The reason why scoring gigantic bargains is so hard is simple: Unlike other Internet auction sites, such as eBay, where bidders don’t pay a cent unless they win, penny-auction bidders must pay for each bid they make, even if they lose to someone else.
 
How Penny Auction Sites Work

Here’s how penny auction sites typically work: Before you can begin bidding, you have to register and buy a package of “bids,” ranging from 50 cents to $1 per bid (the bid prices vary from site to site). At DealDash, you can buy a pack of as few as 60 bids, or as many as 1,000, for 60 cents each. At Gankit, bids cost 55 cents each, with packages starting at $22 (or 40 bids).

(MORE: 6 Times We Spend Too Much Money)
 
Once you’ve bought your bid package and can start bidding, items usually start selling for $0.00 and increase by a penny every time someone bids (even though it costs far more than a penny to make a bid). So if you’re determined to win an item, and keep making bids over someone who has also placed a bid and raised the price by a penny each time he did, you might wind up bidding 20 times or more — that’s easy to do since the “winning price” seems so low.
 
So if you’re paying $1 a bid, you just spent $20 bidding.
 
That may not seem like a lot of money for, say, an iPad. However, experts say most people don’t make 20 bids. They often make scores of bids for very popular items, reeled in by the low auction price and caught in hot bidding wars. QuiBids.com says for items that sell between $100 and $500 retail on its site, where the average bidder places 26 bids, the winning bidder places an average of 66 bids to score the item.
 
What’s more, there’s no final cut-off time for the end of bidding on penny auction sites, generally, because each new bid prolongs an auction for at least 10 seconds. So you can't time your bid to be the last, winning bid.

(MORE: 9 Ways You're Being Watched)
 
Winning the bid doesn’t mean the shopper has actually won the item, either — merely that he or she has won the right to buy the item at the final bid cost plus shipping and handling.
 
And those who didn’t win? They’ve usually lost not just the right to buy the item but also all the money they spent on bids.
 
What Consumer Advocates Say

Penny auction sites have been around for about five years. But recently, as the commercials illustrate, they’ve become more aggressive in their promotions, touting the sites as entertaining ways to win great deals.
 
“It’s fun. It’s easy and you can win,” says the Gankit.com commercial, its first national one, which began running earlier this year and airs on Fox News among other places. CEO John Arnold says it’s designed to engage “the bargain hunter in everyone.”
 
From their earliest years, penny-auction sites have prompted a slew of consumer alerts from law-enforcement officials and consumer advocates.
 
The Federal Trade Commission for example, has an online advisory describing these types of sites as “more like a lottery than a traditional online auction.” As the advisory notes, “your $50 winning bid for a camera might seem like a bargain, but if you’ve placed 200 bids, at $1 each, you’ve actually spent $200 for the bids, another $50 for the right to buy it, plus shipping and handling and possibly a transaction fee.” (My annotation: if it costs $1 per penny bid, that $50 winning price means the site collected $5,000 from bidders for the camera.)
 
“You need to understand how these sites work and figure out the entire price of the product, not just the bid price,” says Charles Harwood, director of the FTC’s Seattle regional office.
 
The 'Buy It Now' Opportunity

Some sites, including DealDash and QuiBids, now offer losing bidders a “Buy It Now” opportunity to purchase the product they were unsuccessfully bidding on — but at full retail price, minus the money they’ve already spent on their bids.
 
But, Harwood notes, that retail price is set by the auction company and may be higher than what you’d pay at retailers’ sites or brick-and-mortar stores. “For a lot of products, it may be cheaper — and easier — to buy at a local store” or online Harwood says.
 
The National Consumers League’s Fraud.org project has issued perhaps the bluntest assessment, “warning consumers to avoid them altogether.” As John Breyault, manager of Fraud.org, told me recently: “I’m sure there are some legitimate penny-auction sites, but given the shady business models — almost akin to online gambling — and complaints we’re getting, I’m not comfortable telling consumers they should consider using them, no matter how careful they are.”
 
One other reason for caution: there seems to be relatively little oversight of the penny-auction industry, just a handful of state enforcement actions.
 
Bidding Against Bots

Several state attorney generals found some sites using software “bots” (or computer programs) to automatically outbid legitimate bidders. Since many sites extend the auction time by 10 seconds or more if there’s a last-minute bid, a bot bid keeps the clock ticking and often prompts a bidding war. In this case, the bot appears to be another user, but is really a shill for the site.
 
FTC’s Harwood says it’s not easy for the federal government to go after penny-auction sites. “As long as sites are not deceptive and adequately disclose the ways in which consumers will end up paying for a product,” the FTC won’t take action, he says.
 
In recent years, penny-auction sites have taken a number of steps to address complaints.
 
In addition to “Buy It Now” options, some sites, including DealDash.com, have implemented “No Jumper” auctions, closing off the bidding to new players when the bid price goes over $5. That way, longtime bidders needn’t compete with others who haven’t spent money bidding from the start.
 
In spite of these steps, consumer advocates say you still need to approach these sites with care (if you approach them at all). Here are seven ways to protect yourself:
 
1. Check the legitimacy of the site before you start bidding. Can you find an address and phone number in case you run into problems? If not, don’t bid.
 
Also, run an Internet search of the company name along with the word “complaint” to see what others have said about the site; check out the site’s record at Penny Auction Watch (on its forum and directory) and at the Better Business Bureau (BBB) site.
 
Read the BBB’s site carefully, going beyond just the overall “grade.” QuiBids has an A rating, despite 1,108 complaints in the last three years.
 
2. Understand the auction’s terms and how the site works. Read the fine print to determine the actual costs, including shipping and handling and possible transaction fees if you win. Check, too, on whether you have the option to use the money you’ve spent bidding to buy an item you don’t end up winning.
 
Observe a few auctions on similar items before making a bid, so you’ll get the lay of the land.
 
3. Research the retail price of the item you want before bidding. This way, you’ll help prevent yourself from overpaying.
 
4. Commit serious time to the auction once you start bidding. The bidding process can last hours (sometimes days, for popular items). So if you truly have your heart set on an item, don’t walk away or start bidding when you have a meeting or appointment.
 
5. As with gambling, be prepared to lose — and to walk away. Figure out how much you’re willing to spend on bids and quit once you’ve reached your limit, even if the bid price is still low.
 
6. Consider limiting your bidding to sites that have a “Buy It Now” feature. Although you may not be getting as great a deal as you had hoped with this option, you won’t completely lose the money you’ve spent bidding.
 
7. If you run into problems, report them to the authorities. Good places to start are the Federal Trade Commission or the Attorney General of your state, the state where the site is located or both.
 
You might get some help and could prevent others from getting burned when they bid.