Since the advent of eBay, online auctions have become a familiar form of shopping. You find an item you want, you place your online bid or series of bids, and then hope you emerge as the highest bidder once the auction has ended. In the last few years, penny auctions have grown in popularity. However, most people aren’t familiar with how penny auctions work. Log on to any penny auction site and you’ll likely see all of the latest electronics and gadgets selling for a fraction of their retail prices. So how do penny auctions make money if they’re selling these expensive electronics for so cheap?
With traditional online auctions like eBay, the consumer does not pay any money unless they win the auction. With penny auctions, some kind of payment is required even if the consumer does not win the auction. Penny auctions typically require a registration fee in order to gain the ability to bid. These registration fees vary by web site. Once the registration fee is paid, the consumer must then pay for credits to permit bidding. These credits are typically sold in packs or bundles and each credit permits the consumer to place one bid. Like the registration fees, bid credits vary by web site. One popular penny auction web site, QuiBids.com, charges around $0.60 per bid. All of the bidding for the items start at $0.00 and from there increases by a penny every time a consumer places a bid. When a new bid is placed, the countdown clock for each auction is restarted. The final price of the item is determined by the number of bids placed. The end goal is to be the highest bidder when the clock officially expires. Many people simply love the excitement involved with the process of bidding, and many critics have equated penny auctions to gambling. While you could end up getting a steal of a deal on an item, you could also end up paying higher than the value of the item. And in general, if you lose the auction, you have lost the money you spent on the bid credits. However, QuiBids.com allows consumers to apply a portion of the money spent on bid credits to purchase the item they wanted at retail price.
The draw to penny auctions is easy to understand. Log on to DealDash.com or Bidserious.com and you’ll see iPads for $25, iPhones for $50 and the latest high definition televisions for a fraction of their retail prices. If you emerge as a lucky winner of an iPhone, for example, you may have only won the ability to purchase the item. You may have placed 250 bids at $1.00 each and the final price of the iPhone is $75.00. Hence, your final price is $325.00. This could potentially be a loss for the penny auction site to have sold you an iPhone at this price. But consider all of the other bidders who did not win the auction. Presumably, there are other bidders who may have placed over 200 bids as well. The penny auction has made $200 from each of the bidders who have placed that amount of bids. They may have sold the iPhone to you at a loss, but they have easily made a couple thousand dollars from that iPhone auction. The key to making money for these penny auction sites is to drive significant traffic to increase the number of bidders on a site. If a penny auction site does not have a significant number of bidders, they could end up selling expensive items for very inexpensive prices, operating at a loss.