What are Penny Auctions? Should You Participate in Them?

Chances are that you have seen ads around the Internet: “Big Screen HD TV for $15!”

These ads usually point to penny auctions. These are auctions where items start out at a penny, and run for a set period of time, usually not more than a few hours. Penny auctions look like a good deal because there is a great deal of hype around the fact that you can get something like a $25 Restaurant.com certificate for a penny, or an iPad for less than $20.

However, it’s not quite the amazing deal that it seems — and winning a penny auction isn’t as easy as you might think.

How a Penny Auction Works

As the name indicates, the penny auction starts off at one cent. Each time a bid is placed, the price of the item goes up one cent. So the price goes up rather slowly. The question that many people have is this: How can a penny auction site make money if the items for bid are so cheap? Much like a cash loan company, the answer is in the way penny auctions operate.

When you sign up at a penny auction site, you usually register for free. Then you buy a certain number of bids. Each bid sends a price up by one cent. You buy your bids ahead of time, and then you can use them to bid on items. Once you are out of bids, you have to buy more. Some auction sites allow you buy packs at a discounted rate.

So, basically, each time you bid on an item, you are paying for it. You are paying for the bid. These bids are non-refundable, and there is no guarantee that you’ll win. So for every winner of the auction, there are potentially hundreds of people who paid for several bids — and didn’t win.

Some penny auctions also add time to the auction clock as more people bid in the final seconds. This keeps people bidding (and paying for the bids) in their attempts to win, and it means that the penny auction site can make a little more money.

As a consolation, there are some auctions where you can buy the item at retail price if you don’t win it. The money that you put in toward the bid counts toward the amount that you owe on the item.

Downside to Penny Auctions

The main downside to the penny auction is that you have to pay for your bids, so you could spend a great deal of money trying to win various items and never getting anything. It’s a little bit gambling in some ways. On top of that, you don’t even know for sure when the auction will win. Since new bids can add time to the clock, an auction can keep going as long as people are willing to battle it out. I watched one auction extend from having 30 seconds last to going for more than 10 additional minutes as bidders kept it going.

Before you decide to try a penny auction, make sure you understand the risks, and make sure that you know what you are willing to pay. Create a strategy, and limit how much you are willing to spend when you bid. And be willing to stop if it looks as though you are having a hard time winning consistently.

6 thoughts on “What are Penny Auctions? Should You Participate in Them?

  1. I have never actually seeen a penny auction, but I don’t do a ton of online shopping either. While reading this, though, I thought “Where is the catch?” Then you mentioned it. Paying for your bids could get really expensive, quickly.

  2. Pingback: Final Carnival of Financial Planning for 2012 | Cult Of Money
  3. I am probably the unluckiest person alive, so I would never participate in such a thing. I loathe raffles and anything where I have to pay “for a chance to win.” Obviously, I will never win the lottery. I would prefer to invest in something that guarantees (or almost guarantees) a return rather than a loss.

  4. Winning a penny auction is exceptionally hard as server response time for each bidder will also be added on to the auction time. That means as soon as it hit’s zero there has to be no response server side from a bidder for there to be a winner. I suggest stay away, my friends got suckered into them a few years back and ended up losing hundreds.

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