If you've seen any television or internet commercials claiming that people have recently won an iPad for 30 cents or an Xbox for a dollar, then you have already had some exposure to penny-auction sites. The hook here is that bids can only be increased in very-small fixed increments, and site users have only a finite amount of "credits" which they have to spend to place each bid. Therefore, in theory, an expensive item could end up selling for a relatively low price if it flew below the radar or if all other interested parties just happened to be short on credits at the moment.
Of course, it rarely works out that those expensive gizmos sell for pennies on the dollar, or these sites would be out of business immediately. It isn't too uncommon for products to sell for slightly below retail on these sites, but after various fees and shipping, you might not be coming out ahead. You also have to consider the loss from all the non-refundable credits you will have spent bidding up items that you ultimately didn't win.
Here is a look at how the legitimate penny auction sites operate, and how the outright scams work. Note that a site being listed as "legitimate" doesn't mean that you'll commonly find deep discounts there; it simply means that the site has a fairly transparent business model and will not outright defraud its users.
Legitimate Penny-Auction Sites
Most of the big-name sites that have made enough money to advertise on national TV (such as Beezid and DealDash) are legitimate. When you use them, however, you'll find the ridiculous deals the TV ads offer are about as rare as a blue moon. To understand why, you have to understand how the whole business model works.
Penny-auction sites can only function if the site itself directly stocks the items in question and distributes them. So it's not like eBay or Amazon Marketplace, where you have millions of individual sellers with their own inventories simply using the same interface and rule set. The reason these big sites tend to be the only legitimate ones is that they are the only ones with the capital and leverage to negotiate favorable wholesale deals with product manufacturers.
The big penny-auction sites have a stock of popular consumer goods that they got for a decent price by buying in bulk. They still have to make a profit selling them, however. This is where the concept of "credits" comes in. The ideal situation for the site is when an auction concludes above what they paid per unit for the item, so they make a profit on it plus all the credits that people spent while bidding it up. Even if the auction concludes slightly below what they paid, they may still turn a profit if enough bidders dumped enough credits into the auction. As long as the bid total gets high enough, the site is making money.
They might also add on to this profit margin by way of post-auction fees, such as a mandatory flat shipping and handling fee that exceeds the actual cost of shipping, or a percentage owed on each auction to be paid by the winner. In addition to charging for credits, they might also require an annual or monthly subscription fee to participate. The large sites manage to avoid heaping on fees, as they have been shown to drive away customers, but they usually sneak at least a little something in there to ensure some amount of profitability on nearly every transaction.
There are a couple more added twists that set penny auctions apart from the more standard e-commerce model. New bids usually extend the auction time by some amount. The purpose of this is to eliminate "bid sniping," where everyone interested in an auction simply waits until the last possible minute to fire off a low bid and hopes theirs is the one that makes it through just before closing. The other method is to limit the number of items you can win per month, in an effort to control "sharp" bidders who have found a way to game the system.
If a legitimate penny-auction site is well-funded enough to keep a good inventory of products they got at a good price, they don't need to resort to much in the way of chicanery. Most of their auctions will close at or near what they paid for the item, and some will shoot above retail as people get into compulsive and irrational bidding wars. This is all more than enough to offset the rare occasions when someone manages to get lucky and pay only a fraction of an item's value.
Not-So-Legitimate Penny-Auction Sites
Smaller sites that can't compete on inventory have developed an unfortunate pattern of doing it through deceit and fraud instead. One nefarious tactic that is commonly employed is to use an automated bidding "bot" that will gradually drive every auction up to the site owner's desired price. They may even hire people at "click farms" to do it manually to make it seem even more legitimate. Still others will simply not ship a bunch of items, or use a vague listing to try to get away with shipping a cheaper item.
A popular tactic for fly-by-night scam sites of this nature is to operate semi-legitimately for a while until customers start getting wise to them and complaining en masse. Then the site suddenly folds up and disappears with everyone's deposited money and credit card information.
Gambling With Pennies?
Since penny-auction sites started to become popular in the late 2000s, there has been ongoing talk about regulating them as though they were lotteries. So far, no concrete moves have been made, but both the FTC and Better Business Bureau have issued sharply worded warnings about these sites, indicating that they are being looked at as a form of gambling. Once in a while you can snag a nice device for a fraction of its actual value, but it's wise to go in expecting the same odds you would with a casino slot machine.
