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FTC Cautions Consumers on Penny Auction Sites

by on August 26, 2011
in Health and Home, News, Computers and Software, Computer Safety & Support, Home Safety & Security, Blog, Shopping :: 7 comments

You've seen the ads on dozens of sites — "Get an iPad for only $10!". Sound too good to be true? You bet it is.

These ads for so-called "penny auction" sites promise incredible deals on popular electronics, sometimes for as little as a penny. But you'll likely end up spending much, much more, even more than the actual retail price, and you may not end up winning the product at all.

Penny auctions are such a bad deal for most consumers that we've pulled the ads from Techlicious when Google tries to serve them on our site. And recently, the Federal Trade Commission (FTC) issued a caution to consumers on the pitfalls of penny auctions. With info from the FTC, we've put together a guide on what to look out for:

How does a penny auction work?

In a penny auction, items are posted by the site owner and you pay to bid for them. The price of auction items usually starts at zero, and each bid bumps the price of the item up a penny. Each bid also adds time – from 10 seconds to 2 minutes – to a countdown clock. The goal is to be the high bidder when the clock runs out. But because the clock resets with each bid, the auction process can be unpredictable and take time to complete.

Unlike a traditional auction, where only the winning bidder pays anything, penny auctions require you to pay for every bid, whether you win or not. And each of those "penny" bids actually cost you far more, up to a dollar per bid.

According to the FTC, some unscrupulous auction sites use bid bots, which are computer programs that automatically bid on behalf of the website. And some fraudulent sites achieve the same effect using human shills. You may be seconds away from winning an auction when another user places a bid. That keeps the clock ticking, and forces you into a bidding war to stay in first place. Though the bidder appears to be another user, it may be a shill, or a bot programmed by the website to extend the auction and keep people bidding (and spending money) as they chase the "win."

What does "winning" mean?

Winning the auction doesn't mean you've won the auction item: It means you've won the right to buy the item at the final price. For example, say you win an auction for a laptop that has a $500 retail price tag. You placed 200 bids that cost $1 each. The final price on the laptop is $50. The laptop will actually cost you $250, plus shipping and handling, and possibly a transaction fee.

If you lose an auction, chances are you've lost your money. If you placed 199 bids on the laptop, for example, you'd be out $199. Some penny auction sites have a "Buy-It-Now" feature that lets players buy the item and apply the amount of the bids placed as a discount on the retail price of the product. So if you applied your $199 in bids to the $500 retail price of the laptop, you wouldn't lose your investment in the bids you purchased, but you wouldn't save any money off the retail price, either.

Penny Auction Pitfalls

Penny auctions may offer deals, but they also can present problems. Examples cited by the FTC include:

  • Time lags. How soon do you need to receive the item you're bidding on? Can you tolerate it being delivered late, or not being delivered at all? Many complaints about penny auctions involve late shipments, no shipments, or shipments of products that aren't the same quality as advertised.
  • Misleading terms. Terms like "bonus bids" might suggest that bids are free. In a penny auction, you pay for every bid.
  • Hidden costs. Read each penny auction site's Terms of Use before you sign in or register. Sites may charge fees (for membership, ongoing subscriptions, or shipping), follow different rules, or have a variety of refund policies or other terms and conditions. The terms and conditions may not be well-disclosed elsewhere on the website.
  • Insecure payment options. Consider how you'll pay. Do you have any recourse if something goes wrong? Don't send cash or use a money wiring service. Instead, consider using a credit card. That way, if something goes awry, like you don't get your merchandise or it's not what you expected, you can dispute the charge with your credit card issuer.
  • Reputation rules. Avoid doing business with sellers you can't identify. Check out any penny auction site by entering its name in a search engine online. Read about other people's experiences.
  • Hello? Anyone there? Look for a phone number and call it to confirm that you can contact the seller in case you have questions or problems.
  • You're about to spend some money. Know exactly what you're bidding on. Print a copy of the seller's description of the product and read it closely, especially the fine print. Save copies of all emails you send and receive from the auction site, too.


Discussion loading


Penny Auctions - Too Good to Be True?

From Penny Auction List on August 27, 2011 :: 9:23 am


Though the FTC issued an alert clarifying how penny auctions work, and highlighting some of the warning signs that consumers should watch for, they did NOT say that penny auctions were too good to be true.

In fact, the alert even acknowledges that consumers can score a deal, but there’s more than meets the eye.

Any consumer who is curious about the penny auction model should look at sites with a bid to buy option. The worst-case scenario on those sites is that you pay retail for the item.

How is that a bad thing?

Josh from the Penny Auction List



I didn't say penny auctions

From Josh Kirschner on August 27, 2011 :: 10:16 am

I didn’t say penny auctions are too good to be true, I said the advertising is misleading and that getting an iPad for $10 is too good to be true. At $.60 per bid with $.01 bid increments, getting to $10 requires $600 worth of bids, then the winner still needs to pay for the item and shipping costs. Overall, the bidders will likely end up paying considerably more than retail,

Is the ability to use your bids to buy at the retail price a good thing? Well, considering that most electronics sell at a significant discount to retail, the answer is “no”. And then you still may be paying additional fees for shipping and have customer service issues if the product is damaged or doesn’t work as intended. And unlike a retail electronics store, you can’t return it if it is broken or you simply aren’t happy with your purchase.



Additional Clarifications

From Penny Auction List on August 28, 2011 :: 7:59 pm


Thanks for taking the time to reply.

Though the advertising can be deceptive, it can also be an understatement. Hypothetically a user could place one paid bid on an iPad and win for even less than $10. To be fair, one must also consider the amount of ad space a penny auction site has to get your attention. Most banner ads are 125 pixels wide and high, so it’s not easy to clarify all the details.

I’m not trying to defend, just trying to give the other angle.

Thanks for conversing.




Know what you do

From Sid on August 27, 2011 :: 4:50 pm

Most of the problems with penny auctions occur, in my opinion, when people don’t really know the pros and cons of it and just jump right in without doing their homework. As a blogger in this niche, I know all too well about this problem and dedicate a whole section of my blog just for strategies that you can use. That being said, there is no way anyone can guarantee you a win.

I am also strongly against misleading advertising and it is just unfortunate that even the leaders in this industry indulge in this form of advertising.

In the end, however, I think penny auction industry should be regulated in terms of not using shill bots or other forms of price manipulation. If the bidders know what they are doing, they should have a choice to enter. Using the bids towards buy it now isn’t so bad if you are looking only for specific items, like gift cards (the shipping is usually low). It should all be left to the consumer to decide, after all.

Great article!



Morons beware!!

From George on April 22, 2012 :: 5:54 pm

The penny auctions, although strictly speaking not outright scams in most cases, are designed to appeal to morons. This doesn’t make them much worse than lotteries, which are little more than taxes on stupidity and greed. The FTC is issuing a “Morons Beware” warning about the penny auctions. Of course, they can’t, for obvious reasons, call it that. Sure there is the occasional “deal” on the penny auctions. But for every deal, there is an army of people who have lost money chasing an illusion.




From DealDash on August 02, 2013 :: 2:51 am

pennu auction site are the best way to make money online



No way

From Josh Kirschner on August 02, 2013 :: 10:58 am

Penny auction sites are the best way to make money online if you OWN a penny auction site. Penny auction sites are one of the best ways to LOSE money online if you USE a penny auction site.

I can’t say this clearly enough - penny auction sites are a bad deal for consumers. Stay away.

[link to your penny auction site in your comment removed]


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