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.
- 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.