If you’ve been the least bit enthralled by the mystery of Malaysian Airlines Flight 370’s disappearance, you’ve no doubt tuned into CNN for the latest updates (or speculation) on its whereabouts.
If so, you’ve probably seen ads for penny auction sites like DealDash.com and Gankit.com where they say you can buy an iPad for $37 or a 55-inch TV. for less than $30. The ads promise you can save up to 99% on tech products, sports equipment, household gadgets and a variety of brand name products.
Can you really? May be.
(FOLLOWING: No guarantees on Penny auction sites)
99% off retail price?
The could be amazing bargains for a few lucky shoppers who have the time, are willing to take a chance, and have learned how these sites work. But for most online shoppers, penny auction sites are money-losing pits that could be dreadful.
As penny auction guru Amanda Lee wrote on her site, PennyAuctionWatch.com, “You almost stand to lose money if you try penny auctions, there’s no question.” (Lee learned from personal experience and started his site to monitor the industry and expose abuse.)
The reason it’s so difficult to score gigantic bargains is simple: Unlike other Internet auction sites, such as eBay, where bidders don’t pay a dime unless they win, bidders must pay for every bid they make, even if they lose. to someone else.
How Penny Auction Sites Work
Here’s how penny auction sites typically work: Before you can start bidding, you must register and purchase a set of “bids”, ranging from 50 cents to $1 per auction (auction prices vary from site to site). At DealDash, you can buy a pack of just 60 deals, or up to 1,000, for 60 cents each. At Gankit, offers cost 55 cents each, with plans starting at $22 (or 40 offers).
(FOLLOWING: 6 times we spend too much money)
Once you’ve purchased your auction package and can start bidding, items typically start selling at $0.00 and go up a penny each time someone bids (even if they costs a lot more than a penny to bid). So if you’re determined to win an item and you keep bidding on someone who’s also placed a bid and raises the price by a penny each time, you might end up bidding 20 times or more – that’s is easy to do since the “winning price” seems so low.
So if you pay $1 per bid, you just spent $20 worth of bids.
That might not seem like a lot of money for, say, an iPad. However, experts say most people don’t make 20 offers. They often do scores auction houses for wildly popular items, reeling from low auction prices and caught up in bitter bidding wars. QuiBids.com reports that for items that retail for between $100 and $500 on its site, where the average bidder places 26 bids, the winning bidder places an average of 66 bids to score the item.
Also, there is usually no cut-off time for auctions to end on penny auction sites, as each new auction extends an auction by at least 10 seconds. So you cannot time your auction to be the last winning auction.
Winning the auction also does not mean the buyer actually won the item, just that they won the to the right to purchase the item at the final auction price plus shipping and handling.
What about those who didn’t win? They usually lost not only the right to buy the item, but also all the money they spent on bidding.
What consumer advocates say
Penny auction sites have been around for about five years. But recently, as the ads illustrate, they’ve become more aggressive in their promotions, touting the sites as entertaining ways to earn bargains.
“It’s fun. It’s easy and you can win,” says the Gankit.com ad, its first national ad, which began airing earlier this year and aired on Fox News, among others. CEO John Arnold says it’s designed to engage “the bargain hunter in everyone.”
From their earliest years, penny auction sites prompted a slew of consumer alerts from law enforcement officials and consumer advocates.
The Federal Trade Commission, for example, posted an online notice describing these types of sites as “more like a lottery than a traditional online auction.” As the review notes, “Your winning bid of $50 for a camera may seem like a bargain, but if you placed 200 bids, at $1 each, you actually spent $200 on the bids, 50 extra $ for the right to buy it, plus shipping and handling and possibly transaction fees.” (My annotation: if it costs $1 per penny bid, that $50 winning price means that the site raised $5,000 from bidders for the camera.)
“You need to understand how these sites work and determine the total price of the product, not just the bid price,” says Charles Harwood, director of the FTC’s Seattle regional office.
The “Buy It Now” Opportunity
Some sites, including DealDash and QuiBids, now offer losing bidders a “Buy Now” opportunity to purchase the product they unsuccessfully bid on – but at full retail priceminus the money they have already spent on their offers.
But, Harwood notes, that retail price is set by the auction company and may be higher than what you’d pay on retailer sites or in physical stores. “For many products, it may be cheaper — and easier — to buy at a local store” or online, Harwood says.
The National Consumers League’s Fraud.org project published perhaps the most stark assessment, “warning consumers to avoid them altogether.” As John Breyault, director of Fraud.org, told me recently: “I’m sure there are legitimate auction sites out there, but given the shady business models – almost similar to online gambling – and the complaints we get, I’m not comfortable telling consumers that they should consider using them, no matter how careful they are.”
Another reason for caution: There appears to be relatively little oversight of the auction industry, just a handful of state enforcement actions.
Bid against bots
Several state attorneys general have found that certain sites use software “bots” (or computer programs) to automatically outbid legitimate bidders. Since many sites extend the auction time by 10 seconds or more if there is a last minute auction, a bot auction keeps the clock ticking and often triggers a bidding war. In this case, the bot appears to be another user, but is actually an accomplice for the site.
The FTC’s Harwood says it’s not easy for the federal government to crack down on penny auction sites. “As long as the sites are not misleading and adequately disclose the ways consumers will end up paying for a product,” the FTC won’t act, he says.
In recent years, penny auction sites have taken a number of steps to address complaints.
In addition to “Buy It Now” options, some sites, including DealDash.com, have implemented “No Jumper” auctions, closing auctions to new players when the bid price exceeds $5. This way, long-time bidders don’t have to compete with others who haven’t spent money bidding since the beginning.
Despite these steps, consumer advocates say you should still approach these sites with caution (if you approach them at all). Here are seven ways to protect yourself:
1. Check the legitimacy of the site before you start bidding. Can you find an address and phone number in case of problems? Otherwise, do not bid.
Also do an internet search of the company name with the word “complaint” to see what others have said on the site; check the site’s record on Penny Auction Watch (on its forum and directory) and on the Better Business Bureau (BBB) site.
Read the BBB site carefully, going beyond the overall “rating”. QuiBids has an A rating, despite 1,108 complaints over the past three years.
2. Understand the terms of the auction and how the site works. Read the fine print to determine the actual costs, including shipping and handling and any transaction fees if you win. Also check to see if you can use the money you spent to buy an item you didn’t win.
Observe a few auctions of similar items before placing a bid, to familiarize yourself with the terrain.
3. Research the retail price of the item you want before bidding. This way you will avoid overpaying.
4. Spend a lot of time bidding once you start bidding. The bidding process can take hours (sometimes days, for popular items). So if you really care about an item, don’t leave or start bidding when you have a meeting or appointment.
5. As with gambling, prepare to lose and walk away. Figure out how much you’re willing to spend on the auction and stop once you’ve reached your limit, even if the auction price is still low.
6. Consider limiting your bids to sites with a “Buy Now” feature. While you might not get as much as you hoped with this option, you won’t completely lose the money you spent bidding.
7. If you encounter any problems, report them to the authorities. Good places to start are the Federal Trade Commission or your state attorney general, the state where the site is located, or both.
You could get help and prevent others from getting burned when bidding.
Caroline Mayer is a consumer journalist who spent 25 years working for The Washington To post. Follow her on Twitter @consumermayer.