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Are Penny Auctions Scams?

Jane emailed me the other day asking me about penny auctions. Penny auctions are those sites that let you win awesome prizes, like Apple iPads and Microsoft XBoxes, for pennies. PENNIES!

Here’s her email, which entertainingly enough, asks specifically about a company that was accused and shut down by the SEC [3] for “allegedly” running a $600 million Ponzi scheme:

Hi Jim,

I love your blog. It is a plain English of everyday life lessons blog. I am totally confuse about something and would appreciate your help. I would like to know if you can write a piece above penny auctions, specifically zeekrewards. I looked at there website and many other sites for an abc explanation of what it does. I still cannot grasp its concept. I would appreciate your finance knowledge and your well explain skill to help guide me. Thank you and I forward to your blog.

(I left the first part in because who doesn’t love a nice compliment??? :))

Before we get into anything about penny auctions themselves, it’s worth noting that in mid-August, the SEC shut down ZeekRewards [4]. They called it a $600 million online Ponzi and pyramid scheme, the owner settled for $4 million and his ownership in the company, and the court has appointed a receiver to distribute the assets to “investors.” I don’t know what that means for people who bid and won items on the site but they were shut down by the SEC so you can draw your own conclusions there. I’m skeptical.

How Do Penny Auctions Work?

The penny auctions works a lot like a regular auction with a few distinct, and very profitable, differences. Every time you bid, the price goes up by just a penny but you don’t bid for free, each bid will cost you money. When you sign up for a site, such as Quibids (another big one in the industry), you have to buy “Bid Packs.” The packs will contain bids and the bids cost 60 cents a piece at Quibids, though they can be more or less at other penny auction sites.

Another difference between penny auctions and regular auctions is when the bidding ends. There’s a timer on each auction and the timer is extended for every bid that is submitted. On Quibids, they add another twenty seconds. So the timer might say 15 seconds left but the bidding could last for much longer. There are a few variations as to what each site will allow but these are the basics. For example, on some sites, losers forfeit everything they’ve bid. On other sites, they get to purchase the item at the fair market value minus whatever they’ve bid (Quibid lets you do this, how benevolent of them!).

I was looking at the homepage of Quibids, where they have live auctions, and I wanted a $25 ExxonMobil gift card get sold for $0.55. Sounds awesome right? 54 bids is $32.40 in fees, at 60 cents a bid, means Quibids made off with $7.40 for the auction (assuming they’re buying it at face value). Then, they get an extra $0.55 from the winner, so nearly $8 in profits on a $25 gift card.

What to see larger numbers? I watched bidding on a Supersonic SC72MID 7″ Android Tablet (you can buy this on eBay for $99.99) get up to $6.22 – which is over $372.60 in bid fees. The winner only put in 41 bids and after paying the $6.22, got the tablet for just $69.17. Everyone else? The six hundred other bids? Those go into the coffers of Quibid.

Are They Scams?

I’ve never read anything that would indicate that penny auctions, in general, are scams. It’s that you separate the cost of the item (the bid) from where the money is really made. At sixty cents, or more, a bid, the winner is being subsidized by all the losers.

One unspoken risk about all this is that there are shill bidders pumping up auctions. Earlier in the day, that same tablet went for $0.73 to a guy who made one bid. For $1.46 thirty minutes earlier. The site does show statistics and other fun little items to help you try to understand trends but you’ll never know if there’s a shill in there. I suspect these are there to help losers feel like they have a shot at the next one and can “figure out” the system. Penny auction sites have been investigated for being more like gambling than an auction [5]. The stats they show users is a lot like the list of numbers next to the roulette wheel. 🙂

I don’t know if they are scams but I’d never use them.

r-z [6])