CBS 58 Special Report: Online penny auctions. Bargain or Ripoff?

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by Chris Patterson

MILWAUKEE -- Penny auction websites advertise great deals, up to 97-percent off of retail.  We wondered if they are real or a scam, it turns out that it could be a little of both.

David Fredrick from Fort Atkinson, WI says he’s done pretty well on the website Quibids.com.  “I have a Jim Beam basting pot. Had some free voucher bids one day and thought I would log on, seven bids later I won it,” Fredrick said.

But not everyone is on board with penny auctions, the internet is full of people who want to tell you they are all a scam. A simple web search will lead to a vast network of conspiracy theories, claiming that users or the websites themselves can game the system with software and con people out of their hard-earned cash.

We went to the Better Business Bureau for answers. Randall Hoth, President of the Wisconsin chapter, says that while they give some penny auction websites a good grade, people still need to use caution. “The BBB is concerned about fair advertising on these sites,” Hoth said.

VIDEO: Penny Auction Explainer

Penny auctions are complicated, and the rules vary with each site. But in general, to get started you have to buy bids, which come in bidpacks from 10 to 1000. The more bids you buy, the cheaper they are per bid. Then you find an item you want to win, and start clicking your mouse to bid. Each time you bid, the final auction price of the item you are bidding on goes up one penny.  Every bid is part of a bidpack you paid for, so it costs you money. You are also battling it out with everyone else on the website who has bids, which could be dozens or thousands of people, depending on the site.

As the clock winds down on an auction, each time someone places a bid, the clock adds a little more time, which gives everyone else a chance to outbid the leader. Once the website counts down to zero, or “going, going, GONE,” the person who made the last bid wins the item, and has to pay the final auction price.  But one thing to keep in mind, when you lose an auction on eBay, you don’t pay anything.  But if you lose a penny auction, the bids you paid for are gone forever, something you might not hear in the ads. “People don’t seem to get the point that ‘my gosh I got this bill for $60 or whatever and I’ve got no shot of winning that item,’” Hoth said. Some sites will give losing bidders the chance to use the cost of their bids to offset the cost of purchasing an item, but that item is usually at the inflated manufacturer’s suggested retail price.

Let’s break down the money involved in a typical penny auction. For example, let’s say an iPad sells for $17. One penny at a time, that means 1,700 bids were placed trying to win that iPad. If each bid costs 50-cents, that means the website raked in $850 on the auction, which is a profit on even the latest and most expensive of these tablets. Let’s also say the person that won the iPad used 500 bids. That means this person spent $250 in bids, and will have to pay the $17 for the final auction price, and will likely have to pay to have the website ship him the iPad.  While the final cost of about $280 is cheaper than paying retail price, it is not even close to the 97-precent discount that is often advertised.

The hypothetical auction I outlined above may be too generous. Check out this auction for an iPad mini on Beezid:

http://www.beezid.com/auctions/computers/ipad-tablets/ipad-mini-32gb/605114

At a final price of $167.92, a staggering 16,792 bids were spent to win that iPad! And while Beezid claims that the winner did get a 13-percent discount, thousands of other bids were spent, with those bidders having little or nothing to show for it.

Bottom line, penny auctions are closer to internet poker than internet shopping. Fredrick says bidding on an item is a gamble, there are strategies used to win, and it often costs money and time to learn those strategies. “A lot of people think they are going to win a TV for $25… try too big to start, then get disappointed or frustrated and walk away,” Fredrick said.

And before you decide to gamble your hard-earned cash, the BBB says to make sure there are ways to make sure the website you use is reputable. “Find out that the auction site has been subject to a third-party audit, like BBB accreditation. That can document the prices you are being offered, and you can actually receive that merchandise,” Hoth said.

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