Understanding The Penny Auction

Penny Auctions, or pay-to-bid auctions, are becoming wildly popular as consumers continue to recognize the opportunity and possibility of amazing deals and incredible savings. Hundreds of penny auction sites already exist. Some of the more established sites include Swoopo, Quibids, BidCactus, BidRivals, Beezid, and more. New auction sites keep popping up all the time as the business model tends to favor the business owner, and of course one lucky winner of each auction.

A penny auction is not the same as or in any way similar to an ebay auction. In an ebay auction you can bid as many times as you want and will never be charged a dime unless you are the high bidder and win the auction. This is not true for a penny auction. In this type of auction you pay before you can even participate. You have to pay for the opportunity to bid on the item.

Penny auctions are just what they sound like: An auction where you can only bid one penny at a time. The price of the item starts at $0.00 and each bid increases the price of the item by one cent. Each bid also extends the time of the auction, typically by 10, 15, or 20 seconds. In this type of auction it isn't the highest bidder, but rather the last bidder who wins the item. Usually the winning bidder snags a pretty good deal, enjoying savings of between 75%-95%.

How can these sites afford to give away pricey electronics and other great items at such huge discounts? Well there is a small catch to consider. As you may recall, the first sentence of this article also refers to these auctions as pay-to-bid. Thats right. You have to purchase the bids before you can use them towards a given item. Typically bids will cost between $0.50 to $1.00 per bid depending on the site.

Lets look at an example of a $10 gift card that sells for a final price of $1. That means that 100 bids were placed during this auction. If each bid was purchased for $0.50, the website made $50 off bids alone which will easily cover the cost of the $10 gift card. This is precisely how these auction sites can afford to stay in business.

Now just because the auction site stands to make a decent amount of money doesn't necessarily mean it is bad for the consumer. Certainly the winner of the auction made out like a bandit getting a $10 gift card for only $1 (plus the cost of any bids used). This is a significant savings for the winner.

Beware though, all of the other bidders just lost some money. If another bidder placed 10 bids in that same auction but did not win, they would have spent $5 and receive nothing in return. This is why penny auction sites can be quite risky.

Some penny auction sites try to limit this risk by offering a "Buy it now" option to those bidder that did not win the auction. By employing the "Buy it now" option a losing bidder can apply the cost of the used bids towards to full purchase price of the item. That means the losing bidder in the example above could apply the $5 worth of used bids towards the full price ($10) of the gift card and purchase the gift card for only $5 additional dollars. This way the losing bidders never actually lose as long as they were willing to purchase the item at full retail price from the getgo.

Penny auction sites can be a great place to pick up some amazing deals on some of the most popular consumer items. However it is important to remember the financial risks involved in this type of auction and to fully research and prepare before you embark on your endeavor to achieve ultimate savings. By full researching a penny auction site before you decide to start bidding you will be able to determine the likelihood of your success as well as sort out which sites are reputable and which sites may be scams.

Source: http://goarticles.com/article/Understanding-The-Penny-Auction/4207480/