We are seeing many new penny auction sites going bust recently so we thought we’d make a post about exactly how penny auction sites make their money. In reality the top penny auction sites are making great money because they simply have a big user base. Whilst other new sites struggle to get enough bids so the item ends up going for a very low price.
So you’re thinking “Great! I’m going to find a new penny auction site” well before you even think about doing that, you need to know that these penny auction sites often scam you. We talked about bidding bots and fixing the auctions on this site before and theres no question that some of the new penny auction sites are involved in that.
It’s the number one reason new penny auction sites fail, we see so many people saying “I’m going to create a penny auction site because the auctioneer makes so much money from each auction” – Wrong! starting a new penny auction site is very difficult because new users want to see hundreds of auctions on at the same time or else they won’t sign up. Which just isn’t possible when you have no users bidding on the items.
The only reason why some of the top penny auction sites are still going today is because they have had huge investment (over $5million usually) prior to startup. This allows the penny auction site to put up plenty of items without going broke before they even start.
Proponents say the setup allows companies to make a profit while offering huge discounts to their customers. However, others argue the pay-per-bid model equates to illegal gambling. Several penny auction sites have been sued on those grounds.
“The winner of the auction is not the highest bid, but rather, the last bid when time runs out,” a lawsuit filed in February reads. “Every time contestants bid they are playing a game of chance hoping that time will run out before another player bids.”
And a post from wired:
There are a couple of main things to look for. First, it’s pretty easy to see if a site is using a corrupt computer code for its content, called a script, that prevents bidders from winning. One script in particular, called “feisty sites” is a surefire marker of a bogus bidding operation.
Lee also checks sites that measure web traffic like Alexa.com, to see if the statistics for penny-auction bid sites add up. For example, if Alexa says that only a few people have visited a site, but owners have hundreds of auctions going and thousands of bidders listed, there’s probably a problem. It takes a while to build sites beyond five or six items auctioned off per day. In situations like this, site owners are probably filling their sites with false merchandise and the auctions with bots. Lee will say as much on her website.
These two posts mention what we have talked about, there is certainly an element of gambling on penny auctions, you are defiantly not guaranteed to win every time. This is something we feel the Gambling Commission needs to take a look at. Because people don’t really know what they are doing when they sign up.
The post from wired talks about bidding bots, it’s a very talked about subject when it comes to penny auctions, but we have yet to come across any proof. We’re not saying penny auction sites don’t use these types of tools because in reality many small penny auction sites probably fix their auctions which is why we don’t recommend them.
And of course the famous shutdown by the SEC on zeekler:
The SEC claims that the $225 million in investor funds that the defendants currently hold are at risk of depletion. The $225 million in question is what authorities have frozen.
In a move that sent shock waves through the Multi Level Marketing Industry, the Security and Exchange Commission (SEC) shut down Zeekler.Com and its affiliate website, ZeekRewards, on Friday, August 17, 2012. The SEC claimed the company was a $600 million Ponzi scheme, built on a pyramid that paid older affiliates from the revenues of new affiliates.
ZeekRewards had over one million active affiliates, all of whom have been unable to access their funds since the company was ordered to take down its websites late Thursday night. Affiliates will have to depend on the Federal government to recover their funds at a yet unspecified date.
Although there is no fear of that happening with some of other penny auction sites such as dealdash,beezid etc because they operate a different affiliate program.
You can also find about more the Zeekler case from the official SEC Complaint.
So in terms of how penny auctions actually make money heres a post from yahoo:
Penny Auctions make money every time someone bids. You normally buy bids at 50 cents to 80 cents each. So, let us say the item is sold at $10.00 and bids average costs are 50 cents each. Remember, every time you bid, you pay (an average in this example) 50 cents and this increases the price by one cent.
$10.00 for the item.
1000 bids at 50 cents each raising the price one penny each bid = 500.00
So, the actual amount (if you factor in bids) is $510.00
Looking at one of the best auctions, a $500 auction went for $26.99. A steal right? Considering each bid cost $1 (bid = $0.01) this made the website $2,699. Wait… is that right? 26.99 * 100 = 2699 bids. 2699 bids * $1 = $2699.
Unbelievable. Looks like a few of the bidders got caught up in a bidding war… Assuming they’re not bots.
Granted not every auction ends up this way. You can see a few auctions that ended up going for $0.03 for $100. Clearly a loss for the website.
What a genius idea…
These two posts explain it very well. Of course some auctions do end up at $0.01, we’ve seen this happen before but unfortunately we wasn’t the user who placed that single bid. It is rare that auctions go that low but it depends on the item somewhat, we’ve never seen an expensive item go for less then $1 other then the so called ‘winner circles’ which you will find on most penny auction sites.
So to sum up, yes. Many penny auction sites make a huge amount of money on some items, I guess you could say that the real winner is the penny auction site and not the actual bidder. But this isn’t always the case, as we mentioned above, new penny auction sites tend to struggle early on which is why we highly recommend you avoid them simply because of the scam/fraud risks. However the penny auction sites that have stuck around for longer then a year or two are much more secure and it’s more “fair game”.
Don’t know how penny auctions work see our penny auctions 101 page.