Clark Howard: ‘Penny’ auctions don’t sell a bargain

ClarkHowardConsumer expert Clark Howard’s column appears here each Thursday in conjunction with Deal Spotter, a weekly print section in The Atlanta Journal-Constitution.

Have you seen those website ads that promise unbelievable bargains on electronics and some consumer goods? Who can resist those come-ons about getting, say, an iPad for some ridiculously low price like $2?

There’s one particularly popular ad with a supposed anchorwoman giving an update on what looks like a local TV station. She goes on and on about this amazing new way to save money, giving the spiel about what are known as “penny auctions.”

But they’re really just an illegal game of chance in my book. Here’s how penny auctions work: You enter bids for the items being advertised while others do the same across the web. You’re required to pay more money each time someone else outbids you and you want to rebid. Only the final winning bidder actually gets the item.

So yes, it is true that the winner gets stuff ultra-cheap. But I cannot believe the various state attorney generals are asleep at the switch on this one. Lotteries can only be run by states. Gambling can only operate when permissible under state law. So any time money is collected from losers in a game of chance is patently illegal.

Know that these kinds of offers are deceptive on their face. MSBNC reported there was one auction for an HDTV where the winner got a $1,500 model for $228. But 22,000 bids were placed and the bids collectively exceeded the cost of the TV by a 9:1 ratio.

If you get involved in this kind of bidding, it can be addictive. In addition, you will probably spend far, far more in bids over time than you recoup in the value of an item you may win on occasion. It would probably be cheaper for you to outright buy whatever it is you want.

-by Clark Howard, Save More, Spend Less, Avoid Rip-offs
Find more answers to your consumer questions at  ClarkHoward.com. You can also listen to his radio show live 1-4 p.m. Monday through Friday on AM 750 and NOW 95.5 FM News/Talk WSB.

15 comments Add your comment

Josh

March 31st, 2011
9:17 am

Clark,

Thanks for your post about penny auctions. Though some are quick to label penny auctions as a lottery, there are a few additional factors to consider.

1. Many penny auctions sites offer a bid to buy option. This means that even if a bidder doesn’t win the auction, he/she can apply the value of their bids toward purchasing the item at retail price. In other words, the worst case scenario is that a person pays retail price, which consumers do at stores everyday.

2. Penny auctions don’t completely qualify as a game of chance. There are proven strategies that make some bidders more successful than others (as evidenced by bidder interviews on http://pennyauctionlist.com) and hypothetically a bidder could guarantee a win by refusing to stop bidding on the item until the auction ended. In other words, bidders can guarantee a win, but it may be costly. You can’t guarantee a win when you purchase a scratch ticket or enter a raffle.

I think the important point to emphasize with penny auctions is that they are a form of entertainment, not a place for cash-strapped consumers to look for deals.

Josh

Josh

March 31st, 2011
9:18 am

Sorry about the broken link – http://pennyauctionlist.com

Al

March 31st, 2011
9:48 am

Clark,

it’s obvious that you have not looked into this deeply enough before you go off and say they are lotteries.. as many penny auctions now offer BIN – Buy it Now , and the bids placed go towards buying the item at retail or retail + tax (usually on iPads). Yes it is one of the hottest things on the internet today… But for the most part I believe this is the way eCommerce is headed, Custom built PHP websites that offer more than just a plain old shopping cart and checkout button!

null

March 31st, 2011
10:57 am

beezid.com is a scam

Daryll

March 31st, 2011
11:28 am

Ishop4cheap.com is really easy to win on without spending more than the cost.

jen

March 31st, 2011
11:59 am

Clark:

I can appreciate your comments on the extreme margins that the company can create off any product, but they do loose too, yes not on many but on some.

Also as stated before it is a skill to get good at buying these items indeed, but you can easily get cheaper products with a nominal investment, so I would not call this a lottery as this is not based off a randomly generated # as are lotteries and most gambling or games of chance, even Bingo is random thus gambling. These sites allow you to buy the product you wanted minus your investment of the bids used after the auction is complete, how is that gambling? Only bid on what you want, stop tossing your chips all over the table and get a strategy, then you will win…Oh yeah, they actually teach you how to win if you care to watch their videos.

Annie

March 31st, 2011
12:15 pm

Clark,

For Penny Auctions to be illegal, they would need to satisfy three requirements in federal law to be considered illegal gambling: they need to require up front payment for participation, they need to decide the winner by chance, and they need to offer a prize. Penny auctions only satisfy one of these three criteria – they require up front payment for participation. However, the winning bidder is determined based on the last bid after the clock runs out, and there is no prize since participants still pay to obtain the item.

Whether this process is manipulated is another matter that doesn’t fall under gambling law. While its understandable that the complexity of the process may cause some people to question it, the reality is that most of these sites are doing everything they can to be open, transparent and fair to avoid bad press or regulation. Additionally, people keep playing because participants do win these auctions and get good deals, the way they would in a traditional auction in eBay. Its true that you risk the up front consideration that you’ve been paid, but you do that to have a chance at a better price. You have control the whole time about how you bid, when you bid, etc.

What’s important is that people understand how the auction process works. However, trying to put a label on this that’s not factually correct is a bit misleading for your readers.

Here’s a legal opinion that may help your readers understand this better:
http://www.bidrivals.com/shared/skin/default/pdf/LEGAL_OPINION_US.pdf

Annie

Jason

March 31st, 2011
12:52 pm

The big thing about penny auctions is that the losing bidders also pay! If you do not win the auction you still pay money. This is not how a traditional auction works where if you do not win, you do not pay.

Penny auctions are games of brinkmanship and there are winning strategies. Check out this list of common penny auction mistakes http://www.bestpennyauctions.net/strategy/common-mistakes/ and you will see why it is important to be informed about how they work before putting your money down. Personally, I love them but know that I can lose money.

Mishap

March 31st, 2011
1:26 pm

Funny, this blog was pumping a locally started Penny “auction” site just under a year ago.

http://blogs.ajc.com/atlanta-bargain-hunter/2010/04/20/locals-score-huge-wins-on-new-site-created-by-emory-grads/

Kind of saddens me to think this is the best the most exclusive private school in GA can produce.

It’s not an auction b/c losers are still paying. It is a game and gaming generally requires regulation.

Personally, people stupid enough to bid on these deserve to lose their money but at least when they play the lottery some of that goes to fund scholarships.

StevePTC

March 31st, 2011
1:48 pm

why not just go Target and get the item cheaper than Walmart? Or even better drive to Birmingham and get a cheaper flight. Time to come up with something new.

PAFan

March 31st, 2011
2:10 pm

I’ve tried http://www.HappyBidDay.com and won a lot of items! It’s a great site. And they give free bids.

Penny

March 31st, 2011
2:13 pm

I still don’t think that penny auctions are 100% gambling. After all, there can be strategies that can help you win, which is unlike a game of chance. Your winning depends not just on your actions but also on your competitors. Look at the new penny auctions: they REALLY have to sell at 90% off, getting a couple of dollars on a $25 gift card. Why? Because there are not enough bidders!

I think the real problem with penny auctions is not their model but their oversight. The industry should be regulated to avoid unethical practices like shill bidding (having a bot bid against you to artificially increase the price) or not sending the won items etc. This would be more helpful to the consumers.

By the way you should also have mentioned the recent lawsuit against the biggest penny auctions. I discuss that in my blog: http://quibidsblog.blogspot.com/2011/03/penny-auction-lawsuits-against-biggest.html
I think this lawsuit should shed some light on the legalities of penny auctions.

In other news, the Titanic sank

March 31st, 2011
2:36 pm

Really, Clark? I’m pretty sure anyone not living under a rock had already discounted these “auctions” as lottos several months ago. This article is as stale as your travel “deals”.

Charles Walthour

April 5th, 2011
2:29 pm

Clark: Until now, I have trusted your opinions and I have been a devoted listener. However, you have made some carte blanche statements about penny auctions and it has made YOU look like a fool to many of your listeners who know penny auctions.

The Penny Auction concept swept the UK in about 4 years and it is still going strong. It arrived here in the U.S. in late 2008 so the concept over here is only a little over 2 years old and a lot of people have not heard of it and are still using EBay to do a lot of their shopping.

Last July 4th, my brother showed me a stack of gift cards 4 inches thick ranging from $25 to $250 for every business you can imagine…Longhorns, WalMart, Home Depot, Target, Red Lobster, etc….that he had won from a penny auction website. He said, “I have found a website that you are going to love!” and he was right. He got me interested, but, admittedly, I too thought that there might be a scam somewhere, but I tried it!

The first two times that I bought bids, I lost my A#@*!. But I don’t like losing because I am very competitive. So I got on every blog, and goggled everything that I could to educate myself on penny auction techniques. I also researched the existing Penny Auctions sites (at that time, there were only 11). Clark, admittedly, there are some penny auctions that don’t have their stuff together, so I avoided them. I checked out their analytics to see how many visitors were going there and the ratings of their websites. I am surprised that you didn’t do the same before claiming them to be “illegal”. Do you know what separates any business as being legitimate or not legitimate?….INTEGRITY of the owners! I hear you talk about EBay all the time, but thousands of people have been scammed on EBay. Penny Auctions are simply another concept of an auction. Remember when you first heard the name EBay? It wasn’t that long ago and, Clark, I think that Penny Auctions are an emerging industry in its infancy. Because of the economy, people are looking for great deals as well as entertainment, and competition and Penny Auctions provide all three. I believe that Penny Auctions ARE legitmate, but it is the owners that make them a scam, just like a gun is not dangerous, but the person holding the gun.

Anyway, after I read everything I could, I bought more bids (my third investment of $27.50, so now I am up to ($82.50). I applied what I had read and won 3 times on items that were worth a total of over $300. Well, I figure that I am ahead of the game, but I didn’t play anymore because I wanted to see if the items actually would be delivered. In the meanwhile, I researched other penny auctions and registered at two more that I thought were quality companies as a result of reading the results and complaints of other bloggers who were also gamers.

Clark, in 4 days, my items came to my door by UPS! Hooray! My confidence level doubled and I played again, but I was still using the bids that I had from the first time. Again, I won my limit! (They will only allow you to win 3 times in a 24-hour period, and 8 times in a month which is something that they call a “fairness clause” to enable everyone an opportunity.) I paid the shipping on my 3 items again (a total of $32) and within 5 days, they too had arrived.

Clark, I have kept a spreadsheet on my expenses and winnings so that I would KNOW whether I was spending too much money on my shopping or if I was actually getting a good deal. Here is the results of my first three months using 4 websites:

In the month of August: I actually spent a total of $1,091 (including shipping) and received all the items for a retail value of $8,917.
Some of the gift cards that I won (Visa/MC), I actually used in the purchase of more bids, but I haven’t counted those in the cost since I won them with bids that I purchased.

In the month of September: I spent a total of $882 and won a total of $7,720.

In the month of October, I spent a total of $774 and won a total of $9,029.

Clark, I think even you would recognize the value of 10 cents on the dollar for quality items that you would have purchased had they been on sale at a retail store.

Clark, at that point, I told my wife, this is such a cook, unique concept, “I wish there was a penny auction for Outdoor Gear. I believe that a vertical market would do much better than an “across the board” merchandise selection.” She said, “Why don’t you start one?” and that was all the permission I needed.

Clark, I put 5 people (including myself) together in November of 2010 with a vision of a penny auction for folks who hunt, fish, and camp. I selected this market because I love the outdoors and participate in all outdoor activities, but also because these people in this industry are the people who compete! Competition is part of their lives and they challenge Mother Nature at her best each time they go out in the woods or on the lake. These are the same people who do NFL, NASCAR, and tailgating. These are also the people who love the outdoors and use the gear that I want to auction! Unlike EBay, all of this gear is brand new, brand name, quality gear just like you would buy at Sports Authority or Dicks.

Every business out there, Clark, has it’s own scammers. The charity industry, the roofing industry, the insurance industry, the loan industry, the MLM industry and even the penny auction industry. But the people who let themselves get scammed by crooks are the ones who don’t do their homework. They don’t investigate the company. They don’t look at the experiences of others, but that doesn’t make the entire industry “illegal”!!

The concept of a penny auction is NOT illegal and I am shocked that you would use that term simply because you haven’t done your homework.

My penny auction opens in April of this month. We have put thousands into its design and development and it won’t be a scam, but I hope that it will provide lots of people with some great deals as well as providing 5 steward-conscious entrepreneurs an income to for their families, jobs for 25 people, an opportunity to contribute to their communities and tithe to their churches.

By the way, I won a 32-Gig iPad for $52.11!!

gwalding

April 6th, 2011
12:27 pm

While I don’t agree that penny auctions are gambling, there is a problem with so many people losing for one person to win. That’s why we created GetInToo.com. We’re not a penny auction, our auctions are won by the person who enters the lowest unique bid. If you enter bids and you don’t win, we give the bids back to you so you can use them again.

Some people have asked how can we do that. We had 2 choices, we could sell the bids and let the auction run it’s course and then keep all of the money from the losing bids or we could give those bids back to try again. It doesn’t cost us any more to give them back or keep them so we decided to give them back to use. Instead of a buy it now option, we just let you keep trying until you win. We still need people to keep buying to make it run, but what business of any type can keep running without selling something?

You can find it at http://getintoo.com