How Does an Online Penny Auction Works?

As you can appreciate from the introduction, penny auctions are not your traditional type of  online auction. In order to win more often, you have to understand how they work, you have  to have a strategy and you have to have a system.

Having a system will help you to stop  becoming too emotionally involved in the game. Just like in a traditional auction, you have to  try to avoid getting into a bidding war with an individual, where sometimes the focus  becomes winning at any cost, rather than getting a good deal. You have to learn to control  your emotions, to overcome the destroyers of rationality; fear and greed.

Having good information, doing your research and having a plan or a system and sticking to  it will allow you to control the things you can control and win more often. So to help you in  your quest to get good information, I’m going to help blow the lid on the industry.

I’m going  give you the inside track, to pull back the curtain and show you how it works, so you can see  the mechanisms, the pulleys and the gears so you know exactly what you are up against  before you spend one more cent. Armed with good information, knowing the odds will help  you to make good decisions. Some people, after reading this blog may even decide to just  walk away – have nothing to do with pennyauctions – and if that’s the case, then at least you  will do so with eyes wide open. Others will take the information, exploit it and go on and win  bigger and better than before.

Now before I go any further, some of this info is not widely known or recognized and the  industry is going to hate me for spilling its beans. Who knows how long this book will be  available, because after telling you what I am going to tell you – they are going to want me  shut down… and fast. I’m going to avoid mentioning names, in the hope that I can keep the  book up a while longer – so that no individual company will come after me claiming  defamation. There are definitely good companies out there, who keep it a game between the  buyers and a few rotten apples that are out to rig the game in their favor. I won’t name names,  but I will show you how to identify the good from the bad.

But before we do that lets dial it back a bit and talk about some more routine matters, how the  typical auction works, the processes involved, from buying bids to collecting your winnings.

The real allure of the penny auction is to the bargain hunter, the person in all of us who likes  to tell his/her friends that they got a brand new XYZ (insert the name of your dream thing in here) for a few dollars (or a few cents) and see their friends gasp in horror and ask how on  earth did you do that?

It appeals to our sense of accomplishment, the feeling we get when we  “beat the system”. It is akin to the stock market trader who bids on a penny stock and it runs  up to $10. We know for whatever reason, it shouldn’t be possible, but it is, we’ve done it, we  have the proof and somehow we are imbued with some power or special ability that makes us  a little bit better than everyone else.

But before we get the bragging rights, there are some processes we need to follow.

Step 1: Find an Auction and Buy Your Bids

The first thing you will have to do is find an auction site that is reputable that you feel  comfortable with. There are many sites out there to choose from, so you have to do some  research on which one you like. Check in the reference section of this book for some websites  that rate penny auctions. These should give you a basic guide to help you choose an auction  you want to jump in to.

When you find an auction that you like, you will have to sign up to the site. You will create a  username and password. Some sites have a profile you will have to fill out. Be sure to enter a  good email address that you can get access to easily.

Here’s a little strategy hint: If you have a mobile device like a phone or tablet that can access  various emails, create an email specifically for the auctions. You can get one like Gmail, or  Hotmail, etc. Use this email to register your auction. Why? Simple, you can integrate your  mobile device to that email. Now you can get up to date information anytime on the auctions,  and even participate quickly with your mobile device!

Once you have registered to the site, you will have to purchase a bids package. The bid  package will vary on each different website, but in general they will run from around $0.40 to  $2.50 per bid. For example: On one reputable website you get a pack of 100 bids for a one- time fee of $60. So each id costs 0.60 cents. You can lower the cost per bid by increasing the  size of your bid package, or get free bids by performing certain acts, like referring friends etc.

Overall, most websites offer bid packages of 100 or 200 bids – up to several thousand and the  price will vary quite a bit. Be warned, cheaper is not necessarily better. The aim of this guide  is to get you into sites with good reputations, which play the game fairly.

That is not to say  that sites who offer cheap bid packages are trying to rip you off, but you have to know what you are buying. Before you shell out ANY of your hard earned, you have to know how much  each bid is worth. If you are buying 2000 bid points for $20 and it costs 10 bid points for  each bid, how much is each bid? And is that better or worse than buying 200 bids for $80  with each bid reducing your bids by one? You have to be able to do that basic math, so you  know exactly how much you are paying for each bid.

Each websites rules and bid packages  will vary, so check them out before you buy anything – and if you think you’re going to stay  on the site long term, then buy the most economical bid package that suits both your budget  and your intended activity.

For those who struggle a bit with the math – here’s how to work out the two examples used  above.

If you purchase 2000 bid points for $20 and you use 10 bid points for each bid, you divide  2000 by 10. So it means you get 200 bids for $20, so each bid costs 10 cents. The tip is here –  you divide dollars by bids. So in our second example $80/200(bids) = 40 cents per bid.

Step 2: The Auction Starts – you bid

For every item, each auction will start off at zero in price. The clock will start to count down  from the set time. Some auction times are set for days in advance, while some are set for 15  minutes or 20 minutes. During this period of time you can place a bid on the item.

The auction will count down until it hits 00:00:00. When it reaches that point the person with  the last bid wins the auction. The winning bidder then get’s to pay the final bid price for the  item. People can and often do bid in the first few minutes of opening – but if you watch these  things long enough you will notice that most of the bidding happens in the last few seconds  of the auction.

There is a reason for this, as the clock winds down, when someone places a  bid; the clock is reset back to 00:00:20 left in the auction. The price will increase by 1 penny.  So, as hundreds of people start bidding on an item, or a few start placing hundreds of bids,  the price will keep moving up incrementally and the time left in the auction will keep  resetting to 20 seconds, or whatever the default time happens to be.

So, in the example picture below, the auction for the cell phone has 00:00:05 left to go and  the winning bidder is “Jimmy’s Bid” on $1.92. If you were to place a bid, the clock resets to  00:00:20 and the price goes up $1.93. Then after that if Jimmy’s Bid comes back in and  places a bid, the clock resets to 00:00:20 gain and the price goes to $1.94. This goes back and  forth until nobody wants to bid anymore and the clock is allowed to run out. The winner is the one who has the highest bid at the expiry of the auction.

Let’s say for the  purposes of this example that no one else puts on another bid and “Jimmy’s Bid” wins. Jimmy would have to pay $1.92 plus postage for the phone. Now we don’t know how much  Jimmy’s Bid actually paid for the phone, because we don’t know how many bids he actually  made, unless we were watching and recording the whole auction. This will lead us into a  strategy a little later. But for now you need to understand that the winner only has to make a  single bid, although most winners (as well as losers) use up a lot more than that. Just as a test;  how many bids were made on this auction? AND, if each bid cost 50 cents how much did the  auction site make on the auction (turnover not profit)?

Penny Auction 101: What's Penny Auction?

The promise of the future is an awesome force!

Imagine someone owning a business where they can buy a product at a wholesale price, say $300.00, and list it at a retail price of say $500.00, and then sell it for less than the wholesale price at around $75.00, and still get around 1286% gross profit on the sale, $4,150.00. 

Now also imagine you are surfing the Internet and you come to a site that is advertising “Get a $500.00 TV for only one penny”. “All you need to do is purchase 1 bid at 60-cents and enter the auction.” “You may win with only that one bid!”

Wow! You do win! What a win-win situation for you and the auction owner. He gets a great profit from just one sale and YOU have a brand new $500.00 TV shipped to your address that  only cost you one cent plus 1 bid at 60-cents for a total of 61 cents (providing you won with the  one bid). Such a deal!

Let’s do the math.

For the TV to be sold at a winning bid of $75.00 there had to be 7500 penny bids placed. Now since the auction owner originally sells the “bids” to the bidders, that would be 7500 x .60 = $4,500.00 just for the sale of the bids for that one auction. Subtract from $4,500.00 the cost of the TV ($300.00) and a reasonable shipping cost of $50.00, the auction owner’s gross profit is $4,150.00; easily stated as 4150 / 350 = 12.86 or 1286%. Remember if the auction owner gets back $350.00 that is 100% of their investment. In this case it is over 12 times their investment price or more than 1200%. 

Once the bidding goes past $5.83 in this case of the TV, the auction owner starts making a profit. Let’s do the math again.

The TV sells at a winning bid of $5.83 so there were 583 penny bids @ .60 each for a total of $350.00 just for the sale of bids. Subtract from $350.00 the cost of the TV ($300.00) and a reasonable shipping cost of $50.00, and the auction owner’s gross profit/loss is $0.00.

In all fairness I must state that most auction sites work on 10 to 15% margin and they lose on as many items as they make a profit. The same TV above could have sold for an auction price of under $1.00 (and many high value items do close at a very small price sometimes).

Ok now that I have your attention let’s look at some things to be aware of. After all the  gambling spirit is in most of us and you just may want to take a chance at winning a TV for a few  penny bids.

Traditional Auctions

In general, the participants attending a live traditional session are local and register at the auction site to receive a number (paddle) to show when bidding. The auction from this point on is driven by the bidders until a final price is settled upon. The price for each item put up for auction is normally settled in a very few minutes. The bids are free and the auctioneer gets a commission on the selling price. No one is committed to spending money except the winning bidder.

On-lineauctions such as eBay® work pretty much the same but the amount of time for each auction is measured more in days not minutes to give the world wide audience a chance to bid.

You must register with eBay® but all bids are free.

How does an online penny auction work?

In general the participants of online penny auctions must first buy “bids” from the auction site  in order to bid on an item at that site. These bids are non-refundable in most cases and can vary in costs from as little as 10 cents each to $2.00 or more each. The auction site will keep your pre-purchased bids in a personal “bid-bank” for you to use while on their site. Yes it is possible to belong to multiple Penny Auction sites and each one holds your unused bids in safe keeping for your return. Some sites will charge a membership fee for these services.

When the bidding is opened, the price of the item is generally set to zero. The first bidder to place a single bid starts the clock and the item is now one cent. When the next and each bid thereafter is made it will reset the clock and increase the cost of the item by 1 penny thus giving the name of the auction; Penny Auction.

Pennyauctions can go on for hours so plan on plenty of time to sit back, watch and/or participate in the auction. Since each bid adds time back to the countdown clock you may have to  wait anywhere from 10 seconds to 2 or more minutes without a bid to see the “going once – going  twice – sold!” message.

The goal is to be the high bidder when the clock finally runs out. The auction process can be unpredictable and take much time to complete. By using my example above with the TV selling for  $75.00 it will show that with simple math, 7500 bids at just 3 second intervals each can take up to 6  plus hours. 

7500 x 3 seconds average = 22,500 / 60 seconds per minute /60 minutes per hour = 6.25 hours    One more thing, some sites will not let you enter an auction in progress after it passes a certain  amount so there is no waiting until the last minute to get in.

The auctioneer receives the money paid for each bid, plus the final price of the item.

How do I Bid?

At a live auction you would show your number (paddle) to place a bid for free. But this is an online auction with an unlimited amount of bidders worldwide and the bids are pre-paid. Imagine if you went to a live auction and every time you raised your paddle you had to pay a dollar. That seems to me that it would discourage bidding.

For online bidding, you start the bidding by clicking on the Bid Button (provided you have bids available in your bid-bank). If someone out bids you then click again to raise the bid once more.

This is the manual bidding process and the safest way to participate. You can stop anytime you  feel you have reached your budget limit for bids on that item.

There are also auto-bidding mechanisms that can be set up in which the program will bid for you, sometimes bidding at the last second. This can be dangerous because 100 bids can go away in a matter of a few minutes if someone else decides to go on auto-bid at the same time. This is known as bidding wars. While the bidding wars are going on, the other bidders just sit back and wait to jump back in when the war is over.

Some sites run hundreds or even thousands of auctions simultaneously around the clock, with items of different values ranging from $10 gift cards to expensive electronics and appliances. Auto-bidding bidders may have a spot in several of them at the same time.

Where and how do I get Bids?

To get bids, you register a credit or debit card with the auction site and some will even take PayPal or Payza. The bids are generally sold in packs, with the minimum pack costing around $25 up to several hundred dollars, depending on the site. Unused bids may be refundable on some sites with a deadline but check first because as with most sites there are no refunds.

One major difference between traditional auctions and penny auctions is the bids you place in a traditional auction are free but any bids you make on a penny auction must be bought first and when they are used they are gone, whether you win or not.

Back to the TV example, if you've made 150 60-cent bids on a $500.00 really cool TV but you do  not win it, you're out the $90.00 for bids.

On the other hand however, if you end up as the winning bidder, you have the right to buy the TV for the winning price. So if the bidding ends at $75.00, the TV would cost you $165.00: the $75.00 price plus the $90.00 in bids you placed. Some winning prices include shipping and many  do not so you may have to pay for shipping and handling, which varies by site.

  

Quick Summary

1.  All auctions require you to register. Many online sites may have you pay a fee to register. Sometimes, the fee is substantial.

2. In a traditional auction, only the winning bidder pays anything. In penny auctions everyone  pays for the right to bid by buying their bids first.

3. For online penny auctions you buy a “bid package” to get bids. For example, you may buy 100 bids for $60 (60-cents each).

4. You must purchase additional bids during the auction if you run out before the auctions  ends and want to continue bidding.

5. All participants that bid in penny auctions pay something win or lose.