Canadian Finance Blog

Posted: 16 Jan 2012 02:00 AM PST

You can get a MacBook Pro for $70! With penny auction sites, prices start at a single cent, and you can possibly buy expensive electronics for low, low prices. At least that's what the adverts tell you. Unfortunately, the reality of these penny auction sites is that they are making loads of money for the site owners – and you have a slim chance of actually getting a good deal.

Pay Per Bid

It's important to understand that penny auction sites aren't making money on selling items dirt cheap. They're making money on individual bids. When you participate in a penny auction, you pay per bid. In most cases, bids cost between 30 cents and 60 cents apiece. You buy a certain amount of bids to begin. So, you might be able to buy 100 bids at 45 cents apiece. That's $45.

Each time you bid, your bid count is reduced. And, thanks to the way penny auctions are run, it is pretty easy to breeze through 100 bids – without winning anything. Each auction is set up to take a certain amount of time. However, in some cases new bids can add a few more seconds to the auction. That means that it's impossible to know exactly when an auction will finish (no waiting until the final seconds to swoop in an win like you can do on eBay).

With thousands of bidders, and no way to determine when the auction will actually end, the chances of you actually winning something are pretty low. But you still pay for every single bid you place. And that's where the site owners make their money. It's not unusual for thousands of bids to be placed by hundreds of people before an auction ends. So, if a $1,800 MacBook Pro garners 5,000 45-cent bids, that's $2,250. It doesn't matter that the laptop sold for $70. The auctioneers already made a profit.

Buying at "Retail" Price

Of course, if you lose the auction (and there's a good chance you will lose), most auction sites offer you the chance to purchase the item at "retail," minus the cost of your bids. So, if you bid 50 times and lost out on the $1,800 MacBook pro, you will have $22.50 applied to your purchase. Plus, you will have to pay shipping. In many cases, there is a markup for items bought on auction sites. You might be better off just shopping around for a better deal in town, or at a more traditional online retailer.

Addicting Nature of Online Auctions

Online auctions can be addicting as well. It's a lot of fun to place bids, and see if you can score a great deal. Even if you don't win, the thrill of the process can be addicting – along with the hope that this time you'll win. It is very similar to gambling in a lot of ways.

If you aren't careful, it's easy to click away your bids, and then need to buy more. You can spend hundreds – and even thousands – of dollars without winning anything. And, if you finally do win something, your great deal is likely to be completely negated by the large amounts of money you have already spent.

How Do Penny Auction Sites Work? originally appeared on Canadian Finance Blog on January 16, 2012.