Penny Auctions have been getting a lot of attention in recent years. The premise of the Penny Auction is pretty simple. An item that would typically sell for hundreds if not thousands of dollars more is put up for auction for an extremely low starting bid. Bidders gather around for the chance to get the item for a bargain. The final price for the item is kept low due to a unique quirk of Penny Auctions. Every time you place a bid you are charged a small fee, usually a penny, which is often non-refundable. While this might seem innocent enough, note that this is the tip of the iceberg. The ugly side of Penny Auction Sites is that you might not be saving much of your money after all.

Penny Auction websites use a well-known medium to make a lot of money. Auctions are simple, fast, and incredibly addictive for the bidders. The thrill of getting an item for a “bargain” often dictates the bidder’s actions more than rational thinking. Traditional auctions make money one of two ways. Either by obtaining the items on a steep discount and selling them under the retail value or in the vague hope that a bidder will bid significantly more than the retail value. Online Penny Auctions are a little different, but work similarly to the second scenario. Thanks to the fee collected from each bid the auctioneer stands to make a considerable profit even if the Final Selling Price of an item is nowhere near Retail Value.

Let’s use an example to illustrate this point. Say that the auctioneer is selling an item that retails for $100 at a Penny Auction. The starting bid is just a penny with each of the bidders paying a fee of a penny along with their pledged bid if they win the auction. This auction ends with a winning bid of $63. At face value it appears as though the auctioneer lost $37 on the auction. This is not the case. Though the winner paid just $63 and a penny if that was their first bid there were also 6,300 other bidders. Each of these bidders paid the penny fee when they bid. Even though they did not win the item this fee must be paid. So the auctioneer gets the $63 and one penny from the winning bidder along with the fees from every other bidder. In all the auction grossed a little over $126. The auctioneer actually made a profit on this auction even though the winning bidder obtained the item for less than Retail Price.

That’s not all. Many Penny Auction sites charge additional fees on top of the bidding and winning fee. Some require you to pay a monthly fee or access charge even before you begin bidding. Others will charge you a ” Transaction Fee ” or other fees that you might not be aware of until bidding is over. Then some bidders take advantage of legitimate Penny Auctions for their profit. These bidders, commonly known as snipers, wait until the last minute to bump up the price of an auction in an attempt to confuse legitimate bidders or help the auction owner obtain more money. Sometimes the winning bid will be from the auction owner themselves or a friend of the auctioneer who gives them raving reviews to increase their credibility before an actual scam happens. You must err on the side of caution and use your instincts when participating in a Penny Auction. It could be the difference between finding a bargain and falling for an extremely expensive scam.