Consumer Reports' Investigation of Online Penny Auctions: Many Bidders Spend Lots and Leave Empty-Handed

Oct 14, 2011, 06:00 ET from Consumers Union

YONKERS, N.Y., Oct. 14, 2011 /PRNewswire-USNewswire/ -- The discounts offered on online penny-auction sites might be tempting, but a new Consumer Reports investigation reveals that for all the people who click their way to an amazing deal, most end up spending a lot of cash only to end up empty handed.

Encouraged by TV and Web ads promising as much as 95 percent off of retail, swarms of people are signing up for the piece of auction action at sites like Bidcactus, Bid Rivals, HappyBidDay and QuiBids. These sites hawk items like an $1,800 high-definition television for $73 or a $15 store gift card for 28 cents.

But actually winning a big-ticket item for pennies on the dollar from one of these sites can take an extraordinary amount of effort and is hardly a given.

"You could get a bargain, but generally, you stand a very small chance of winning the amazing deal they advertised," said Tony Giorgianni, associate editor, Consumer Reports. "For everyone who gets an amazing deal, many others spend a lot of money only to be disappointed.

The full story, Penny-Auction Sites Offer the Thrill of the Bid," will be available at at 6 a.m. on Friday, October 14th.

How they work
There are scores of penny-auction websites. The ones Consumer Reports investigated work and look pretty much the same, although the rules and costs differ. The sites typically run dozens of auctions at the same time, with items of different value, such as gifts, electronics, and appliances, all of which are offered by the site itself.

Like traditional auctions, participants bid on items, with each bid increasing the price. To bid, you click a bid button. Auctions are timed so when the clock runs out, the last and highest bidder wins the item at final price. Often that price is ridiculously low. That's because bidding starts at or near $0, and each bid raises by a fixed increment, usually just a penny or two. So an item that gets 1,000 bids in one-penny increments sells for $10, even if it would cost you hundreds or thousands at retail.

But unlike with traditional auctions, bidding isn't free. You must buy bids up front—typically for 50 cents to $1 each. To get bids, you register a credit or debit card or use PayPal. Bids are sold in packs, with the minimum pack costing around $25 to $60, depending on the site. Unused bids are refundable on some sites though sometimes within only 30 days of when you buy them.

One key difference between traditional and penny auctions is that any bids you make are gone, whether or not you win. So if you've made, for example, 100 60-cent bids on a $2,000 computer but you aren't the winner, you're out $60. If you wind up the winning bidder, you and only you would have the right to buy the computer for the winning price. So if the bidding ends at $14, the computer would cost you $74: the $14 plus the $60 you bid. If you lose, some sites give you the option of buying the item at a higher retail price, minus all or part of the amount you've bid. Not every site has this option.

Whether you're buying a product at the winning price or at retail, you also have to pay for product shipping and handling, which varies by product and by site. Return policies also differ from site to site. has only a seven-day return policy. And ArrowOutlet imposes a 15 percent restocking fee on some returns.

Bidder beware
Getting an auction deal appears simple enough: Just wait until the clock is about to run out, place your bid, and hope for the win. But it's not that easy.

Lots of your fellow bidders will have the same plan, which is why a flurry of bids often comes in as the clocks winds down from it initial setting. And whenever someone bids, 15 to 30 seconds or so is added to the remaining time. As a result, you never know when an auction will end, even if the clock has ticked down close to the last second. Participants often bid again and again, extending the auction sometimes by hours or even days. That's especially likely to happen for hot products such as iPads, big-screen TVs, and other electronic gadgets. Some bidders get so carried away that they're determined to win no matter how many times they have to bid and how unreasonably high the price goes.

Complicating things further, many sites offer an automatic-bidding feature—names include Bid-O-Matic and BidRunner—that bid on your behalf until the price reaches a certain level. So you can end up bidding not only against dozens of real-life bidders but also against a mindless, tireless computer, which won't doze off in the wee hours of the night. Sites usually limit how many items a participant can win within a given period, supposedly so others can have a chance. For example, among other win restrictions, QuiBids allows participants only three wins per account each day and 12 wins over 28 days.

Critics and happy customers alike say penny auctions amount to gambling. After all, you spend money with the hope of being the winning bidder at the end of the auction. But the websites reject the gambling label. The main reason, they argue, is that there's no element of chance, as there would be when you play a state lottery, for example. They also say that you control how often you bid and when to stop.

Penny Auctions 101
If you decide to try your hand at penny auction, keep the following in mind:

  • Be prepared to lose whatever you bid or the bids you've purchased.
  • Bid only on sites that allow unlimited refunds of purchased bids, offer advice and tips, and have a buy-now feature that lets you apply all your losing bids towards a purchase.
  • Find legitimate sites by checking out user reviews. Look for a consensus among many reviewers instead of relying on just one or two posts, since Consumer Reports has seen one report of a sites' paying or otherwise rewarding people for posting positive reviews.
  • Run a search with the name of the site you're interested in with such words as "complaints" and "rip-off" to see what problems people might have had. Also get a report for a site from the Better Business Bureau, but don't rely solely on the BBB's letter grade. Read the entire report, paying special attention to the number and types of complaints and any government actions.

Consumer Reports is the world's largest independent product-testing organization. Using its more than 50 labs, auto test center, and survey research center, the nonprofit rates thousands of products and services annually. Founded in 1936, Consumer Reports has over 8 million subscribers to its magazine, website and other publications. Its advocacy division, Consumers Union, works for health reform, food and product safety, financial reform, and other consumer issues in Washington, D.C., the states, and in the marketplace.

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SOURCE Consumers Union