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Avoid The Bidding Fee/Penny Auction Scam

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Are you familiar with bidding fee auctions or penny auctions? If not, here's a description of what they are how they work.

Sales scams are as old as humanity, but the Internet has introduced a whole new way to rip people off. Penny auctions are very popular because it seems like you can get something useful - cameras, computers, etc. – for way below retail. But you pay a small fee for each bid (usually $0.50 to $1.00) and if you aren’t the winner, you lose that bid money. Winners often are not even the top bidder, just the last bidder when time runs out. Although not all penny auction sites are scams, some are being investigated as online gambling. BBB recommends you treat them the same way you would legal gambling in a casino – know exactly how the bidding works, set a limit for yourself, and be prepared to walk away before you go over that limit.

This description was from the Better Business Bureau's top ten scams of 2011. While I have said you shouldn’t always trust the BBB, the point was made that if they warn about something, you shouldn't get involved. In short, the BBB just veto'd penny auctions as a way to save money or get a good deal.

The BBB isn't alone.

The Washington Post goes into more detail about the bidding fee auctions in its coverage of Swoopo.com, a defunct bidding auction company with the same model as Zeekler. The article points out a number of reasons why it "may be the most devious way to separate folks from their money yet devised" including pitting buyers against each other, getting them to make snap decisions, and making it seem like they are spending much with relatively small bids. The article goes on: "In essence, what your 60-cent bidding fee gets you at Swoopo is a ticket to a lottery, with a chance to get a high-end item at a ridiculously low price.... the only winning strategy is not to play in the first place."

The New York Times called Swoopo's bidding auctions, "devilish" noting how the process allows for a business school professor to sell a $20 bill to educated college students and make $50 in bids. The article shows how Swoopo was able to auction a $1000 check and collect $2452 in total fees.

In fact these bidding fee auctions may be illegal lotteries. This NBC News article explains why:

"Doing something truly as a penny auction ... there's no doubt in my mind that's an illegal lottery," he said. "But I believe they could be conducted correctly. ... Are there some operators doing things in addition to bidding that means they (satisfy) sweepstakes and lottery laws? It's possible. Those things would have to be analyzed more deeply."

There are three elements to an illegal lottery -- prize, chance and consideration. In a basic penny auction, all three elements are satisfied, Lewczak said. The discount is the prize. There is chance involved, as the auction bidder does not know when an auction will end. And finally, there's consideration: The bid fees.

Even the FTC has put out a consumer alert against these penny auctions (another name for bidding fee auctions). They agree that they are more lottery than auction saying, "But in many ways, penny auctions are more like lotteries than traditional online auction sites." It warns that unscrupulous auction sites use computer programs that automatically bid on behalf of the website to extend the auction and keep people bidding (and spending money) as they chase the "win."

When you add up the chance of losing money, the potentially illegal lottery/gambling, and potential for the fraud by the auction company itself, the only logical conclusion is that the Washington Post is dead on with bidding auctions, "the only winning strategy is not to play in the first place." I previously only put bidding auctions as a 5 or 6 on Lazy Man’s Scam Scale, but after doing this research, I think I underestimated it.

Tomorrow, I will build on this illustrating one specific penny auction company that I've been looking into, Zeekler.

Last updated on August 5, 2012.

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17 Responses to “Avoid The Bidding Fee/Penny Auction Scam”

  1. SueAnn says:

    [Editor’s Note: Here’s an example of how scammy the bidding auction fees are. The first comment I received not long after posting is a person whose website that does some kind of recruiting people into a business around these bids.]

    I am definately interested to see what the future holds for penny auction websites. Can’t wait to read more of your blog posts!

  2. I’m not into penny auctions but this was an eye opener for me. I never trusted them.

  3. Alex says:

    I signed up for one and lost $50 and stopped playing, then the site gave me “free money” to come back and play. Exactly the same thing some gambling sites do when they lose customers….

  4. Kosmo says:

    I find it amazing that some well respected sites let the penny auction site advertise with them. Specifically, I’ve seen QuiBids advertising on ESPN and my local news station’s site.

    True, they aren’t working directly with QuiBids; they are using Adsense. Still, you’d think these companies would filter out some of the advertisers. I make an effort to do this on my own site (I’m sure I don’t catch everything), but these are companies with full time employees. Heck, ESPN is a subsidiary of Disney.

    Your reputation is influenced, in at least a small way, by your advertisers.

    • Lazy Man says:

      I saw Quibids advertise on NFL Network recently. The commercial was something like this (http://www.youtube.com/watch?v=H7wm5zU4U9c) but featured a person who had won something like $7000 worth of stuff for a few hundred. The commercial didn’t mention how much he spent on bids, but what caught my attention is the bottom that said, “Results Not Typical.”

      As the FTC says:

      “Under the revised Guides, advertisements that feature a consumer and convey his or her experience with a product or service as typical when that is not the case will be required to clearly disclose the results that consumers can generally expect. In contrast to the 1980 version of the Guides – which allowed advertisers to describe unusual results in a testimonial as long as they included a disclaimer such as “results not typical” – the revised Guides no longer contain this safe harbor.”

      The typical case of the average person losing their money in buying losing bids is not represented in the commercial.

  5. Max says:

    Last year (don’t know the current status) Mike and Mike in the Morning on ESPN always talked about how great SkoreIt.com was.

  6. Anthony says:

    I am discouraged into joining something in which winning highly depends on chance. I prefer getting into a venture in which profit depends in the accuracy of analysis, measurement or computation.

  7. […] couple of days ago, I wrote why you should avoid the bidding fee/penny auction scam. If you haven't read that article my conclusion after much research was that adding up the high […]

  8. Kosmo says:

    It seems weird that NFL Network and Mike & Mike value the marginal revenue from the ad (as compared to the revenue from using a different ad in that spot) as worth more than the small ding to their reputation. Talk about penny wise and pound foolish.

  9. Steve says:

    A penny auction, scammy though it is, isn’t really analogous to a dollar auction. I’m not sure why the NYT made that comparison. A dollar auction works because of escalation of commitment. The only escalation of commitment with a penny auction is mental. A penny auction is more like a lottery, as you say.

    • Lazy Man says:

      @Steve, I don’t see how the escalation of commitment is any different when bidding for a $20 bill vs. a iPad. Isn’t the escalation of commitment mental for both?

  10. Steve says:

    @LazyMan, it’s not the prize that makes the difference, it’s the auction format. In a “dollar auction” the first and second place bidders both pay their bids. Even rational bidders making rational choices at every bid can end up bidding $50 for a $20 – at each step they can either give up and pay their current bid, or escalate $2 and gain a net $18. In a penny/bid fee auction all bidders pay 60 cents for every lottery-esque ticket. Well, I do see the similarity when I put it that way, but they are still different auction formats. The key difference may be that other bidders who aren’t already in the auction, can swoop in and overcome your bid.

    • Lazy Man says:

      Ahhh, I think I misunderstood how the dollar auction worked Steve. I thought it was the same format of buying bids and it going up incrementally in the same way as the penny auction.

  11. […] Man @ Lazy Man and Money writes Avoid the Bidding Fee/Penny Auction Scam – When you add up the chance of losing money, the potentially illegal lottery/gambling, and […]

  12. […] [email protected] Man and Money writes Avoid the Bidding Fee/Penny Auction Scam – When you add up the chance of losing money, the potentially illegal lottery/gambling, and […]

  13. […] couple of days over the last week or two, I've been covering the the penny auction scam and in particular one company's version, Zeekler. Those articles, particularly the Zeekler one, […]

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