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Spend a penny

Robert Blincoe looks into the recent phenomenon of penny auction sites. It’s essentially just as much gambling as a slot machine or lottery – but there are some important factors to consider before you try to land yourself a bargain

If you're lucky enough to have the kind of high-pressure job that allows you to watch the daytime TV shows Bargain Hunt, Cash In The Attic and Flog It!, you'll have a good idea how traditional auctions work.

This isn't the eBay model where there is a strict time deadline for the auction to finish, which can culminate in mad sniping session at the end if it’s a popular item. In the traditional model, if something's going, going and about to be gone, and there's another bid the auction carries on.

This should be borne in mind if you get excited about the phenomena of penny auctions. These are online auctions where each bid raises the price of the item by a penny, but you have to pay for each bid you make. A typical pricing structure is £5 for 5 bids, £9 for 10, £20 for 25 and so on.

The enticements to bet, oops I mean bid, are big. The sites are littered with examples of deals such as a 32GB iPod won for £0.88. An HP Photosmart colour printer sold for £4.64. A £250 gift card for Jimmy Choo shoes at H&M for £8.38. Someone's getting a deal.

These are examples from site BidFella, but there are loads of auction sites out there, and in this market they can come and go quickly. Their opening pages usually show a nice piece of kit with the current auction price and a clock clicking down, but just as you think the auction is going to close, another bid comes in and another 20s or more is added to the time.

This means the obvious online strategic approach doesn't work. These sites have all the hallmarks and appeal of casino sites. That buzz about getting something for next-to-nothing, the luck, the suggestion of skill, and the people selling the goods being the winners.

Look at our examples of bargains above. The HP Photosmart colour printer sold for £4.64. That means there were 464 bids at £1 each, so a total of £464 went to the site. The given RRP was £148, so that's a nice return. Even better was the Jimmy Choo vouchers. These raked in £838 for something with a face value of £250.

The iPod is a different story. It brought in £88, and had an RRP of £229. Not a winner for the site, and this example illustrates a risk not just for the sites but for the bidders.

If new sites don't get enough bidders, or are under capitalised, they lose money and can't get out of that hole. Either they close, or they take the routes of not sending the goods that have been won, or they use fake bidding bots, meaning they never have to give up the prizes. Check out Penny Auction Watch (pennyauctionwatch.com), it regularly reveals examples of ‘shill betting’.

There are a couple of main things to look for. If you know what you're doing check out for computer scripts for bogus bidding – one called ‘feisty sites’ is very popular with the dodgy sites. Also, if a site's web traffic (check at Alexa.com) reveals few people have visited it, but the auction claims to have hundreds of auctions and thousands of bidders, then there's a distinct smell of fish around.

But what about the winners? You can either get lucky but the one real strategy to adopt is to be an aggressive bidder and get a reputation on a site for that approach. But it only really works if there are no other big fish in your auction pond.

Then you do you research. One champion bidder, Gary Fowler, proved to Wired magazine that he had won $39,000 worth of stuff having spent $18,000 to get it. He full-on bids on everything, and gets his rep by overpaying if he has to. Opponents then back down. He also spends at least six hours researching a site and weeks of bid history to know his market.

All this means is that most people aren’t turning a huge profit on the site, and a lot are losing money. Also, the sites aren't bound by any gaming authority so are unregulated. So it’s worth bearing in mind these wisest of words for any auction bidder: Caveat emptor – "Let the buyer beware".
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