Internet penny auctions (how they work)

I'm sure you've heard commercials for internet penny auctions like Beezid on television and on the radio.  "NEW MERCHANDISE, Cameras for $10, Cars sold for $300!"  Did you ever wonder how these sites can afford to sell these seemingly expensive items at such a cheap price?

The way these sites work is as follows.  An item goes on auction for an incredibly low price, for instance a digital camera will begin at $0.50.  Once the item gets put up for auction a timer begins to count down usually from somewhere around 20 seconds.  Each time a user bids on an item, the price goes up by $0.01 and the timer is reset.  If the timer runs out, the item is sold to the last person to bid on it.

The basic principal of any online auction site is to make it seem like you are getting an amazing deal.  In order to explain how these sites work we will walk through an example of an auction.  Our auction item will be a television which would typically cost $600.00 at any given electronics store.  We begin the bidding at $1.00.  You may think that this is an outrageous starting price for a television, 0.166% of the value we bought it for.  On top of that, each bid will only raise the price by $0.01.  If you do the math, it would take 59,000 bids for us to break even on the auction of the television.

So how do these sites make money?  The trick is, each time a user bids on an item they pay $1.00 to the site.  Let’s say there are 100 people bidding on our television, which seems like a reasonable number of people who would want to try to win a television for a cheap price.  If each person bids 10 times (1000 bids total) the television will be sold to the winner for $11.  The person who just won the television thinks he/she just cheated us out of $589.  The other 99 bidders are a little upset that they just lost $10, but think it would have been worth it had they won.  How do we come out of all of this?  We make $1,000 from the bids and $11 from the television, giving us a 168.5% return on our investment!

I hope you learned something from this post and you will be smart about your internet bidding!