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Are the "crazy deal" auction sites better than eBay?

How the math works on those "penny bid" sites that offer something for nothing

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Penny bid sites that offer crazy deals can seem like a good bet versus the stodgy and "more expensive" eBay, but anyone who actually does the math is likely to think twice before bidding on penny sites.

Image: Hasenonkel / Dreamstime

You've seen the advertising for them all over the Internet—those other auction sites that seem to offer deals about a hundred times better than any deals that you can find on eBay. Deals like:

  • $26.00 for a brand new 3rd generation iPad!
  • $31.00 for a 46 inch plasma TV!
  • $101.00 for a full 2-karat diamond ring worth tense of thousands!

Everything for pennies on the dollar, because manufacturers and retailers are overstocked and don't know what to do with their stuff!

No, you're not missing similar deals on eBay—you can't find "deals" like this on eBay, and may not actually find them on the sites in question, despite the fact that the prices they list are probably real examples. Here's why.

How eBay Auctions Work

On eBay, which is open to anyone (individuals, retail businesses, liquidators, and government agencies alike), a seller offers an item at auction to the general public and pays a small fee to eBay for the privilege of doing so.

After that, anyone is free to place a bid, or as many bids as they like up until the appointed time at which the auction ends. Once the auction ends, the item has been "won" by the highest bidder.

The winning bidder then pays the seller directly (not eBay) for the item, and eBay charges the seller a second fee—a percentage of the final value of the auction—as a commission.

Because anyone can bid for free, a worldwide audience of buyers is likely to keep bidding on any non-sketchy item offered by a decently-rated seller until it stops being worth their time to do so. Usually this happens once they can get it for the same or a lower price somewhere else, meaning that basic supply-and-demand market logic is at work.

So on eBay, the model is:

  • Auctions end: At an appointed time, no exceptions
  • Auction site paid by: Seller
  • Winning bidder pays: Item seller
  • Per-bid charge to buyer: None
  • Time investment required by buyer: Enough to bid once using the proxy system (a few seconds total)
  • Auction site revenue based on: Commission on market-value item sales
  • Fees earned by auction site for every auction: Small percentage of item value

How "Crazy Deal" Auction Sites Work

On those auction sites offering seemingly too-good-to-be-true deals, the model is somewhat different. There is no independent seller; instead, the auction site themselves effectively offer the item. If there is another sourcing partner, they are guaranteed a particular price per item similar to the market value of the item, regardless of the apparent sale price in each case.

Rather than being generated by charging fees to sellers based on the sale price of the item, auction site revenue comes from bidders. These kinds of sites charge bidders for each bid that they place. In order to bid, buyers must buy a "package" of bids (usually 100 at a time or more at a cost of a few cents per bid) and must bid in predefined increments (often a penny at a time).

The auction continues until no bids have been placed for a specified amount of time (usually one or several minutes). Each time a new bid (of the predefined amount, again usually a penny) is placed, the auction is extended once again to allow bids to continue. Bidding thus continues until bidding stops.

The winning buyer is the last buyer to place a bid, and they then pay the auction site again, this time for the value of the winning bid.

Because bids cost money, there is a much more limited pool of buyers against which to compete, meaning that there is a chance that a bidder may get lucky and win an item at below market value due to lack of interest and/or competing bidders. At the same time, because all of the bidders have paid up front for the privilege of bidding, the total price they pay for an item is generally much more that just the closing value of an auction listing.

Just as importantly, because bidding continues until no more bids have been placed for a particular short period of time, because bidding is limited to very small increments, and because bidding can't be automated, bidders must sit for hours or even days watching an auction and placing competing bids each time someone else bids on an item to have any hope of winning it.

So, on these sites, the model is:

  • Auctions end: When no bids have been placed for one or several minutes
  • Auction site paid by: All bidders (not just those that win)
  • Winning bidder pays: Auction site
  • Per-bid charge to buyer: Cents to dollars, depending on site
  • Time investment required by buyer: Hours or days of attention and active participation
  • Auction site revenue based on: Charging buyers for bids
  • Fees earned by auction site for every auction: Usually higher than closing value of auction, in bid fees from bidders

This last point is key and explains how these sites can offer such amazing "deals." Imagine a site that charges $0.10 (ten cents) per bid, structured so that bidders can bid a penny at a time, with the auction extended by 60 seconds each time a new bid is placed.

With this fee structure, an item that sells for $500.00 has actually earned the auction site total revenue of $5,500.00 ($5,000.00 in bidding fees and the $500.00 ending value of the auction itself). This means that the auction site can afford to "sell" an item that cost them $4,000.00 for a $500.00 winning bid and still have a $1,500.00 margin for profit and overhead.

Sounds great, doesn't it?

Read on to find out why the punchline is different once you've run the numbers.

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