For the past eight months, I’ve been researching a relatively new entity that has creeped up onto the internet and is now covering the web with advertising - and this entity is known as the Penny Auction.
The idea of a penny auction seems very tempting at first - you can get items for pennies on the dollar - but the reality of the hype is far more dangerous than it appears.
This article delves into why penny auctions are dangerous and if you still choose to enter, you do so at your own risk.
What Are Penny Auctions Really Selling To You Anyway?
Let’s start off by looking at what’s on the surface and then we’ll delve deeper. What’s the difference between a traditional online auction site and these penny auction websites?
Let’s say that you wanted to buy a camera via a traditional online auction, which has a starting auction price of $150. You make a bid for the camera (which is free by the way) and other people will also make a bid for that same camera.
In this example let’s say that 100 people also placed bids for that same camera. At the end of the bidding period, let’s say that the highest bid was $275 and that was your bid - so you won the camera.
With the example mentioned above, you would only ‘part’ with your money if your bid was the highest. If you did not win the auction, then you would simply move on - without losing any money. Simple, right?
Let’s use this same ‘camera’ example - but for a penny auction this time. Remember - the lure of a penny auction is that you can get items for pennies on the dollar, right? Well, let’s see if this is really true.
So the camera has a retail price of $150 - but the bidding starts off at a penny and as more people bid, the price will incrementally go up by one penny.
But how are you allowed to bid in these penny auctions? Here’s the catch!
You are only allowed to bid via “bid-packs”. These bid packs allow you to bid a certain number of times and the bids are usually sold in packs of 25, 50, 100, 250, etc. - depending on the penny auction site that you are using.
Keep in mind that these bid-packs have absolutely no value whatsoever outside of the penny-auction site and that you are giving in your real money for - what exactly?
If you want to continue playing in the auction, then guess what - you have to buy more bid-packs. In a scenario like this, it is very possible for people to loose quite a bit of money in the purchasing of these bid-packs. The penny auction site profits from luring people in who are hoping to get cheap items.
By the way, did you notice that the camera has not been sold as yet?
See the problem? Unlike a traditional online auction, where you are only paying for a camera that you actually won - in a penny auction however, you are paying for the HOPE of winning that camera.
That’s what a bid-pack actually is. It’s a HOPE-PACK, where you hope and pray that the other bidders would run out of bids before you do.
But even in the remote chance that you actually won the camera - well guess what? You would still need to pay whatever the current bidding price was when you won the camera.
So in the end, the penny auction site makes FAR MORE than the $150 retail price of the camera - and this example is true for every item than they sell.
Penny auction sites make the bulk of their profits by selling and trading their “virtual-hope-currency” to customers and not by the actual physical items for sale on their sites.
They sell HOPE, in nice little packs - and there’s no way to avoid that fact.
Are You An Auction House Or A High Yield Investment Company? Make Up Your Mind!
Some of these penny auction sites have taken it a step further - into the grey area - and this is where the FTC has to step in and question the legality of the business.
Here’s the reality of the problem. Many people are catching on to the inherent problem of penny auctions. Going back to my previous example: why pay money for the HOPE of getting a camera when I could use that same money TO ACTUALLY BUY a camera? Think about it.
My months of research have proven that most people would stick around if they are given free sample bids - but would leave when those bids dry up. Yes, some people do stay for the long haul - but would the low number of customers be enough to sustain this type of business? Definitely Not!
To “solve” this problem (notice the quotes) some of these penny auction companies have dived into the MLM arena. Now I’ve been doing MLM for over ten years - so I know when something stinks and I also know when a company is trying to cover its tracks.
Using an MLM downline structure, the companies encourage people to register and partake in their income opportunity. At this point, people are joining - not for the great deals - but for the money that they can get from the company.
But there’s a catch - in order to take part in this so-called income opportunity, you would need to pay a monthly fee.
… and this is the part where the FTC has you in their crosshairs.
You’ve just stepped your foot into something that smells funny - and that odd smell is the smell of a Ponzi scheme.
I am going to assume that you are reading this and that you know EXACTLY what a Ponzi scheme is. If you are unsure, please look it up on Wikipedia right now before you continue.
Some of the ‘affiliates’ in these companies are making a good amount of money from these schemes - but where is the money actually coming from? Is it coming from the customers?
If you actually believe that, please go back and re-read the first section of this post.
This problem has made these companies “top-heavy”, where there are much more opportunity-seekers than actual customers for the business to sustain itself - and for one in particular, it has become a major legal mess.
This particular organization actually got itself banned from Craigslist - can you imagine an entire company and all of its affiliates getting banned from Craigslist? That’s hilarious!
The only thing that’s been accomplished by having so many opportunity-seekers, is getting the attention of the FTC. The FTC looks at the behavior of these companies as investment practices - and you cannot be a legal investment company without having a license to do so.
Let’s not fool ourselves here.
Bid packs and VIP bids are not products. They are non-existent outside of the penny auction sites. You cannot barter, trade or sell them in exchange for actual goods and services to the general public. They are not stocks - you do not have any ownership of the companies that sell them to you. The only thing that you can do with these bids is to use them and HOPE that you can get an actual product in return.
The low customer retention means that the companies have to maintain their scheme (and their affiliates) somehow - and that is done by the monthly fees. Want proof of this? Take away the monthly affiliate fees and see how long it would last before it goes under. See if the company is able to survive on getting customers alone.
Never fall for the marketing hype and re-assurances that these companies throw at you.
Like I said before … let’s not fool ourselves here.
So What’s The Smartest Thing To Do?
As a Customer:
If you’re looking for a camera, iPhone or whatever, it’s best to check traditional online auction sites first. Heck, check retail stores, both online and offline - you might be surprised by a great deal.
Only use a penny auction site when everything else fails. Know what you’re getting into. You’re not paying for an actual product, you’re paying for the HOPE of getting a product. So ask yourself this question - do you want to part with your money, for HOPE?
As an Opportunity Seeker (affiliate):
Be extremely cautious of any company that draws the attention of the FTC. Trust me - I know this from experience. Years ago, I was an affiliate for a company called SkyBiz (older marketers would know what I’m talking about). I thought that everything was fine and that I was set for life - until the FTC pounced and killed the company.
Myself and many other affiliates lost money because of that fiasco, but I learned a valuable lesson - always be cautious of a company’s business practices. If it’s too good to be true and you’re seeing high yields coming into your account, then you can bet your last dollar that the FTC is not far behind.
If you’re already involved in these high-yield investment companies that are disguising themselves as penny auctions, then the smart option is to withdraw your profits as soon as possible. Look for companies that have stable marketing practices - and sell actual useable products to the general public.
Don’t make the mistake of thinking that the company will last for years and years - with questionable business practices.
The FTC has a history of pouncing and killing a company - when you least expect it.
Well that’s all that I need to say about this topic - the choice is now in your hands.