Penny Auctions: Why They Aren't What They Look Like
A penny auction is an online auction in which every bid costs real money and each bid nudges the price up by only a cent or so. The item can end at a headline price of a few dollars, which is why the format looks like a bargain machine. But the price on the screen is not what the winner, or anyone else in the auction, actually paid. The people who placed bids paid for each one, whether they won or not, and the money from those bids is how the site makes its living. This guide explains the mechanics, why the final price misleads, what the Federal Trade Commission has told consumers, how the best-known site in the format ended, and how an ordinary auction differs.
How a penny auction works
The format is more precisely called a bidding fee auction, and that name is a better description. You do not simply register and bid. You first buy bids, often in packs, and each time you click to bid, one of your purchased bids is used up. Spending a bid raises the item's displayed price by a tiny fixed increment, and in most designs it also adds a few seconds to the countdown clock. When the clock finally runs out with nobody clicking, the last bidder gets the right to buy the item at the displayed price.
Three features follow from that design.
First, the price climbs by pennies, but bids are being bought at much more than a penny each. The increment on the item and the cost of the bid are two different numbers. The site collects the second one on every click.
Second, the clock extension means the auction does not end at a set time. It ends when people stop bidding. As long as someone is willing to spend another bid to stay in front, it continues.
Third, only one person wins. Everyone else who clicked has spent bids, and those bids are gone. The loser does not pay the final price, but the loser has still paid.
The arithmetic that makes the headline misleading
The Federal Trade Commission published a consumer warning about penny auctions on August 25, 2011. Its worked example is the clearest way to see the problem. A camera advertised with a winning bid of $50 looks like a bargain, but if the buyer placed 200 bids at $1 each, the real cost is $250, plus shipping and handling and possibly a transaction fee. The FTC also noted that sites in this category often charge a fee to register and a further fee each time you bid, win or lose, and that some add membership, subscription or shipping charges.
The FTC's observation that matters most is where the money comes from. In a penny auction, the site earns its revenue mainly from the bids, not from selling the item. Every one of the other bidders contributes revenue even though only one of them gets to purchase the item.
A well-documented example from the format's most famous site shows the scale. One widely cited Swoopo auction for a MacBook Pro with a retail price of $1,799 reportedly ended at $35.86. But the auction drew 3,585 bids, and at the 60 cent price Swoopo charged for a bid on its U.S. site, those bids brought in about $2,151. The "winner" paid $35.86 plus whatever bids they had personally spent. The site collected far more than the retail value of the laptop. That is the opposite of the picture the final price paints.
This is the central point of this guide. In a penny auction, the final price tells you what one person paid for the item. It tells you nothing about what the auction cost the participants as a group, and it says nothing about what you personally will spend if you play.
Why "bonus bids" and "buy now" options don't change the picture
Penny auction sites typically advertise ways to soften the risk, and the FTC addressed some of them directly. Terms like "bonus bids" can make bidding sound free, but the bids still cost money to acquire, and many sites also charge for membership, subscriptions or shipping on top.
Some sites may offer ways to recover part of what you spent if you lose, and you should read any such terms closely. Whatever the offer, the bid fees you spent are still real money. The question to ask on any site is simple: if I spend every bid I have bought and lose, what do I have, and what did I pay for it?
What makes the format psychologically sticky
Without making claims about any single company, a few features of the design are worth naming because they explain why people spend more than they intended.
Sunk cost. Once you have spent forty bids on an item, walking away feels like throwing the forty bids away. But that is true of the next bid as well. The money spent is already gone whether you stop now or later.
The clock never really ends. A regular auction closes at a stated time. A penny auction closes when everyone has stopped. Each reset gives bidders a fresh reason to think it is almost over.
The visible price is small. The only number most bidders watch is the price of the item, which looks tiny. The cumulative cost of their own bids is not displayed on the auction screen.
Only one prize. A single winner and many paying participants is the structure of a lottery. Critics of the format have made exactly that comparison for years.
The FTC's other warnings: delivery and trust
The FTC did not limit its concerns to cost. Its release said that many people had experienced late shipments, no shipments, and shipments of lesser quality than advertised. It also said that some unscrupulous sites use computerized bid bots or human shills to push up the bidding automatically, forcing real participants into a bidding war and into paying more in bid fees to stay in first place. The agency directed consumers with complaints to its online Complaint Assistant or to 1-877-FTC-HELP.
State regulators have acted too. According to a summary of the format on Wikipedia, Washington state shut down a site called PennyBiddr after accusations of shill bidding, and Georgia's consumer protection office secured a settlement with Wavee US, LLC, after which that site closed following complaints about delayed shipments. Those are the allegations and outcomes as summarized there. The point is not to name every operator that had trouble. It is that the combination of paid bids and an opaque clock made trust the central question in this category, and some operators did not earn it.
The rise and collapse of the best-known site
The history of the format explains why the model looks the way it does, and it is a useful test of the claims the category made about itself.
Penny auctions in their modern form began with a site that launched in September 2005 as Telebid. Its founders, Lloyd Liske and William Buckell, are credited with inventing the model. The site was renamed Swoopo in 2008.
By the standards of the time, Swoopo grew quickly. According to the summary on Wikipedia, at its height it employed about 50 people, reported revenue of around 20 million euros in 2008, and raised venture funding, including $10 million from August Capital in April 2009. Another source puts its 2008 profit at $28.3 million and its user base at 2.5 million in 2009. The sources do not agree exactly on the numbers, and the safest summary is that it was a real, funded company with millions of users.
Then it ended abruptly. Swoopo went offline on March 17, 2011 with a notice about "technical issues." On March 23, 2011 it filed for bankruptcy in Munich, Germany, and its parent company filed on March 26. The domain was later acquired by DealDash, a long-running U.S. penny auction operator, in February 2012.
Swoopo was not the only closure. By January 2012, according to the Wikipedia summary of the format, sites including Swoopo, Rapid Bargain and Bid Boogie had folded, while MadBid was still operating. Reasons cited for the decline included heavy criticism that the model resembled gambling and difficulty retaining customers, since people who lost money were unlikely to return.
The United Kingdom's Gambling Commission said it was not convinced that penny auctions were gambling and declined to regulate them. That is a useful reminder that the legal question was contested and not settled in one clear way. It does not change the arithmetic of what participants pay.
How an ordinary live auction differs
Ordinary auctions, including the live and timed formats used for collectibles, watches, jewelry and similar goods, work on a different principle. In the standard format, bidding itself is free. You may be asked to register, and the seller or platform may charge other fees such as a buyer's premium, shipping or taxes, and you need to read each listing's terms to see what applies. But you do not pay a fee each time you raise your hand.
The practical effects of that difference are large.
- The price you see is the price that matters. If you win at $200, you owe $200 plus any disclosed fees. You do not also owe for every attempt along the way.
- Losing costs nothing. If someone outbids you, you walk away with what you started with.
- The auction ends at a known time or when bidding stops by rule. Many ordinary live auctions give you a countdown that does not reset indefinitely, or end when the host closes the lot.
- Your maximum is yours to set. A buyer can decide in advance the most they will pay and stop there.
Those points describe ordinary auctions in general. The terms of any specific auction can differ, so check the listing rules before you bid. For a look at how reserves, starting bids and final prices fit together in an ordinary auction, see our guide How Auction Pricing Works: Reserves, Starting Bids, and the Final Price. For what a no-reserve sale means, see Absolute Auction: What No Reserve Means. And for a comparison of formats, see Live Auction vs Timed Auction vs Buy-It-Now: Which to Choose.
Questions to ask before you bid on any site
Whether you are looking at a site with a fee per bid or any other unfamiliar format, these questions cut through the presentation.
- Does each bid cost money, and how much? If yes, you are in a bidding fee auction no matter what the page calls itself.
- What do I owe if I lose? The answer should be nothing in an ordinary auction.
- What is the total I could spend? Add up bid fees, any membership or registration fee, shipping and tax, then compare that with the item's retail price.
- Does the clock reset? If yes, the auction has no guaranteed end.
- How do I know bidding is genuine? Look for plain statements about how the site prevents bots and shill bidding, and treat silence as information.
- Who ships it, and what are the returns? The FTC's delivery complaints show why this matters.
- Is the "retail price" real? Compare to what the item sells for elsewhere before accepting the site's number.
If you cannot get clear answers to these questions, that is a reason to skip the site.
Bottom line
A penny auction is a bidding fee auction. The low final price is real, but it is the price one person paid for the item, not what the participants paid together, and the site earns its revenue from the bids and not from selling the item. The FTC warned in 2011 that a $50 winning bid could cost $250 once bid fees are counted, and that some sites suffered from shipping failures and bidding bots or shills. The best-known operator, Swoopo, went offline in March 2011 and filed for bankruptcy within days. An ordinary auction, where bidding is free and losing costs nothing, is a different product. Before you bid anywhere, work out what you could spend in total, not just what the item might sell for.