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Steve Bennett blogs
…about maps, open data, Git, and other tech.
Penny Auctions – a bit of analysis
Posted by on July 31, 2009
swoopo, bidray, bidstick (bids tick, apparently), bidrivals and dozens of others are running what we’ll call “penny auctions“. Using bidrivals.com as the example, they all work on the following principals:
- There are consumer electronics for auction, usually at big discounts.
- It costs a certain amount to make a bid, regardless of whether that bid is ultimately successful. For bidrivals.com, it’s 40 British pence.
- Every bid raises the price by a fixed amount. In this example, by 1c. It also extends the auction to last another 15 seconds or so.
- If you “win” the auction you must then buy the item at the final price.
- It’s not a lottery. Because they say so.
At first glance, the auction looks great – buy a phone for $20! Buy a plasma tv for $1.53!
But not so fast. A couple of things that are not obvious to the beginner:
- Every dollar of the final price represents $40 in bidding fees. A $1000 TV selling for $1 is a big loss for the site. The same TV selling for $25 is a small profit. Sold for $1000 it’s a $40,000 profit.
- You can use a site-provided bot (“bidbot”, “bidbutler”…) to bid on your behalf. If two people do this simultaneously, they’ll both lose a lot of money with no apparent gain.
So, is it a scam? Well, there are really two quesions:
- If the site is running completely as described, legitimately, and not using shill bidders (bidding on their own auctions), is this an honest way to make a living – and should you participate?
- How do you know if a site is legitimate? Is it likely to be?
Is this honest?
I see very little to distinguish these penny auctions from gambling:
- When you bid, whether you win or not depends entirely on whether anyone else bids in the next 15 seconds. Assuming you’re bidding on an item which is clearly a bargain (eg, $5 for a TV), then the normal considerations of auctions do not apply: any rational person would bid if they could so for free.
- The house take is enormous. Frighteningly so. For example, imagine on average the site sells items at a 65% discount from RRP, and bids cost 40 times as much as the amount they increase the value by. This means that it costs on average (100-65)x40 to win a $100 item (whose value is now $65), or in other words (100-65)x40/65=$21.50 to win one dollar’s worth of value. By comparison, a skilled blackjack player in a casino can pay as little as $1.01 to win $1’s worth of value.
- Most bids give no return to the bidder. This means that even if you don’t want to call it “gambling”, it should still be regulated, as the potential for dishonesty is great. You don’t want to be bidding for a dead donkey.
There is quite a bit of antipathy towards these sites: Washington Post, Jeff Atwood, Ed Oswald.
Can you trust them?
There are two main risks:
- The site may use “shill bidders” to bid on items that would otherwise go for a low price. This could prevent you ever winning, or cause you to spend far more than you want.
- Even if you “win”, the site may never ship. The whole thing could be a scam.
Fortunately, there are sites on the look out for this kind of thing, such as pennyauctionwatch.com. There is evidence of dodgy sites, such as fake testimonials.
So, what are the incentives for a site to use shill bidding? Well, as we saw above, the difference between a $1000 item selling for $1 and $25 doesn’t look like much, but it’s the difference between breaking even and posting a big loss. Imagine there is fairly steady bidding activity, but there are just a few gaps before that $25 mark. If the site could shill just a few times, they would massively increase their profitability.
But how much should they shill? Consider two strategies:
- bid whenever the time gets to 1 second; or
- bid immediately after anyone else bids.
In 1), the shill bids guarantee almost any asking price, as long as there is still some demand. This has the potential to greatly increase profit, and decrease variance.
In 2), half the bids end up being shill bids. This causes two problems: first, you’re directly losing one bid fee for every shill bid. Second, by inflating the price, you’re accelerating reaching the point at which people no longer want to bid, because the prize at stake is shrinking. So if people might normally bid strongly up to half the value of the item, then shilling along the way is just replacing paying bids with free ones. You might even decrease the final sale value, and every dollar of sale value lost is $40 of bidding fees lost.
Conclusion: shill bidding seems likely to occur, in small doses, because the incentive is just so strong.
Can you beat them?
Probably not. It’s been tried. To beat it:
- You have to find a site that is not a complete scam.
- You have to find a site that is completely honest. Even a little bit of shill bidding will crush you.
- You have to defeat an absolutely incredible house take of 95% (remember, normal house take for gambling ranges from 1% to 5%).
- You have to know enough about the auctions and your fellow users to make you fairly confident that no one will bid in the next 15 seconds. In the $1000 TV at $25 case (40c to bid), you need there to be a greater than 1/250 chance that you will win the auction with this one bid. Sound easy? Think: if that were the case, how did the price get to $25? It would stop, on average, at $2.50.
If it is beatable, you’d think people would have done it. And, since they’re capped at 4 wins per month generally, there would not be much harm in them sharing their secret. Unless they have a network of penny auction-beating bots. There’s a thought.
But just in case you wanted to try:
- Compare sites. Find a safe one that appears to be losing money.
- Collect lots of data. Try GreaseMonkey.
- Find the right time of day, with the least competition.
- Track all the auctions, pick individual moments and place bids.
- Don’t try and win a specific auction. Bid any time your positive expectation on that bid is positive. The moment could pass.
- Consider the effect of distractions. A good moment might be when several auctions are closing at the same time. You could even engineer that by bidding on several simultaneously.
- Consider using several accounts to bid with, to drive off other bidders. If you know they’re paying attention and will react appropriately, that is. I’m thinking you bid with a group, gradually spacing their bids further apart and hoping you can sneak a 15 second gap through.
Steve Bennett blogs 
Great post. I don’t think they’re gambling but I think you’re right about the need for regulation, there are far too many dodgey sites out there. Regarding whether they are a scam or not, ignoring things like shill bidding etc that are clearly just outright fraud, I think IF the proposition is made clear to people, then it just can’t be classified as a scam. ‘Scam’ by nature implies some sort of disguised loss. It’s more complex than that of course and I’ll be covering that in a bloog post soon-ish. Thanks.
David’s email address probably won’t show up, so I’ll just point out that it’s pay-per-bid@xxx. And the URL pay-per-bid-online-auctions.blogspot.com. Heh…
HI
Great information and the incentives for a site to use shill bidding? Well, as we saw above, the difference between a $1000 item selling for $1.
http://www.bid66.com
If they didn’t ship the products the site wouldn’t last one month. Bidrivals delivers because I have received several items.
I’ve seen this kind of comment on many sites. Note the lack of detail: “I have received several items” – but no description of what they were, when, photos, etc. And who is the poster? To be convincing, you’d need posts from someone who had a pre-bidrivals reputation, and no affiliation with the site.
Hello,
Thanks for providing this nice post It is such a wonderful Information. Auction websites are pretty good place to bid on products and acquire them.
Auction Website Script- Professional Auction Script Software offers flexibility and advanced features that are simple to deploy and easy to manage.
Translation: “Penny auction sites aren’t a rip-off. Here’s how to make your own rip-off penny auction site!”
Auctions websites or penny auctions are based on the mechanism of the bidding system because of the competition. And some how customer may take the benefit of the bidding system. Penny Auctions on the internet are very common these days and every one who spends time over the internet must come for shopping.
Regards
Ok.
Hi guys, Not all penny auctions are scams. Or i guess it depends on your definition of scam. I have tried a few. The only one i can say for sure is not a scam is Bidstick.com. I won a 40″ lcd tv. for about $50 total including shipping.
Thanks for that sincere, heartfelt comment. I appreciate it.
Solid post on penny auctions. It’s actually some of the controversy/skeptical interest that has led us to create a review website with detailed penny site info. Our site lets you see the average savings people can expect to get (ie. 15%, 38%) for any product on any auction site. It’s all arranged by category (ie. Giftcards, Accessories, whatever) and you can see rankings sorted on any level. If it helps your readers, here’s a link to some detailed penny acution reviews.
Given some of the comments on that site, I’m going to go out on a limb and say it might actually be genuine. Cool.
Thanks. Yea, the idea is to peer into what people are truly getting their products for. The site’s not perfect, but it’s a good start. And any feedback is always welcomed.
** Disclosure I work for YooBeeDoo **
I made a comment on this blog a while back (David at the top) from my pay-per-bid blog. On that blog I had a disclosure about my involvement with the industry but no further information. I’m pleased to be able to come back now with more info and show you what we’ve been up to.
For those who want to skip the wordy part…here’s what we made http://www.YooBeeDoo.co.uk
About 18 or so months ago, a group of us got together to create a completely new type of pay-per-bid auction. One central aspect of the regular penny auction model that none of us liked and as covered in the original blog post by Steveko, is the disproportionate income the sites can make relative to the value of the prize up for offer. Now, with pay per bid sites, you always have to bear in mind that some items go for only a few pence and so the site needs to recoup those losses but we still felt that the unrestrained income was not in the interest of the bidders and so something we needed to tackle head on. To ensure that a balance was created between the ‘collective user spend’ and the value of the prize on offer, we came to the conclusion that the number of bids per auction would need to be restricted and based on the prize’s value. We invented a bunch of different auction models and settled on one (US Pat Pend) that we felt would work the best from the bidder’s perspective. So with our model, we limit the number of bids per auction based on value of item. In the interest of openness and transparency, we show all of these possible bids right from the start, and show when they are taken and by whom. We then operate a special bid-erasing system that adds a strong element of strategy to the auctions. The easiest way of understanding how it works is to watch our “How it Works” video on the site. It’s been fascinating seeing how bidders have taken to the new model and developed strategies that even we, after more than a year of working with the model, had not thought of. To allow people to get a feel for how it works first hand, we’ve started a system where people who register can have 25 free bids on special beginner auctions that we call “Have a Play” auctions.
A good original post that I’ve been meaning to come back to for some time! :-)
Interesting twist. My first thought is that it well encourage bots. I can picture some situations where there is a clear winning strategy, but it’s not necessarily obvious to the human eye. If I understand the rules correctly, imagine there are 15 green bid spots left, including (critically), the spot 15 below the maximum possible bid. Assume also that the cost of buying those spots, and the cost of paying the highest bid and postage, are still economically advantageous. Then it’s clear you should do so: as you buy all those spots, 15 existing bids are removed from the top, making your top bid the winner.
I don’t know if in practice all the bids ever get bought out, or what fraction of the value of the item is set as the maximum.
It does seem like a more honest system. It’s evidently still bad value for the punter, and a form of gambling, but it’s up-front. And now the game is capped, so there’s a maximum loss per player. With the greater visibility of the taken bids, and available bids, it seems less deceptive to me.
There has been one occassion of a ‘guaranteed win’ and it was snapped up by someone who spotted the opportunity. It was really pretty exciting. I’m not sure it’ll happen that regularly. We have systems in place to detect bots.
Glad you feel it’s a ‘more honest system’. Regarding value for the customer, I disagree. I like the concept of online competition to win a bargain and have personally had good fun with playing a PA site. The entertainment factor has to be taken into account on these auctions and when you compare it to say going out to the cinema or down to the local pub (bar in the US?) then the value of that entertainment, so long as you don’t go wild, is very good indeed. I know YooBeeDoo has lead to a LOT of conversations about strategy and other player strategies and that’s all part of a fun mix. Then on top of that, there is the chance for a very good saving.
I think we’re in agreement on the ‘up front’ area. When we first looked at PA sites, we didn’t like several aspects and one that you’ve picked up on in your reply is the ‘hiding’ of the the number of bids. We felt that the number of bids was ‘buried’ in a ‘highest bid’ figure. This was another reason for creating a model where all the bids were seen.
We may have to respectfully disagree about the “entertainment” aspect. This is the same argument made by pokies (slot machines) operators, who talk about it as “gaming” and “entertainment” and “exciting”. In reality, you see bored, lonely, depressed, pokies addicts sitting in long lines pushing buttons, hoping for a miracle. There is an enormous disconnect between the advertising and the reality.
Perhaps a survey of your customers would prove me wrong, but my (unproven) gut instinct is that people come to these sites because they believe they can win stuff cheaply. They’re not there for entertainment, they’re there because they’re gullible enough to believe they’re going to buy a PS3 for $10.
Hi Steveko,
Yep, we’ll have to disagree on that one :) I’ve immersed myself in this industry for the last 18 months and the image you paint does not ring true with me. As an example, when we launched, someone bought a large bid pack but then only placed a few bids and we had some auctions close very early. I emailed him out of interest (was our offering not right etc) and the answer was clear and simple from them….”I want more competition”. The person qualified it – on a PA site, they said they wanted no competition but on YooBeeDoo they wanted to play more like a game of chess with strategy, and that meant more competition needed. PAW did a survey on why people play PA’s and at my last look, it was evenly split between “to save money”, “to make money” and “because I like to win” – This again points to the competitive edge.
Everyone gains their entertainment in different ways and pay-per-bid sites is one of those ways. The only issue we had with them was the non-transparent nature of them and the unbalanced auction model…and that’s something we’ve tackled head on.
When we roll out to the US, I’ll get back in touch with you. I’ll ask you to come and have a go on our free “Have a Play” aucitons and I think you’ll find that you might just enjoy YooBeeDoo! :-) Have a good day.
Has anyone actually won and received their items on the penny auctions site? It’s kind of strange no one hardly bidding. I don’t see any familiar bidder names and it sure feels kind of strange when nobody bidding. Before buying bunch of bids I will wait for someones feedback.
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Very informative post. There are some honest penny auction sites; BidOink.com. The site is very similar to Quibids.com but in some cases BidOink penny auction site is better then Quibids because you can use 100% of the value of your bids that you have placed previously. So there is no chance to lose any money on Auctions that have the “Buy it Now” option. The bids cost just $0.50 to take part in an auction.
amazing post!! yes you are rite friends some sites are fake but not all sites. some sites are really good and they accomplish their promises what they did.Chose penny auction sites after quick analysis.
As with every bidding site, some bidders are much more aggressive and successful than others.