Penny auction websites are an interesting new trend in the world of online auctions, and many people have decided to start their own penny auction sites in order to make money. However, many of these sites have had to shut down in the past years due to bankruptcy. So, how do these sites make money and why were so many of them unsuccessful?
The auctioneers make money a couple of different ways. First, they earn money from the fees they charge for each bid and the payments on winning bids. Usually how much they make from these bids and payments total more than the value of the item that went up for auction, which is how they make their money. For example, if an iPad if up for auction, many people bid on the item, but only one person wins, let’s say at a final price of $50.
That is a great deal on an iPad for the winner, and although the iPad will cost a few hundred dollars to the auctioneer, they’ve made money from all the bids that people used during the auction of the item. Bids are non-refundable, so every single bid is money in the pocket of the auctioneer; this could add up to thousands of dollars. Meanwhile, the winner also has to pay $50 to the auctioneer, as well as shipping costs (usually), and in some cases, there are penny auction websites that also charge a “winning” fee that is usually an additional charge that is a percentage of the cost to the auctioneer of the item won. Here is a breakdown of these fees.
The purchase fee is what customers pay when they purchase bids (the more bids a customer buys the lower the cost per bid, but the more money the auctioneer earns). Plus, each bid means another chance for the item to stay in live auction and continue to increase in bid value. In the end, the auctioneer earns the money that was paid for each bid by each person that placed a bid on the item (the value of each bid will depend on what the customer originally paid for the bid), as well as the final price of the item when the winner purchases it with his or her credit card.
Unfortunately, some penny auction websites use automated bidding systems to essentially compete against their customers and keep the bidding going and purchase price going up. This way they can continue to make money on bids even if not many customers are completing in the auction.
Most penny auction websites charge a shipping fee, which can vary, but it could occasionally add to the profits of the auctioneer in some cases. Another fee that is unusual, but does exist on some penny auction websites, is the auction fee; this is a fee you have to pay in order to get your win. It could be anywhere from $5.00 to 10% of the purchase price of the item. That doesn’t mean the price you pay for the item, but rather what the item cost the auctioneer. Some penny auction websites also have sign up or registration fees, so make sure you are aware of all fees involved in bidding on auctions before you get stuck with a bunch of costs you weren’t expecting. Those are a few of the ways auctioneers make money in addition to the bids and purchase prices of the won items.
There are a few other more dishonest ways that some auctioneers make money. For example, they may fail to send the item after the winner has already purchased it, or they may send out an item of lesser value than the winner was expecting (there have been several complaints online of these types of situations where the auctioneer kept the payment from the cusomter but never sent them the item they had purchases). There are also penny auction websites that apparently offer free bids for signing up to get your credit card details, and then automatically charge your credit card for a bid purchase (something that was probably explained in the very small print of the promotion).
Why penny auctions sites are going bust
Of course, if there aren’t a lot of people participating in these auctions, then very expensive items could go for just a few pennies, or the site won’t get enough bids daily, and the site would end up losing money. That is what is happening to many penny auction websites, and why so many are shutting down; usually it is simply because they don’t have the user base they need to make a big enough profit from bids. The fewer people bidding on an item, the riskier the more financial losses they are bound to incur. Also, due to negative feedback and bad reviews online, a lot of these penny auction websites have lost users which is another reason so many have gone down.
Some penny auction sites can’t get out of debt from the get-go because it is hard to build up a user base, especially when customers want to sign up for a site that looks established, legitimate, and has lots of auctions going on at the same time. Brand new sites can’t do this immediately; they need time to build their customer base. That’s why it is usually only the penny auction websites that had a very large original investment that are still going strong today. Their original investment allowed them to auction off hundreds of items at a loss while they built up their customer base and reputations, a luxury that many other sites didn’t have.
So, whether a penny auction site was successful or not, how they make their money is clear- they make it on bids. The more bids, the more money they make, so attracting new customers to purchase bids and participate in auctions is the name of the game. Plus, keeping these auctions going as long as possible so the bids continue to come in hour after hour only continues to benefit the auctioneer financially.