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Penny auction websites seem to be popping up everywhere. A couple months ago, I was introduced to Quibids. I’ve watched Quibids from the sidelines, but I never got involved. I thought penny auctions were bargains, but I soon realized, bidders could potentially lose large amounts of cash without actually winning anything. But, you can also find bargains, if you know what you are doing.

That was my first introduction to penny auction websites. Fast forward to today, now I am seeing a ton of ads from penny auction websites like Ziinga, BidRivals, Jeaper, BidSauce, BidRodeo, BidCactus, Swoopo, Beezid, to name just a few. The list seem to be growing monthly.

So the question in most people’s mind is, are penny auction websites scams? Or are they legitimate businesses? First of all, you need to understand how penny auctions work, before you can make an opinion. Penny auctions are online auctions that involve bidding for items at one cent at a time.

For example, you start bidding for an Apple iPad at 1 cent. There is a time limit of 15 seconds or more, depending on the auction site. If no one bids and the time expires, the iPad is yours at $1 cent. If someone bids before the time expires, the bid goes up to 2 cents and the time resets to 15 seconds. And it on and on it goes, until someone eventually gets the item.

I suggest you watch Quibids to get a sense of how penny auctions work.

How can penny auction websites make money if they sold an iPad for just $34.33? Trust me, they make money. A boatload of it. Penny auctions sites make money because they are not really penny auctions. It’s a bit deceiving. The cost for bidding one cent is actually a lot more. Most penny auction websites charge anywhere from 50 cents to one dollar for one bid. Quibids charges $0.60 cents.

For the sake of our example, let’s say the cost of one bid is one dollar. To start, you purchase $50 dollars worth 50 bids. You see a number of bids that are currently running on the auction site and begin to bid. Let’s say, at the end of the night, you get nothing. Not one single item. You came close twice, but somebody out there outbidded you. You multiply this scenario a thousand times, and you get the drift. The penny auction websites are raking in cash.

Penny auction companies also make money on items they sell. Lets take for example, the iPad auctioned at $34.33. We will use our example of a dollar per bid. If you do the math, the actual cost for the iPad is not really $34.33. The real cost is $3,433. To get to $34.33, there would have been 3433 bids at a $1 dollar each.

iPads typically costs anywhere from $500 to $800 depending on the model. A penny auction website can break even if it auctions the iPad for just $5.00, if we use our one dollar per penny bid example. In addition, bidders also have to pay for winning the item. Let’s say, you won the iPad for $34.33. That means, you have to pay $34.33, plus the sales tax if you live within the same state. In some cases, you may have to pay for the shipping costs as well.

Are penny auctions scams? It doesn’t seem to be. They seem legitimate. The penny auction websites are not doing anything illegal, unless they hired bidders behind the scenes outbidding customers to jack up their prices.

There is great potential that you could lose money in penny auction sites, but you can also find bargains if you know what you are doing. Proceed with caution. Spend your money wisely.

If you do participate in penny auction, don’t bid on anything that just actively started. You may find better bargains towards the end of the auction. Don’t bid on popular items with dozens of active bidders. Try to win a 50 or 100 bid vouchers first. This will give you more bids that you can use later on.

Finally, a disclaimer. I have not participated in penny auctions to date. You are on your own on this one. Just like they say in the lottery, play responsively.