Let’s face it, penny auctions are one of the least-understood and most-criticized types of online auctions. We think that the reason is that many penny auction participants don’t understand them. So, let’s review the basic of penny auctions.

What is a penny auction?

A penny auction is a type of auction where users pay to participate. Typically, users must pay for each bid placed on auction items. The name “penny auction” is derived from the fact that each bid typically raises the auction closes price by 1 penny.

Why pay for an auction when eBay (and other auctions) are free?

The appeal of penny auctions is that the auctions typically have no or a very low reserve (minimum closing price). This means that it is possible to get huge savings on items if the auctions end quickly. However, it is also possible to spend money on bids and not win.

How do penny auction work?

  1. Bidders purchase bid packages, or bundles of bids. Each bid gives the bidder the ability to place one bid on one auction item.
  2. As each bid is placed, time is added to the auction clock, this allows other bidders to jump in and bid as well. As bids are placed, the auction closing price also increases, usually by 1 cent (thus the name “penny auction”). However, some auctions deviate from this.
  3. When the clock runs out, the last bidder wins and then purchases the auction item for the final closing price. All other bidders get nothing, although many auctions allow them to purchase the item at FULL price in order to get a refund on all or some bids placed.

How do you calculate your costs when winning auctions?

When bidding on penny auctions, it’s extremely important to monitor your costs. While you may walk-away with an iPad for $100, other costs may actually make that a really bad deal!

Here’s a simple formula which outlines the basic penny auctions cost calculation:

Total Cost = (# of bids placed X price paid for bids) + final auction closing price + shipping costs

If you plan to bid on several auctions, you’ll inevitably lose some so calculate the costs of lost bids on other auctions too. At the end of the day, compare your total spend to the value of products won and make sure that you’re coming out on top!

Tune it to our blog for much more information on penny auction strategy.