Penny auctions: where do they fit in the auction landscape?

One of the current trend on the auction sector has been the emergence of penny auction websites. These are mostly consumer facing websites offering the consumer a chance to buy retail goods at knockdown prices.

On the face of it this looks like a good way for the consumer to get ‘one over’ on the retailers. Especially in current economic times. Customers of the world unite!  Many items are sold below retail for a few pennies or a few pounds. The user takes part by first purchasing blocks of bids which can be used at will. Typically bids are purchased for around $1.00 each in a blocks of 30 upwards. Everytime a bid is made the sale price increases by a peppercorn amount $0.15 or similar value (hence the name penny auction) and the auction is extended by 30 or 40 seconds.

Certainly investors have seen an opportunity. Swoopo attracted $10m in venture capital funding during April 2009. There is no dispute, from the investor point of view, this is a cash cow. For every item sold below retail value, the auctioneer is making many times the retail price through selling the right to bid on that item.

It’s genius. Everyone’s a winner, surely? The consumer buys an item for pennies and the auction site pays for the lots through the sale of the bids themselves. In some cases the auction sites openly declare they do not hold the item in stock. The perfect business model. 

However, scratch the surface and different picture emerges. The consumer has complete control over what they spend and they are free to bid when they want, if at all. They don’t have to bid more than once if they don’t want to. The problem is once the user has purchased bids they are committed. Once they have bid and then been outbid they are further committed. In the traditional forward auction the bidder can speculate on items at no financial cost, whilst making no commitment to purchase unless they are highest bidder. A fair deal. In the penny auction, the user has given over to more than idle speculation to take part. The more they bid, the more the user invests and the more they want to see a return on their investment.

This is of course the key to the success of this business model. As bidding progresses the more the bidder will want to win. As the current bid, along with the cost of bidding approaches the retail value of the item, the need to win will become more urgent. It is something of a vicious circle and there can only be one winner.

This feature is something that has pricked the attention of the gambling experts, at Nottingham Trent University who suggests penny auctions should come under the control of the gambling commission. One analyst suggests it is only a matter of time before action will need to be taken. The risk to the shopper has not gone unnoticed in other sectors of the media and consumers have also started to see the risk of taking part in these auctions. Analysts and consumer groups have also taken time to demonstrate why the consumers are not necessarily getting the bargain they sought. 

Perhaps we are being unfair. The assertion by penny auction site MadBid.com is that, “This is definitely a game of skill, and would not fall under any circumstances under the definition of gambling.” This is true of course. Randomness is being created by the other users on the site and there is no reason, especially in the case of a low interest auction, that there may only be one bidder completely able to take his moment and pick up a bargain. The bidder has to make a judgement and time his bid at the right moment. 

This whole model has caused much discussion internally. One of the main issues we have is that of user experience. To us it seems less than transparent for the user. We are always particularly careful to make sure the user has a good experience on our (auction) websites. We work with not-for-profit and fundraising companies, as well as in the private sector. Our clients are able to generate revenue through an easy to use site attracting many bidders whilst bidders are able to compete on a level playing field. There is an implicit trust between buyer and seller. The platform needs to convey that trust. 

Penny auctions to us, appear to be heavily loaded in favour of the seller. Whilst commercial enterprise exists to generate profit, it has to be an equitable deal for the consumer too.