Penny auctions3

Penny Auctions are a special type of auction that is becoming increasingly popular around the world. The main difference between a penny auction and a normal auction is that the bidder buys the bids prior to bidding on the item at auction.

The bids represent a small percentage of the purchase price, for example one penny, but cost the bidder around ten times that amount, in this example ten pence. The advantage of penny bids for the bidder is that as a result of the small bid increment the final sales price of the item can be significantly lower than the retail price or even the auction price.

The risk to the bidder is that if you do not win the item, you lose all of the money with which you have purchased bids.

For the seller, the advantage of the penny auction is that although the item can sell for less than the amount that was paid for it, the total amount of money that can be made includes all of the losing bids purchased as well as the funds from shipping and transaction costs.

The risk to the seller is that if an unpopular item has few bids it can sell for less that the retail price paid and the total value of all of the bids purchased and the transaction and shipping costs will not make the endeavour profitable.

The process of the penny auction, with its advantages and risks is best illustrated with a worked example. We will assume that the purchaser wishes to buy an item which has a recommended retail price of one thousand one hundred pounds. The purchaser locates this item on a suitable penny auction site and registers.

The purchaser must then buy a suitable number of bids. In this case he may decide that he wishes to pay no more than one hundred and twenty pounds for the item, including the cost of the bids. As such he purchases three hundred and fifty bids at ten pence each at a total cost of thirty five pounds.

This means that the maximum he can bid is one hundred and twenty pounds less thirty five pounds which equals eighty five pounds. The bidding on the item then commences with a countdown timer which in our example is set at five minutes.

Whenever a bid is made the total sales value increase by one penny and the timer is reset. So for every one hundred bids the value of the item increases by one pound.

For our bidder he is prepared to pay up to eighty five pounds for the item which represents eight thousand and five hundred total bids from all bidders. Obviously, he will be hoping to pay less, but as the penny auction involves a degree of risk, it is important to set a maximum price and be prepared to walk away when this is exceeded.

This is known as a stop-loss strategy. In order to increase his chances he may wait before bidding or try and bid at less popular times of the day.

In our example the total number of bids is three thousand and our bidder has the winning bid. He has therefore purchased the item worth one thousand one hundred pounds for sixty five pounds, which illustrates how successful Penny Auctions can be.