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With the popularity of penny auctions on the Internet, it is not surprising to find hundreds of articles, reviews, critiques, and strategies written about them. A search on "Penny auction" in EzineArticles.com alone yields a list of more than 800 titles. Here are some observations distilled from various sources and experiences. Penny auctions are so named because the price of the product being auctioned rises by one cent with each bid. But to place a bid, the bidder must pay with bids that cost anywhere from 60 cents to a dollar, depending on the auction site. These are actually a class of auctions known as ascending-price auctions. They are also bidding fee auctions, which are popular because, after all, paying sixty or seventy cents is not a lot of money to spend for a chance to save hundreds of dollars on a purchase. Of course, if you bid twenty or thirty or one hundred times trying to win the item, and there may be twenty or fifty or two hundred other bidders, and only one will emerge as the winner... Draw your own conclusions. Most penny auctions are offered by merchants selling their own merchandise. The item sold by auction can yield rates of return far in excess of what is normal for the item. A $600 television set for which the merchant paid about $400 may easily yield revenue of $3,000 or more with a penny auction. This excess revenue is somewhat offset if the merchant agrees to lower the price to losing bidders to compensate them for their cost of bidding. Any sales to losing bidders earn a normal profit margin in addition to the very high profit margin on the sale to the winning bidder. Whether the winning bidder gets a bargain depends on what he had to do to win. A bidder who spent $380 in bids to buy the $600 TV for $20 saved $200 on the purchase, provided he did not lose several hundred dollars in bidding unsuccessfully on other products. Penny auctions often extend over a period of several days. New bidders may join them at any time. Strategy advisers suggest that bidders may wish to bid during late night or early morning times when fewer bidders are active, to improve the chance of winning. With each bid costing, for example, $1 on a $600 item and increasing the price of the product by one cent, the merchant has to accumulate a large number of bids just to cover the cost of the product. Additional bids have to be garnered to cover operating costs, and yet more bids to generate a profit. A merchant cannot, therefore, afford to have an auction start on a $600 product with a selling price of $1 and have it end after only one or two hundred bids. The more unscrupulous auctions employ robot shill bidders to keep the auction going and the price rising while waiting for bidders to place the bids that generate revenue. The truly fraudulent sites operate long enough to accumulate a pile of money then shut down their site without delivering any products. The ethical sites do not use robot bidders, but it is impossible to determine that what they say is true. Bidders should do a thorough investigation of a site before
they commit money to it. A very popular penny auction site that advertises heavily on TV and other media actually lists two categories of on-going auctions: those that are about to end and those that will not end for some time. An interesting question is: How does a site know that a bidder will soon emerge in an auction? And how does a site know that bidders will continue bidding in an auction before enough profit is generated? Are not the actions of bidders independent of the site's programming? These are questions worth considering before spending money in a penny auction. A descending-price bidding fee auction starts at a high product price and the price decreases with each bid. Such an auction may keep the price secret and reveals it only to the bidder, who must then decide if the price is low enough to warrant purchasing the product. Another variation of this auction is that as long as a bid shows a price, however low it may have decreased, there is no winner. The winner is the bidder who places the bid that drives the price to zero. In effect the winner gets the product free of charge (except for the cost bidding and the cost of shipping and handling, of course.) A descending-price bidding fee auction that discloses all information to bidders is the Kyrano auction, where bidders must pay an enrollment fee for the privilege of bidding and the fee creates a discount from the product's listed price. When bidding starts, it is limited to enrolled bidders, and each bid increases the discount by lowering the price further. During enrollment, bidders can observe the increase in the discount, and during bidding they see how much discount increase each bid contributes. Unlike most bidding fee auctions operated by merchants that sell popular electronic merchandise, gift cards, and similar items, the Kyrano auction may involve high-value items costing thousands of dollars that are bought by winning bidders from any merchant of their choice, using the discount won in the auction. One difference between penny auctions and Kyrano auctions is the price of bidding. Penny auctions sell bids at a set price, such as 70 cents or $1. Whether a participant is bidding on a $10 gift card or a $2,000 TV set, each bid costs the same. Kyrano auctions also sell bundles of biding tokens, typically at 10 cents per token. To bid on a $300 item may require the use of six tokens, while bidding on a $3,000 item may require the use of 20 tokens. There is a more realistic relationship between the cost of the item and the cost of bidding. One reason why penny auctions may take several days to come to an end, especially on high-priced items, is the single cost of bidding regardless of the product's price. It takes many bids to accumulate the product cost by the merchant. On the other hand, once bidding starts in a Kyrano auction, it may last from a few minutes to an hour or two. In all cases of on-line auctions, the wise bidder investigates the site carefully and decides in advance on the limit of spending. One should participate in on-line auctions only if one plans to buy the item anyway, whether at the auction or from another merchant. Bidding on something you don't need is not a good idea.
About this Author Serge Matulich, Ph.D., CPA writes articles on various subjects, including MBA programs; the MBA degree; on-line auctions; and on-line education. He manages the Official MBA Guide, a data base
of MBA schools and programs, offered as a free public service by Unicorn Research Corporation, of which Matulich is a director. Unicorn Research Corporation provides information about the MBA, on-line education, on-line auctions, and on-line investing. Visit http://unicornresearch.com to learn more about on-line auctions.
Article Source: http://EzineArticles.com/?expert=Serge_Matulich
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