We often receive e-mails from readers wondering whether this or that penny auction site is an awesome way to kill time and get cheap iPads, or a scam. Back in 2009, we looked at Swoopo, and penny auction sites have proliferated since then. The sites differ somewhat, but the business model is always the same, with users placing prepaid bids, and the auction site collecting far more from all of the bids than the retail value of the item. It’s like a very lucrative, for-profit raffle.

Let’s look at readers’ experiences with one of the more popular penny auction sites, QuiBids. Commercials for them are beginning to pop up on TV (I saw one during “The Daily Show” last week) and people are curious.

Charles wrote about his experience with the site’s consumer-unfriendly math:

An example from today I witnessed (for a $1680 Canon EOS 7D Digital Camera):
I mean, come on … 1¢ bids on this item, lasting 10+ hours, with bids “artificially” hitting almost $99.00? Seemingly a great deal and opportunity for consumers, most people don’t think about the fact that they made $0.59 per bid (taking out their incremental 1¢ bids from the $0.60 consumers pay, per bid), multiplied by almost 9,900 bids equals an amazing $5841.00 in revenue, on a $1680.00 retail item, which actually costs them approx. $1200.00.

Update, 3/21/11: a representative from the PR department at QuiBids contacted us about this post, and had the following to say:

Seeing Charles’ experience is unfortunate b/c he seems to be confused on how our model works. Each bid costs $0.60 but we do not subtract one cent from what the consumers pays for the bid(s). If you want to take this item’s ending price multiplied by the number of bids placed, assuming his math is correct, let’s say we did bring in $5,841.00 on a $1,680 item. What is not included in this explanation is also the number of free bids that were placed (voucher bids) and the number of Buy-it-Nows that were utilized. This can drastically change the ending revenue. Also, we do not have nor do we engage in bots or shill bidders. These practices are unethical and against our company policy.

Felipe gave it a try, and noticed that live auctions work differently than the ones you see before signing up for the site:

I signed up and bought the beginner pack of 100 bids for $60.00. I won a beginner auction as it was basically rigged to let me win and that is fine because they’re just trying to teach you the process. I won two other auctions easily but then after that it got practically impossible. No more auctions were being shown with “no bids” all of a sudden in the search results. I observed the site for a while and realized all the sales now were closing for relatively high prices in terms of number of bids.

Curious, I opened another browser that was not logged in to my account and did not have any of their cookies installed yet, and saw a different search result page from the one I had when I was logged in. In it, they listed several items that had no bids and expired without a winner. I tried copying those links over to the browser that was logged in and was automatically redirected to the scam home page. I tried logging in from the other browser to bid on those items but they conveniently expired with a single bidder right after I logged in.

Apart from issues with their business model, one blogger even complained that the computer he “won” wasn’t the one he received, and QuiBids was dragging their feet in sending it back.

Should you use penny auction sites? We don’t recommend it, and really don’t recommend it if you have a gambling problem. We can’t vouch for their reviews, but the site Penny Auction Watch watches over the industry and tries to sort out the scams from the harmless fun.

An iPad for $2.82, or illegal gambling? [MSNBC]

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