Auction sites can make oodles of money off unsuspecting bidders, who think…
Perhaps you've seen the ads on TV for auction sites with funny names — QuiBids, Beezid — that promise the chance to score cool things like cars and iPads for up to 99% off the retail price.
So what's the catch?
It's this: You may indeed win an auction and walk away with a nifty prize for considerably less than you'd pay at a store. But it's more likely you'll lose the contest plus the amount you bid, which, unlike a traditional auction, is nonrefundable.
And the actual price tag for the goody could end up being many times what it would have cost to just buy the thing the old-fashioned way.
"The average player loses money," said Ned Augenblick, an assistant professor at UC Berkeley's Haas School of Business who has studied online auctions. "These things prey on people who don't think through what's really happening."
Is it a scam?
"If people are fully aware of the rules and conditions, then it's not a scam," Augenblick said. "The problem is that even though the websites might make the rules clear somewhere, most people really aren't aware of them."
As a result, these auction sites can make oodles of money off unsuspecting bidders, who think they're vying for a sweet deal but in reality are just pumping cash into the site's coffers.
"It's an amazing business model," Augenblick said with a hint of admiration.
How does it work? Let's look at QuiBids, which says it accounts for about 80% of the market for so-called online penny auctions.
First of all, it's not like sitting down at an auction house like Sotheby's and bidding on a painting. You need to buy your bids upfront.
Each bid costs 60 cents. You initially buy 100 bids for $60. QuiBids then sells extra bids in bundles (45 bids for $27, 75 bids for $45 or 300 bids for $180).
When the bidding begins for a particular item — a new iPad, say — the amount starts at zero and a clock starts ticking. There may be as much as 48 hours on the clock at first, but the serious bidding only transpires in the final minute or so.
Each bid boosts the selling price by 1 cent. In the final minute, each bid also adds a few seconds to the clock.
So let's say you've prevailed in fierce bidding for that iPad, which retails for $500. Your winning bid is $20 (unlikely but stick with me). Does that mean you'll pay just $20 for the device? No. You may have had to submit 300 bids to overcome your rivals.
At 60 cents a bid, that means you've spent $180 to place your bids, plus the extra $20 for the selling price. But even at $200, that's still a great deal for an iPad.
However, to get to a $20 selling price, 2,000 bids had to have been made (each bid, remember, costs 60 cents but raises the selling price by just 1 cent). That means QuiBids is taking in $1,200 for that ostensibly $20 iPad.
Apple hasn't donated the device to the auction site. Instead it was obtained by QuiBids from some other retailer, presumably for close to its full $500 retail price. So even minus that initial cost, QuiBids has still turned a profit of 140% on the deal.
But QuiBids doesn't want unsuccessful bidders to walk away empty-handed. So the site offers a "Buy Now" feature that enables you to supplement your losing bids with extra cash to purchase the same item at what the site says is its retail cost.
Let's say you spent $150 on your failed bids for that iPad. You could kick in an additional $350 and still get the gadget. This obviously eats into QuiBids' 140% profit margin for the auction, but Augenblick at UC Berkeley said the site still profits by either raising the retail price or tacking on extra fees.
Now you see why he called this an amazing business model. When people bid on a product, the company wins. And when losing bidders buy the same product through QuiBids at a marked-up price, the company wins.
Jill Farrand, a QuiBids spokeswoman, said it's wrong to view the site solely as an auction venue or shopping outlet.
"We're an entertainment auction site," she said. "Our whole value proposition is to have fun shopping."
That's basically the same line that casinos use to accommodate the awkward fact that visitors almost always lose more money than they win. They cite the entertainment value of gambling, rather than your pitiful chances of actually hitting the jackpot.
Farrand said QuiBids tries to improve people's odds by matching them with bidders of similar skill levels, and by blocking neophytes from getting into last-minute bidding wars with more experienced players for hot items like cars or flat-screen TVs.
"We want to look out for the consumer," she said.
It's a nice sentiment. But consumers would be well advised to simply steer clear of sites like these. As with a trip to Vegas, you may have some fun, but the most likely outcome is that you'll go bust.
Want an iPad? Buy one. It'll almost certainly be cheaper.
David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to firstname.lastname@example.org.