Penny auction websites are a relatively new phenomenon popping up all over the internet. Deal seekers are drawn in and attracted by the chance of winning an auction on goods at a fraction of their value. In a penny auction, the price normally increases only a couple cents per bid placed. But before you begin bidding on an item in one of these auctions, you should have a thorough understanding of how penny auctions work and the risks involved.

Is it possible to win a penny auction on an item that is valued at $1000 for $30 or $40? The answer is “Yes.” As with any auction, either on-line or at some other venue, other bidders have the opportunity to place a higher bid causing you to either place another bid or give up. The thing to know while bidding in penny auctions is that every time you place a bid, penny auction sites charge anywhere from 50 cents to $1.00. So, to place a bid that is one cent higher than the current bid, it will cost you the auction site fee each time you place a bid, even though it may only be one cent higher than the current bid.

Let’s say you are taking part in a penny auction that charges 50 cents per bid, and the current bid for an item that is valued at $100 is $2.20 and you want to place a bid for $2.21. You will have to pay the 50 cent fee to place the bid. Once you place your bid, the auction is automatically extended 15 seconds, giving other bidders the opportunity to place a higher bid. If you win the bid with your $2.21 and only had to place a single bid, your overall price would be $2.21 (the bid), plus the 50 cent fee for placing your single bid for a total of $2.71, plus shipping and handling of course.

How are sellers/penny auction sites able to turn a profit if a $100 item sells for only a couple dollars? The answer is simple mathematics. Let’s say there are 100 participants bidding on this same $100 item. All 100 place their initial bid each increasing the bid by one cent. This would bring the current bid to $1.00. The auction site just made $50 in bid fees. One dollar for a $100 item is still very attractive, but let’s imagine that half of the bidders drop out. The 50 remaining bidders each place another bid, all 1 cent higher, bringing the current bid to $1.50. The penny auction sight just made another $25. Let’s say half of the remaining bidders drop out leaving 25 more bids each increasing by one cent. The current bid is $1.75, and the penny auction site just made another $12.50. So the bidding goes until there is a single high bidder who pays the winning bid plus the fees for placing each bid. The winner gets a great deal while the losers of the auction pay their bidding fees and walking away with nothing to show for their time and money. When all is said and done, the winner gets a great deal, and the auction site quickly makes double the retail value of the sold item.