Reverse auctions? Fun? Profitable? Or considered illegal and classified as gambling in some countries?
Many people love auctions, off line and online. A few years ago online reverse auctions began to pop up. Dubli, created in Europe, was, I believe the first to go hot and heavy online.
Though the concept of reverse auctions is very appealing as a great deal and great money maker, I personally believe it is so interesting because we are not looking at the backside of what is really going on. There is also a question of legality in some countries.
Before we talk about the legalities, let’s look at how auctions work. Please do not beat me up with comments about ‘cost is all wrong’ blah, blah, blah …. all auctions vary in costs, I’ll only be covering the general principals.
The regular Auction we all know and understand:
Let’s say you have a pair of designer Levi Jeans that retail for $150. For the purpose of this post, let’s say you paid $50 for the jeans and then put them on Ebay – high bid reaches $100 and the auction time runs out. The buyer got $150 pair of jeans (a $50 savings off retail) The seller got a good deal because they bought the jeans for $50 and received an additional, let’s say about $40 on the sale (after fees for the auction).
What did the losing bidders pay? Nothing. That’s the way a normal auction works.
Reverse Auctions – the concept:
Now unlike the regular auction sites like Ebay, in the reverse auction, you have to pay a fee to be a bidder. Next you need to buy bidding credits.
Here is our same pair of Designer Levi Jeans. We put the jeans up for auction at the retail price of $150 and then the bidding starts.
In order to bid, the bidder must pay a fee. For argument’s sake and ease of calculation, let’s say the fee to bid is $10.00. Once you have paid your fee to bid, you must purchase bidding credits. Again, for argument’s sake, let’s say that the bidding credits cost 80 cents each.
Every time a bid is placed, the price of the jeans goes down 25 cents.
At the end of the auction, what have we got? The winning bidder, of course, pays for his product and gets the jeans. This fee is over and above what he used in credits. So let’s say the winning bidder made 20 bids. The cost is broken down like this: $10 for the right to bid, 20 credits for a total of $16.00 and then the price of the winning bid, plus of course, shipping and handling in most cases.
What did the other bidders get for the the $10 right to bid and 80 cents per credit they spent? NOTHING.
At the end of the day – or auction as is the case – how much money was brought in for that $150 Retail priced pair of Designer Jeans and better question where does the money go from there?
Let’s presume, as we have been, that 600 bids were placed, $480 has been sent in to the company for bids. Add to that the amount paid to bid. Supposing each bidder paid $10 for the ability to bid and there were 20 bidders, the company has now collected $200 free money to the company off the top in addition to the $480 collected through the 600 bids. That is a total of $680 brought into the company.
Now what does the business agent/associate/affiliate get? In most cases they receive a commission on the savings percentage – the more customers you have, the more commissions earned but are not paid on the fee collected to allow someone to bid. The company instantly pockets (in our example) $200 off an auction with 20 bidders.
After all that is said and done, what do I, as one of the losing bidders get for the money I spent? If I spent $10 to participate and I too placed 20 bids at a cost of $16, I have spent a total of $26 with nothing to show for it.
Now let’s look at a twist I found on one of the sites. This is taken from the Terms of Service on one of the reverse auction sites:
If the bidding requirements (sole lowest bid at a certain price) are not fulfilled, neither an awarding of the item nor an entitlement to a contractual agreement with a participant is established. The item remains the property of [Company]. The bids placed for the item expire and the Credits used in bidding for the item are not refunded.
In this case, no one gets or makes anything but the Company. Every transaction that took place is PURE profit for the Company.
On the losing side, it almost sounds as good as buying Lottery tickets, doesn’t it? I spent money in hopes of winning something. I did not win, but also do not get my money back either. That’s where the rub or question of legality comes in. Recently there have been grumblings that reverse auctions are a form of gambling (gaming to some), which is illegal in some countries.
Now, let’s step outside and look at where all the funds the Company makes are being banked. Most all of the reverse auction companies are setting up their bank accounts in countries where other countries like the US can not freeze their bank accounts and/or assets should the company be investigated and proven to be a form of illegal gambling. Cyprus seems to be the home country of choice for at least one of the big reverse auctions.
In googling for reverse auctions, I actually came across two who boldly claimed to be ‘gaming’ sites. One of them is not available in the US.
Because an investigation can take 2-3 years from the first complaints, a company can rake in LOTS of money before the ax falls. And because the banking is being done out of the reach of the US, the FTC may boot a company out of the country; however, there will be no chance of restitution to victims.
One thing to keep in mind…. If you are being told that the credits you buy are the actual product- RUN! Product cannot be an exchange of cash for tokens which are another form of cash. Money is not a viable PRODUCT according to the FTC. Rod Cook of mlmwatchdog.com says, “THE WORD CYPRUS = RUN!”
You, the reader, ultimately have to decide if the reverse auction businesses are for you or whether you are better off to RUN the other direction.
~Jennifer Fisher
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