Do Reserves Help or Hurt the Auction Process?
Posted by Jim Olson on Nov 15th 2024
In the auction industry, one of the most common questions we get is whether or not to set a reserve price on consignments. Reserves, or minimum price thresholds, are sometimes put in place to prevent an item from selling below a certain amount. The underlying intention is to protect a seller’s interest. However, in practice, we believe reserves often backfire, limiting bidder interest and lowering overall final sales prices. Though this may seem counterintuitive, here’s why avoiding reserves can actually lead to a more successful auction process.
Understanding Bidder Psychology
Setting a reserve, especially a high or undisclosed one, can discourage participation by making bidders feel the item is overpriced, or that there is no “Chance of a deal.” High opening bids or starting prices have a similar effect. We often peruse auctions with starting prices close to, or even above, what we would want to pay for an item, and in these cases, us (and many others) don’t even sign up to participate. The auctioneer has unknowingly created a perception of items being out of reach, which reduces bidder interest before the auction even starts.
On the flip side, bidders are enticed by opportunities that feel accessible and possibly rewarding (the allure of a deal). Low starting bids with no reserves invites everyone to sign up, signaling, “This item could be yours for a bargain.” Consequentially, once bidders are engaged, they are more likely to stay involved, which in turn, actually increases final sales prices. The transparency of no-reserve auctions “dangles the carrot” needed to encourage participation. It’s common sense, a smaller pool of interested buyers undermines the competitive nature needed to drive prices.
Competition Drives Prices
In auctions, it is competition (or the lack thereof) which drives prices. Naturally, the more bidders there are, the greater the chance of higher bids as participants get invested in “winning” the item. Seeing other bidders actively engaged also validates the item’s value and desirability, fueling further interest. The competitive bidding process with numerous bidders helps achieve true market value (what ever that result may be). This is why auctions with low starting bids and no reserves often result in higher overall prices, because more people sign up, resulting in more competition.
Low starting bids and no reserves also creates a sense of excitement and accessibility that encourages people to participate. No other method of selling is more exciting than a live auction with a good auctioneer. Once live bidding begins, many become committed to the process of winning. This progression allows the item’s true value to emerge, often exceeding initial expectations.
Can Reserves Harm Sellers?
A seller who is overly protective of an item’s minimum price may inadvertently end up selling it for less than they could have (due to low competition), or in some cases, not selling it at all. Now-a-days, with the prevalence of auctions being available on the internet, sellers have the advantage of access to a vast pool of potential buyers worldwide. As noted, a high volume of interested bidders is what it takes to realize true market value through healthy competition. However, undisclosed or high reserves can undermine the bidder pool, discouraging bidders from participating at all. No reserve auctions with low starting bids always attract a more extensive and enthusiastic bidding base, creating a unique environment where fair market value is determined naturally — the exact opposite of what sellers get from a high reserve, high opening bid auction.
Special Circumstances for Special Items
While we generally recommend no reserves in most cases, there are exceptions for rare or high-value items where a reserve might be warranted. But if you can “Google” your item and find several of them, either for sale, or that have been sold recently, then your item is not rare, and likely does not warrant a reserve. However, there are certain one-of-a-kind items which do not trade regularly on the open market. In these cases, auctioneers and sellers should work together to set reasonable expectations that don’t deter potential bidders. Keeping in mind that it’s important to remember that too high of expectations can limit an item’s potential and possibly hurt the final outcome.
Devil’s Advocate
Some might ask, “What about the times when an item sells for less than what is was worth?” We have two responses to that: First off, in a well advertised auction with hundreds or even thousands of interested bidders signed up and bidding— the item actually brought what it was worth that day on an open market. Perhaps seller expectations were just too high? Market values can and do change all the time.
The second response to an item selling below perceived value is: No big deal! If an item didn’t sell for less than perceived value once in a while, the “allure of a deal” would not be as present. We counsel sellers all the time that they need to keep the overall big picture in mind. Most of our sellers have multiple items in an auction. Some items will do better than expected, some will do worse than we thought, and most will do about what they should have. In the end, a seller’s average is what’s best to focus on, not that odd item here and there that sold for less than perceived value.
Conclusion
By cultivating an open, competitive marketing environment through a no-reserve strategy, sellers gain access to a larger pool of motivated bidders who compete freely and enthusiastically. This is typically the most reliable way to discover an item’s true worth on an open market. For most items, avoiding reserves is the best way to achieve fair — and often better than expected — market values because, ultimately, it is the bidders who determine value.
Take a look at the highest-rated and most successful auction companies in the world, and you will find that few take consignments with high reserves. The results speak for themselves: as long as an auction is properly marketed, no-reserve auctions with low starting prices are the proven path to a successful auction and achieving true market value.
Jim Olson © 2024