The typical auction is the nice straightforward kind of winner-takes-all. However, there are special auctions, and one kind in particular is critical for any seller who wants to reach the top pinnacle in the auction business.
Here is a quick overview of the different kinds...1) Reserve Auction
We have already explained this kind of transaction. Reserve auctions are a very small minority and are usually reserved for higher-priced items.
2) Dutch Auctions
Dutch auctions are vitally important to us. They are the key to substantial income generation!
Dutch auctions are very confusing to understand at first so don’t despair. (We will discuss them more in the chapters ahead.) A Dutch auction is one in which the seller offers more than one of the items she is selling. For example, if you have 25 Nascar models to sell, you can create 25 different listings, or you can put them all in a Dutch auction.
Sometimes it is appropriate to create single listings. Other times, Dutch auctions are the way to go. There are different strategies for either approach...i) Rules -- On most sites, brand new traders cannot participate in a Dutch auction. For example, on eBay, you must be a member for 60 days and have at least 50 feedback points. This restriction isn’t to pick on the “new kids.” It’s because it takes some skill and practice to manage them.
There can be no reserve price in a Dutch auction. There is no proxy bidding, either. The winners in a Dutch auction purchase the item at the lowest successful bid.
This can get a little confusing, so stay with me here. First, let’s make up an imaginary auction just for the sake of explanation. After that, we’ll look at some actual auctions...
Example 1... Let’s say that Jane is auctioning 10 pairs of earrings, with an opening bid of $5. If 10 people (or less) bid $5, no problem. They all get a set of earrings.
Example 2.... What if 16 people bid on those 10 sets of earrings? Who gets them and for what price? We’ll pretend the bids went like this...Buyer A - $13.50
Buyer B - $12.75
Buyer C - $12.25
Buyer D - $11.80
Buyer E - $11.00
Buyer F - $10.43
Buyer G - $9.10 Buyer H - $7.50 Buyer J - $5.00 Buyer K - $5.00
Buyer L - $5.00
Buyer M - $5.00
Buyer N - $5.00
Buyer O - $5.00
Buyer P - $5.00
Buyer Q - $5.00
Buyers A to K get the earrings. But why would J and K get earrings, and buyers L to Q not get them, when they bid as much as J and K? It all has to do with the chronological sequence. The first buyers who bid a winning price are the lucky ones. Perhaps J and K bid on Tuesday morning, and the others didn’t bid until Tuesday afternoon or sometime on Wednesday.
Now for the tough question. What does everybody pay for these earrings? The price is based on the lowest successful bid which in this case was $5. Therefore, everybody pays $5.
Yes, you read it correctly. Everybody! Even though Buyer A bid $13.50, she only has to pay $5. Arrgh!...
…WHAT THE HECK IS GOING ON?
I promise, it will get very clear when you start to wheel and deal in the Dutch auction arena. For now, just be aware that Dutch auctions are something you want to master. They are the source of super profits.
Let’s look at two actual Dutch auctions that might make this whole thing clearer.Situation A… This seller began her auction with 5 digital cameras and opened the bidding at one cent (knowing full well that the cameras would climb much higher than that)...
74 people bid on the cameras. The five winners are listed below. The two top bidders offered to pay $55 and $52. The next three bidders offered $50.Mini-quiz... Did they pay different prices? Or did the five people all pay the same thing? If the latter, how much did they pay?...
The answer is... (drum roll)... all five people paid $50, even though two of them were willing to pay more. Why? Because $50 was the lowest successful bid! Here is our second example, an auction in which I bid...
The seller offered 250 garnet pendants for one cent, and the # of bids is 283 bids. The bidding stayed at one cent for days, and that is what I bid as well. The pendant sold for $2.50, since this was the lowest successful bid. The top bidder was willing to pay $25, yet it only cost $2.50. I’m sure she was delighted.
A word of caution, however -- if you ever bid a high price on an auction (assuming that you won’t have to pay that much) you may be unpleasantly surprised. Don’t bid any sum unless you are willing to pay it!
There are three other interesting comments to make about this particular Dutch auction example. These details affect your profit as a seller...• The listing above has the number 283 in the bid column. This is another difference between a Dutch and a regular auction. The number of bids is actually the number of people. But each of the 283 may have made multiple bids, and so there might be 1,000 requests for earrings for all you know.
• Did I win? No, I didn’t because I didn’t bid high enough. I would definitely have been willing to pay much more than my one cent bid but because I didn’t constantly follow this auction, I lost track of the bidding. Each day, I received an “update” from eBay recapping my sales and my bids. However, this isn’t nearly as powerful as receiving constant updates, which is what happens with a single auction item.
This reality can depress the price if you are a seller. How come? When there is only one item for sale, the sites immediately notify the losing bidders when someone bids higher. This doesn’t occur in a Dutch auction. Therefore, your prices may not move up as quickly.
• It may cause a seller to gnash her teeth in frustration to see that these buyers were willing to pay so much more. That’s just the way it is. Those are the rules of a Dutch auction, and we either have to abide by them, or not participate.
ii) When to use Dutch Auctions - Dutch auctions may be an important wealth tool but you will only want to use them when you have tested a certain product and are confident that you know what you are doing. For example, if you have never sold solid gold widgets and you auction 5,000 of them, you may be in for a real shock. There is an insertion fee for all 5,000 of them -whether you sell them or not!
Dutch auction is definitely a power strategy but one to use prudently. If it sounds intimidating, don’t worry about it. As you gain more and more auction experience, your comfort level will rise and you will become more experimental. Personally, my largest Dutch auction was for 150 items. But I am very careful.
Key learning point... TEST, TEST, TEST!Reverse Dutch auctions are sometimes found at specialty sites, but they are not very popular. In a reverse auction, the price begins dropping at specified intervals. The buyer’s job is to figure out when the price is acceptably low. Wait too long and someone else will buy the widget.
It is similar to a Dutch auction, however, in that everybody will buy at the lowest price. However, you had better be willing to pay whatever you have bid. Be sure of your bid -- don’t hope or expect the price to drop because it may not. So far, this doesn’t seem to be an especially popular format. I have yet to talk to anyone who has participated in such an auction.
4) Restricted AuctionsRestricted auctions are usually for “adult” auctions. To even look at the items in restricted auctions, the site requires credit card information which means the browser must be 18 years old. (This is the Internet auction equivalent of putting “Penthouse” magazine in plain brown wrappers behind the counter.)
5) Private Auctions
In a regular auction, the identity of the bidders is available for all to know. In a private auction, this isn’t the case. There are usually two reasons for a private auction...
1) If the item is very expensive, the bidders may not want the world to know that they can afford a Van Gogh.
2) In the case of adult auctions, the bidders may not want anyone to know they are bidding on a particular item.
