I recently attended a large sealed-bid sale in Minneapolis featuring equipment from 3M. The sale included an assortment of custom late-model manufacturing equipment. My goal was to purchase machinery for my personal resale. I spent five hours reviewing the equipment to ensure my bids were as high as possible, but still left a profit margin when they sold. In the end I submitted four pages of bids and did not win one single item.

I was shocked. It is very rare for me to invest substantial time in a conventional auction and not win a single item. This got me thinking about the differences between sealed bid sales and auctions.

An auction involves real-time bidding. At a live auction the back and forth between bidders is public confirmation between the bidders that the current price level is attractive (to at least two people). These interactions build confidence for both parties to continue bidding, as they receive confirmation that their perceived value of the item is in line with other interested parties. If the bidders have a similar idea about the value and there is strong demand, this is obviously a fast method to sell items.

At times, in light of back-and-forth between interested parties, auctions prices exceed the value of the item. Auctions also create a public loser. With every item there is a single winner and a single loser (the second to the last bid). When bidding at an auction, the audience can see the loser. In my experience, the pressure not to be a loser will keep people bidding past their predetermined limits. Additionally, since the cost of items increases in small increments, bidders are enticed to keep bidding higher and higher–after all, the increases in price are minimal, so what’s the harm? No one wants to lose a $2,400 item for only $100. The fast pace, extended bidding, and chant of the auctioneer add to the fervor at the close of sale of an item. This excitement often pushes prices even higher.

When there is not a lot of demand for an item the live-auction method is not the best solution. If a bidder is only mildly interested in an item, willing to bid $30 for instance, while another bidder is madly in love with it and willing to bid $150. The second bidder will win, but only have to pay $35. This is great for the buyer, bad for the seller. Every auctioneer has a story about an item that sold well below its value because there was not enough interest that day at that auction.

A sealed bid sale takes care of the potential problem described above. It forces each buyer to make one single bid for an item. This final offer must be determined without the help of another bidder driving up the value. Based on the same scenario with sealed bids the item above would sell for $150 instead of $35. Even with limited demand the highest possible price is still achieved, the seller is successful, and the buyer is happy.

In addition to low demand, sealed bids work well if there is a large gap in the perceived value of an item. For example, there is a cabin for sale on a small lake. Cabins on this lake almost never come up for sale. One bidder is looking for any cabin on any lake and the other bidder spent their childhood on that lake and will only consider cabins on that lake. The perceived value of the cabin for sale will be much higher for the second bidder; there will be both emotional and financial investment in the cabin purchase, one that is more significant to the person who merely wants a cabin on a lake. If there is a large gap in perceived value, a single sealed bid will net a higher return.

If there is strong demand and the value is generally the same for bidders, I advise sellers to go with a live auction. If items are difficult for buyers to value, demand is limited, or there is a big gap in perceived value, go with a sealed bid. The manufacturing equipment that 3M sold were unique. I’m sure the winners paid thousands more than my bids. However; I would not be surprised if after five hours of work I was the second highest bid on at least one machine.

By Russ Hilk Co-Founder Wavebid