Buyer’s premium is much better than a seller’s commission. Buyers don’t want to be losers. That is psychology 101, Maslow’s Hierarchy of Human Needs. Even disciplined buyers lose the effect of the buyer’s premium near the end of bidding at an auction, as the tempo increases. Smart buyers set a max they will spend. This is usually a round number based on homework and research. Very few buyers stick to this number because the buyer’s premium clouds the math and auctions happen fast. Auctions happen very quickly and emotions often drive bidding. No one likes losing, especially if it is something they want. Dealers will reduce their profit if it means winning the item. End users want to use the item and will pay a little more if it is the difference between winning and losing. Auctions exploit emotions and incremental justifiable bids to achieve the highest possible price. Each bid is a minute step toward the final selling price.
The $13,000 Truck
Say you want to buy a truck for $13,000. You have done your homework, and for the item you picked out, it’s a fair price. Not too much, but a reasonable amount that you believe will be enough to win,and you think it is a good price. There is a 10% buyer’s premium (BP). So you do the homework, the dealer is getting $15,000; doing the math before the auction you decide you will spend $11,700 (11,700+1,300 BP = $13,000).
It’s the day of the auction. You are excited. You have done your homework, you are prepared. In your mind you are already driving your new truck. You’re hauling your boat, you are the envy of the neighborhood. You see your new truck in your driveway. The bidding quickly reaches $11,000. This is a quality machine. Which only stands to reason, based on your research. The bidding is at $11,100 now…$11.2, $11.3, $11.4, $11.5, $11.6, and…as expected, bidding has hit your limit: $11.7000. The guy you are bidding against is at $11,700! You are on the wrong side of the bid. For $100 more you can be the high bidder. That might be the final bid. You tell yourself that it’s “only $100.” You are your only chance to be a Winner. It’s only $100 more. Your mind is racing. $11,800 is a long way away from your limit of $13,000. After all, you want this truck, you did your homework, you set a limit, and you are not going to lose the product for $100. People would call you “crazy” if you didn’t bid.
It’s that point where you lose track of the Buyer’s Premium. Your limit is $13,000, but the live auctioneer is chanting $11.8, $11.8, anyone $11.8? He is talking to you. Pleading, as if he knows this is a great deal for you. Online you keep hitting refresh and it is right in front of you: $11,800. It’s up to you to change that amount. Empowered you bid $11,800. It was your only option to win. Good choice. $100 is nothing. Suddenly, your adversary bids again at $11,900. Now what?
Well, it was a really good deal at $13,000. That was your limit that would enable you to brag to your friends about the great deal you got. You never overpay on merchandise, so you remind yourself that there is always a little wiggle room within your financial limits. So you bid $12,000. Now you are confident you’re a Winner, not a Loser. You look over and realize that the truck is a lot nicer than you thought, the paint is perfect and the body is perfect. What a deal! You are really excited to be The Winner. But now your new enemy bids $12,100 and gives you a look like he plans on driving off in your truck. [After all it is your truck. You did the homework, you did the research, you deserve it.]
You are not a Loser, but the bidding suggests that you might become one very soon. What will the neighbors think if you don’t come home in this truck? You have no choice, so you bid $12,200 and become the Winner again. Relief is short lived when the other guy goes to $12,300. If he’s willing to go $12,300 you wonder what is keeping you from $12,400? You remind yourself that $100 more on the bid is less than 1% of the total cost. Who walks away from a sale for $100? “I will not lose this opportunity for $100.” You need a truck and at the dealership they are going for $15,000. If you stop bidding now, the dream is over. $12,400 is below your $13,000 conservative limit. You will have to go spend $15,000 if this opportunity passes you by. $12,400 is a great deal versus $15,000.
You bid $12,400. And now, you are a Winner! You want to hug or high-five everyone around you. That was the final strikeout in the bottom of the ninth. You tip your hat triumphantly to the other bidder as a salute to your hard won battle. The best part is you won the truck for $12,400. Well below the $13,000 limit! Then you get the invoice: $13,680 ($12,400 + 1,240 = $13,680).
And that, is the power of the Buyers Premium.
By Russ Hilk Co-Founder Wavebid