Here is another blog article in our series of silent auction tips. This one is related to setting starting bids and silent auction bid increments.
Organizing a silent auction involves many unique tasks that require careful and strategic thought. One such activity is setting bid increments.
Our customers often ask us how we should set up these bidding rules, and in this blog article, we will give you some ideas on how to best optimize your starting bid and bid increments!
So, where should you set your starting bid and bid increments? If you search around the Internet, you will find some rules of thumb and some best practices. In most cases these are based upon some sort of basis such as "Fair Market Value” (FMV).
Many of these websites will tell you to set your starting bid to some percentage (e.g. 30%) of FMV. If your fair-market-value is inflated, however, you will create a steep entry point for your item. If you are going to base your starting bids off of fair-market-value, keep in mind that FMV can often be subjective. So be careful.
What is the Fair Market Value of an Item?
There's a good reason that FMV stands for "fair market value." It's critical to be honest yet fair with FMV. If its at $50 gift certificate, then its value is clearly $50. If its something else, make sure you estimate the value "fairly."
Remember, donors sharing goods for your auction can inflate these values for their own purposes, so don't just take their word for it. Search the internet and check. See what people can buy a similar item for online.
Pro tip: We had a donor once tell us that a baseball signed by some "random” MLB player was worth $250. An internet search found it available from multiple places for $75.
An accurate FMV will help you better understand how your bidders will bid. While you may state the item is worth $250, don't be surprised if bidders think otherwise. Be accurate. Bidders will appreciate it since they really only get to claim deductions on their purchase amount, which ultimately, might be less than FMV.
What is a Fair Starting Price?
As mentioned before, some advisors will tell you to set minimum bids to roughly 30-40%% of FMV. Is that always the right point? We think starting bid prices are more of an art than a science, and formulas don't always work. Our years of data crunching have shown us that the bid increment is actually a bigger influence on overall auction performance.
We think that 30-40% of FMV is an okay place to start. Auctions work well once people are engaged. To get them engaged, you need to get them a low (but fair) entry point.
If you set the starting bid price too high - you will price out some people - even those that may have paid a price higher than the starting bid. This is because once people get engaged in bidding on an item, they're likely to get emotionally attached to it, which can cause themselves to bid higher.
If the item up for auction has a higher starting bid, it will be harder for the bidder to justify bidding on that item initially.
What is a Good Bid Increment?
Bid increments should be kept as low as possible and mobile bidding makes it easier to do that. Many have a formula for this as well. Here is what we suggest - you keep your bid increments AS LOW AS POSSIBLE.
For those coming from silent auction paper bid sheets, the practice was to put bid increments reasonably high to incentivize people to bid. However, we've debunked this in our article about the hidden costs of bid increments in a paper silent auctions. In most cases, people set bid increments way too high - especially for more expensive stuff.
Think of it this way, for an item with a FMV of $1,250, using a ratio of a minimum bid at 40% of FMV and increment at 15% of the minimum bid, we would have a starting bid of $500 and a bid increment of $75.
This automatically prices out anyone who would have paid $500 - $575 or $575 - $650. The more bidders you get involved with, the better. Once they are in a bidding war - their logic seems to fall by the wayside and emotions take over.
The Formula Approach
If you are the type that absolutely needs a formula - here is one to consider:
Suppose you want to see roughly 13-15 bids per item that has a starting bid of $500 and an "accurate" fair-market value of $1,250. For this specific example, we would suggest that you set the bid increment to $50.
Here is the math for that:
$50 x 13 = $650
$500 [starting bid] + $650 [bid revenue] = $1,150
Getting $1,150 for a $1,250 item is an 92% efficiency and would be considered a success in almost any auction.
The Non-Formula Approach
Keep your bid increments as low as you can stomach and try to get people engaged in the auction. Have an item starting at $1,000? $100 doesn't have to be the bid increment; consider something less than that, like $25! It's not heresy. It is ok! If you get enough traction on the item, it will go for much more than $1,025!
Perhaps with a paper bid-sheet auction, some of these ratios (rules of thumb) and high bid increments make more sense. There is a high cost for a bidder to keep returning to a piece of paper to increase their bid. However, mobile bidding allows you to keep the bid increments lower as you should see people more willing and able to whip out their phones and up their bid. For those that don't have a mobile - proxy bidding is their best bet.
Do you have any questions about bid increments and setting starting bids? We would be happy to help. Comment below with your question and we'll answer it as soon as we can.
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