Hack 35 Reserve Judgment

Use a reserve-price auction for items with unknown value or limited appeal.

One of eBay's greatest strengths is the lengths to which its policies go to protect its millions of users, both buyers and sellers. One of the best known of these policies is the reserve price, which subsequently gets overused.

A reserve price is a dollar amount the seller specifies, below which he or she is under no obligation to sell. For example, you might want to sell a car for at least $15,000. But if you set the starting price at $15,000, you might not get as many bids as with a starting price of $100 (see [Hack #33]). A reserve effectively allows you to start the bidding at $100 while protecting yourself from the auction closing with too low of a bid. If a reserve is set at $15,000, and no bids exceeding that amount have been placed by the end of the auction, then neither the seller nor the high bidder is under any obligation to complete the transaction.

Bidding on a reserve-price auction proceeds just like a normal auction, with two exceptions. First, a notice stating whether or not the reserve price has been met is shown next to the current price at the top of the auction page. Second, if the reserve has not been met and a bidder enters a bid that exceeds the reserve, the current price is automatically raised to the reserve price.

The reserve is never made public, which is essential for it to work as intended. Keeping the reserve price secret allows the seller to decide whether to sell the item at the end of the auction at whatever price bidders have set.

The problem with a reserve price is that it can scare away bidders who feel that they have no chance of winning the auction, and as a result the final price will often be lower than if there were no reserve at all. For this reason, you should use a reserve price only under these circumstances:

• If you don't know the value of the item, a reserve still allows healthy bidding with minimal risk to the seller. However, in most cases you can determine the realistic market value of your item by using eBay's Completed Items search, as described in [Hack #33].

• For items of limited appeal for which you expect only one or two bidders, a reserve might help you get more money. For instance, consider an auction with a $1 starting bid and a $20 reserve, on which a single bidder enters a $25 proxy bid. Since eBay raises the current price to the reserve price when the reserve has been met or exceeded, the price will rise to $20. Without the reserve, the closing price would otherwise stay at $1. This approach might be useful if you're relisting an item that previously didn't sell with a high starting bid.

But that's about it. Sellers often use reserves for other reasons, most of which don't turn out to be terribly good ones. For example:

• If there's a lot of competition, a seller might use a reserve to permit an arbitrarily low starting price, which would rank the auction more favorably in search results sorted by price. Unfortunately, any gains in visibility will likely be negated by the lower overall appeal of reserve-price auctions.

• On non-reserve auctions, the Buy-It-Now price disappears once the first bid has been placed; on reserve-price options, it remains visible until the reserve is met. Some sellers add a reserve price simply to keep the Buy-It-Now option available longer. The problem with this approach is that the Buy-It-Now price looks to bidders like the reserve price (even if it's not), which may scare them away. If you want to set your reserve equal to your Buy-It-Now price, it's best to use a fixed-price listing instead.

If you do end up using a reserve price in your auctions, you may want to explain a few things to your bidders. First, many less experienced bidders don't really understand how reserve-price auctions work, so you might want to include something like this in your auction description:

"Attention bidders: don't let the reserve scare you. If you're interested in this item, just go ahead and bid as though there were no reserve. If your maximum bid is not over the reserve, you'll know right away, and you won't be under any obligation to buy. If your bid exceeds the reserve, the current price is automatically raised to the reserve price, and you'll have a shot at winning the auction!"

You might also want to reassure your bidders that you're a serious seller by explaining that you might be willing to sell to the high bidder even if the reserve isn't met. In fact, for vehicles in eBay Motors, sellers can use the "Second Chance Offer" to do just that.