What Can Auctions Teach B2B Us About Customer Willingness To Pay? 👛
Do auctions encourage customers to pay more or less than fixed pricing OR do they just create confusion and speculation about willingness to pay that rogue sellers want to exploit?
It’s a question to not only ask before you attempt to redesign your pricing and revenue models based on customer willingness to pay, but it’s also something you’ll likely ask yourself every single week/month you’re in business from now on. As one thing is for sure, the business was tough before, and it is only going to get much tougher from here on in. You need to understand why your customers buy your products, and then design the right revenue pricing model to extract the right dollar value from the market without losing your hard-earned volume and revenue.
Figuring out what value your business really holds for your customers and why they continue to buy your products is no longer “nice” to know its “essential” to stay in business. What’s more, understanding the buy-sell dynamics in an auction is a great way to help you understand your customers’ real willingness to pay for the stuff you sell, even if you are in a traditional B2B or B2C business.
Willingness to pay is based on innate risks and desires
Why? This is because your customers’ willingness to pay and willingness to accept from you is based on innate risks and desires inherent to us all. And, auctions are a great place to see how people really respond to internal and external pricing cues and marketing suggestions.
When you go to a property auction, for example, you can see people’s clumsy attempts of understanding and justifying the price of very expensive property. You can see people say the price is fair when in reality it’s completely disproportionate to the cost of the property or even the market value.
Another example would be when you go online on E-Bay or Amazon; you feel your purchase decisions are driven by not only your internal drives and motivation to buy, but also by external pricing cues, pop-ups and suggestions all of which are persuading you to upgrade and buy more for less.
So, in this article, we will discuss what auctions teach us all about our customers’ willingness to pay for our goods and services. We will argue that auctions come into their own when nobody is quite sure of the value of what is being sold.
We believe that the buyer-seller dynamic (i.e., sellers want to be where the buyers are and the buyers want to be where the sellers are) makes auctioneering a natural monopoly. Which means there’s always a greater risk that large auctions abuse their price positioning in the market and push the price ceiling higher than they should (i.e., price gouging).
But before we begin, we’d just like to explain the ins and outs of this sales method to help you understand the power of auctions on human spending behaviour and price decision making. This includes the best customers’ customer willingness to pay formula for your business and how to understand how your customers perceive the value of your products and services.
What is an auction price guide?
A price guide is an estimation of price, based on recent sales of comparable products. Sometimes it’s a set figure or a guide which gives a price range of about 10%. It’s very handy to have access to price guides when doing your initial searches, particularly when trawling through the hundreds of items on websites.
However when you start to filter through and isolate the handful of products you want to inspect and investigate further then it can be handy to do your own research to determine an item’s realistic sale price.
Price guides (sometimes intentionally) cause disappointment to potential buyers, not to mention wasted expenses such as getting hidden defects or expired warranties and getting the appraiser to look over the product if it’s real.
More buyers mean more competition and, in theory, a higher-end price. A busy and active auction site will also help with consumer confidence during quiet sale periods.
For example, 600 years ago, Herodotus describes men bidding for the most attractive wives in Babylon.
“The rich men who wanted wives bid against each other for the prettiest girls. While the humbler folk, who had no use for good looks in a wife, were actually paid to take the ugly ones.”
Problematic, yes – but ingenious. This auction was a community affair which funds raised from the high bidders used to compensate the poorer men.
Auctions seem to be almost as common as the marketplace itself.
By making it clear what others prepared to pay, such auctions make it hard for the unscrupulous to exploit the gullible.
Here are the reasons for willingness to pay in auctions:
- We pay for more security. Pay for housing, a place to feel safe and insurance. We want to have a safe and orderly life which doesn’t come with any hiccups along the way.
- We pay for more admiration, acceptance or approval, the need to belong, a deep need to be a part of a family or community, to be accepted, approved of, and even admired. We’ll pay for beauty products, clubs, interest groups, charity, nice clothes, even new music or entertainment to be “in the know” and able to converse on popular culture.
- People pay for more time (or the quality of time or just freedom of a boring life). People will pay for that, almost more than anything. That is because it is the main force that comes down on all of us, whether wealthy or struggling or whether happy or sad; we all operate with time constraints.
Thus, people’s willingness to pay for anything that “creates” more time they have:
- hacks and tricks that allow saving time
- help from other people that take over some of your duties
- technology that does things for you
- health knowledge or products that give you more free time with the people you love
- products that allow for true multi-tasking
- We will pay for more money. Who doesn’t want to get rich? Whether it’s investments, learning how to make more money out of things we already have or could obtain, a rental house, a home gardening course, a car that was hardly used, and a collection of stuff we could sell on eBay or Craigslist, every normal person here on Earth wants to obtain a significant amount of wealth.
- People pay for more escape or more free time. We can easily be tempted to spend money on a babysitter, an app to entertain the kids for a while, movie night, a good book or a vacation.
- We pay for more chances to pursue our passion. Even if we have no intention of making money from our passion, we will still pay to be able to practice our passions be it painting, music, collecting or sports.
- Auction details can matter a lot; if an auction opens up a loophole for cheats or discourages bidders from bothering, it can fail badly.
- Each bidder makes use of their own information.
- The best way to make a lot of money in auctions is to go for higher-end products with higher price tags. To do that, you need to think about what it is people are marginal willingness to pay the most for.
- People will pay for admiration, acceptance, and approval when auctioning. They want to belong to a group or community, seeking both admiration and appreciation.
- People will pay for items that are rare yet do not know the true price. Determines its value once put on auction. It’s called speculation to see if a person is willing to pay for it.
- Humans pay for more pleasure for obtaining a rare object and passion for collecting it. Nothing excites a collector than an object he has been looking for. The prestige of owning a one of a kind object is something every human always seek.
- Auctions are a way of finding the value of an item. If unknown, they will put it on display to see if someone wants to buy it.
To learn more about building value in auction pricing, download this whitepaper.
This offer may not last long. So contact us and see what you think of our pricing team assessments. After all, with so much to gain—and with absolutely nothing to lose—shouldn’t you at least find out how?