The Psychology of Auctions - Why This Model Was a Game Changer

 I wanted to spend some time today to talk about the psychology of auctions and why the entire auction model was such a game changer for my business.

When I started the business I wanted to avoid auctions as a model, largely because that is what literally EVERYONE in this industry was and is doing. It seems that the retail model of stamp dealing has almost died out. It is at the point where I was unable to source very attainable stamps for clients of mine from other stamp dealers, because they had completely abandoned the retail model in favour of auctions. I didn't like this, because for me it seemed that the idea of being in service to collectors was giving way to purely financial considerations. The auction model is popular with dealers because it is 100% turnover, that is immediate, when there are no reserves, and it allows them to make a profit that is often as much or more than they would make in retail without having to invest a dime in inventory. But, the problem that I saw with all dealers following this model is: who is going to educate new collectors? Who is going to make the hobby accessible to new collectors? Who is going to help collectors who need specific items grow their collections? The problem that I saw with most stamp auctions is that they present the elite end of the hobby as being the norm, and they eschew the common and less expensive material, relegating it to being sold in ridiculously large lots that only a dealer would really want. 

So, this was why I avoided auctions and focused on retail. What I didn't consider though, was that it was possible to do auctions in a unique way that is different from what most businesses are doing, and in a way that address most of the concerns I raised above. 

As I explained in a previous post, I got into auctions by accident. I was trying to find a way to attract traffic to my retail listings on my website. I had tried everything: paid Facebook ads, Google Shopping and Google Adwords. Nothing worked to any great degree: I was just pissing money away, and with online advertising that is very, very easy to do, as there is absolutely no transparency in terms of how your budget gets spent, and in terms of providing you with actual evidence that "X" number of people actually clicked on your ad. 

The whole online advertising world is built upon the what I think is the completely false idea that all you have to do is attract traffic and if you have a good product it will sell. Go online and you will see all kinds of stats being presented about conversion rates being 10% and such. I think most of it is bullshit. The problem is that little distinction is made between the different levels of quality in online traffic. For example, high quality traffic consists of people who are specifically looking on Google for a product or service and are both willing and able to buy. For this traffic, I think the conversion rates quoted are probably accurate. But, for people casually searching Google, or who are scrolling on Facebook, or any other social media site, it is a completely different story. This is very low quality traffic, in the sense that there is no intention to buy anything. Heck, I have people on Facebook who like every single blog article link or ad that I post to my stamp groups, who have never bought a thing from me and never even placed a single $1 bid in any of my auctions. I'm not slagging these people off - they serve a very important role in helping me build my brand, so the term "low quality" is perhaps undeserved. However, the label fits if you are looking to this traffic for quick and instant success. 

In actual reality, conversion rates for any traffic that is not looking to buy is very, very low. So, the only approach that really works is to use traffic to create brand awareness, rather than look for immediate conversions. Brand awareness leads to the willingness to sign up for your e-mail newsletters, and it is at that point, and that point only that a prospective customer enters your sales funnel. The average open rate on e-mails sent to a mailing list is around 15-20%, and of that percentage, only another 15-20% actually click on the links in the e-mail the e-mail. From there, only 10-20% will actually buy the item advertised, or will take the action in the call to action contained in the e-mail.

So, let's do some quick math assuming you have a mailing list of 1,000 people:

• 150-200 people will open your e-mail.
• 3-5 people will unsubscribe and most of those will say they never signed up when they clearly did.
• 0-2 people will report your e-mail as spam.
• 22-40 people will click on the link in the e-mail.
• 2-8 people will actually take the action, whether that is bidding or buying.

So, you need A LOT of names in order to build a following of 20-30 loyal customers, because those 2-8 customers will not all return, or if they do, they may not be regular customers. This is one of the main reasons why repeat business is so important to the long-term success of most businesses. 

To get those first 1,000 names is no easy task and it will cost you time and money in running Facebook Lead ads, blogging and other "work" on social media. I found that a $50 ad spend on Facebook might yield me 10 names, but 8 of those names would ultimately unsubscribe from my mailing list, so building up this many names is expensive.

After trying to attract traffic for a year or so, using the usual methods, I decided to try unreserved auctions with a limited amount of material. I knew that it meant that I would be giving most of my items away, as I had no loyal bidder base: everything would sell for $1 or very low prices. So, I had to consider the cost of these stamps to be an advertising expense. However, this form of advertising made a great deal of sense, for the following reasons:

• The irresistability factor is high: who doesn't want to buy a $20 stamp for $1 or a $150 item for $5? So, there is a high incentive to take the action of placing a bid.
• The auction becomes an experience as more people participate, and it is fun to bid and win the items.
• My actual cost is not as high as it may seem at first: if I pay 30% of catalogue for certain stamps and they bring 15% of catalogue at auction, my true cost is only 15%. So, for an auction with $5,000 worth of material, my cost at the beginning might be $1,500 and if the auction grosses $750, my true cost is $750 - high, but not bad when you consider that you can blow $300 on Facebook ads and get nothing. 
• If a bidder is successful in snagging a bargain, there is a very high liklihood that they will return, especially if they know that the auction is held regularly at the same time.
• If I am going to spend the money with Google or Facebook anyways, with no guarantee of any quality leads, why not spend that money on a customer lead that is very likely to come back and bid again? 
• Although prices will initially be low, due to weak competition among the bidders, they will rise as more bidders enter the fray and start to compete with one another. 
• However, my expectation was that unsuccessful bidders would go to my retail listings so as to not leave empty-handed.

It didn't quite go the way I planned: the last thing didn't really happen. Instead, what happened was that most bidders came back every week, and so fairly quickly the prices begain to rise. I lost money in the first 10 auctions or so, and from 11 to 20 I was breaking even. After the 20th auction I started to make a profit. I also begain getting new bidders, usually 1 new name every week or so. At first one or two bidders were carrying most of the auction, buying most of the lots, but over time this changed, and I started to find that when one bidder stepped back and reduced their bids or spending one week, another bidder would step forward and spend more. 

It dawned on me that this was actually a viable business model in its own right, even with my small lots, but I wanted to refine it and adapt it for the vision I had always had. So, I decded to pivot and de-emphasize the retail section of the website, and place all my focus on growing the auction.

I eventually decided to do auction themes, where most of my offerings each week would follow a particular theme that I would promote. This would have the advantage of being highly promotable, as opposed to a run-of-the-mill auction where there is no cohesive focus to the stamps being offered. 

Soon after I made the decision to focus on the auctions it became apparent that 40 lots a week was not going to cut it, and I would have to increase the number of lots if I wanted to grow weekly sales. The problem with leaving it at 40 lots as my customer base grew is that there would not be enough material to keep everyone interested and there would be few to no bargains to draw new bidders in. So, it became apparent that it was important to ensure that 10% of the lots sell for bargain prices. If the bargain percentage fell below this, it was time to increase the size of the auction. Of course, too many lots would result in prices that were too low as well. So, it is a fine balancing act, to grow the auction in lockstep with the bidder base. 

The main reason though why this was such a game changer for me is that it really forced me to focus on what works, in real time, and the auction results themselves do not lie. Now, one reality that has become apparent is that my bids will not be high the first time I run a theme, because I do not have enough of a base for that theme to generate sufficient competition to make it sucessful. Thus, the concept of investing in business development does come to the fore, and must be taken into account. Nevertheless, if a theme is run three or four times and it fails to make money, then it is time to seriously re-evaluate it, and the data to do that evaluation is freely available, and it is timely. I can analyze the bids, because I have people's maximums, and so if the prices are low, but maximums were high, then I know that there simply weren't enough bidders to make the auction a success. If, on the other hand, the maximums were also low, then I may be dealing with an area that is unpopular with my base of bidders, and therefore there may not be a viable way to continue offering it. 

With online retail, it is very difficult to do this, largely because the data available is open to interpretation and there are so many reasons why it could be the way it is. One of the problems is that there are simply not enough transactions to do any meaningful analysis compared to say 52 weeks of auctions where 300 items a week are selling. 

Now, when I speak of analyzing the results I'm not talking about spreadsheets or detailed analysis of individual bidder's bidding habits or anything like that. For one thing I don't have the time, and for another I don't want to misuse people's information, particularly when I have been entrusted with it. I want to make that very clear here. What I am talking about is a general sense that I get after running many weekly auctions back to back. After a while I will know if over all maximum bids were, say 20% or 30% higher than what the lots are selling for overall, that is enough detail to evaluate the auction. As a matter of fact, a 20-30% discrepancy is what you want in this case. You don't want bidders consistently paying their maximums - otherwise they won't feel they are getting bargains. But, if I were to find that the maximums are 50-60% higher than the realizations, then I know I need to attract more bidders if I want to narrow that spread to 20-30%. 

Another thing that is valauble about doing auctions is the information they teach you about buyer psychology. Retail is based on the idea of a motivated buyer who knows exactly what he or she wants and appreciates the opportunity to shop for those things. But that model is based on people having the time and the patience to actively browse, and then the motivation to complete the purchase. The reality today is that most of the time one of these things is missing. People these days are largely overwhelmed with the number of choices and options out there, which has made retail very difficult. The other thing is that auction sites and marktplaces like E-bay and Amazon have created a perception that no matter how good the price appears to be, there is always a better deal just around the corner. 

A good auction addresses these issues by providing an experience that is structured. People are far more open to find time for scheduled experiences that they enjoy, such as TV shows and nights out. A weekly auction can mimic that, and at the same time it can provide structure by narrowing down people's choices and still satisfy their desire to grow their collections and learn about stamps. So, in that sense, if it is run properly, it has the potential to build a captive audience of people who regularly return to the website, and in fact this is exactly what has happened. On any given week now, I usually have between 50 and 60 active bidders and about 40-45 of those bidders are successful. Most of these bidders - at least two-thirds of this number bid every week, or every second week. 

Auctions provide bidders with validation about their perception of value, because other people are willing to pay as much or more than they are. So, when there are other bidders competing with them, they can often feel more comfortable that they paid a fair price for the thing they are buying. In retail, buyers are forced to comparison shop to gain that comfort. 

Retail also has no time limits, and so many customers of online businesses will fill their shopping carts and never check out, or at least not do so for a long time. An auction, on the other hand, with a definite end date forces a decision: either bid, or not. Fear of missing out or FOMO can motivate a customer to bid in the auction, and quite often, they wind up paying more than I would have sold the item on a retail basis for. That has happened at least 4 times and I am not sure as to why. 

What I have noticed in the past 2 months is that retail sales from the website have now begun to pick up, and most of these sales are coming from, you guessed it, the bidders. So, what has become apparent is that retail can work when you have already built up a devoted following of customers from other means, of which the auction has proven to be a very cost-effective way to build a customer base that is loyal. But, to try and build a retail business from scatch, with no hook to draw customers in, is in my view, virtually impossible -  at least not without a massive investment in online advertising to create brand awareness and build a mailing list. But, as I have said before there is no guarantee that such an investment will bear fruit. 

So, this explains why things were so difficult for me in that first year after I left E-bay and how what started off as a marketing gimmick turned out to be the thing that saved my business from certain ruin.