Guide to Auction Starting Price Strategies

When setting a starting price for your auction, sometimes the key to finishing high is to start low.
January 4, 2017

When selling royalties at auction, setting the right starting price is an important but often misunderstood strategy.

The natural instinct is to ask for a high price in order to get a high price. After all, a high first offer will set the stage for a high closing price, right?

Not necessarily. Both academic research and direct experiences on Royalty Exchange show that to finish high, it’s usually better to start low.

The desire to set a high opening price is typically tied to the perceived value of the royalty up for sale. You either have a number in mind that you hope to get for it, or you have a number in mind for what you think it’s worth. And by projecting that number to potential buyers, you’re hoping they will value the royalty in the same way.

But the goal of an auction is not to get potential buyers to agree with your valuation. It’s to encourage bidding.

A recent study by Northwestern University’s Kellogg School of Management showed that participants were more likely to bid in an auction with a lower starting price than a higher one. Seems obvious, right? But what it also showed was that the increased flow of auction traffic also led to a higher selling price.

For instance, we recently conducted two separate auctions for different royalty streams stemming from the same song---one for the writer’s share and another for the publishing. The writer’s share listed a starting price of just $500, while the publishing share listed a starting price of $25,000.

The writer’s share attracted four times the number of bidders and twice the overall number of bids submitted than the publisher’s share. That activity drove the price up to nearly eight times its prior year’s earnings. That means the seller earned eight years worth of royalties in one auction. The more expensive publishers share sold for five times the amount in made in the year before the auction. Not bad, but not the same either.  

There are several reasons for this. First, in an auction, the perceived value of an item goes up when there are more bidders vying for it. It’s like choosing the restaurant full of people over the empty one. The Kellogg study, for instance, asked two groups of participants to guess at the value of the same item, one with five bids and the other with 24. Those who saw more bids placed a greater value on the item than those who saw fewer.

Another factor is the investment of time. Once bidders are engaged in an auction, they immediately value the item more than if they’re not already bidding. It’s like a poker player who continues to bet into a pot. Once they’ve bid, they’re already envisioning themselves owning the item, and therefore its perceived value increases.

Finally, there’s the simply human competitive spirit. Bidders are doing more than simply buying something at auction. They’re beating somebody else who also wants that same item. Coming out ahead in an auction means far more than just buying something. It means winning something. And that’s a valuable thing.

But none of these forces come into play unless there are bidders. So when contemplating your starting price, consider weighing these factors, and set a price that will drive up the actual price, not the perceived value.

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