Fixed Price Vs. Auction Style Listing April, 2013
Fixed Price Vs. Auction Style Listing Pricing strategy has always been a crucial element of success in the retail industry. Historically, pricing was decided by haggling between buyers and sellers to reach the best price for a product. However, the experience was frustrating for the customers as well as the salesperson on many occasions. Then sometime in mid 19th century, a retailer started using fixed pricing in his stores which was welcomed by his customers. In fact, this fixed pricing strategy became so successful that most of the retailers started using it as a primary pricing strategy though auctions style (or bargaining) strategy also continued. In 1990s, almost 150 years later, eBay provided buyers and sellers with an online marketplace wherein products were sold by auction. The idea was to provide a marketplace where price of product was to be determined by its demand and supply. The marketplace also helped small sellers have a wider sales network and compete with global retail giants. Sellers would list their price as low as $1 and then would invite bid from buyers. A product high in demand and low in supply may fetch higher prices than the actual price of the product whereas some products with low demand may result in lower prices. However, soon web was swarmed with many online sellers who were offering fixed price products. In this case, sale was instantaneous and customers did not have to wait for the entire bidding process to get over to know whether they own the product. Many customers liked fixed price while many continued liking the auction style listing. As a retailer it is pertinent to know which style of pricing to use: here are some pointers for the same. When to use ‘Fixed Price Listing’ Some sellers are more comfortable with fixed price listing as they can estimate their revenue and margins more accurately. Though they may not be able to make any wind fall gain, they also may not have to sell a product below the cost - Tim Boyd, Analyst, American Technology price as may happen in low bids in auction style Research listing. But they also run a risk of not selling an item at all at a listed price wherein in an auction style listing a product is more likely to be sold, albeit at a lower price on occasion. Below are some of the scenarios when a seller may use fixed price listing: “The bloom is well off the rose with regard to the online-auction thing. Auctions are losing a ton of share, and fixed price has been gaining pretty steadily.”
For products that are common, produced in mass, and sold off-the-shelf Products for which high number of substitutes are available and have low differentiating factors When a seller cannot afford to sell a product at price lower than the cost of the product as auction may result in lower bids and may fetch less than the cost price Sellers ready to wait for the buyer to buy at the listed price
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When to use ‘Auction Style Listing’ Auction-style listing can provide sellers with prices higher than what he actually might have asked for. It also is most likely to result in a sale of the product at some price point. However, if a seller doesn’t set a reserve price, the product also runs the risk of selling at a much lower price thus resulting in a loss. Below are some of the scenarios when a seller may use auctionstyle price listing: For products that are rare in-demand, low in supply Products which have almost no substitutes and have high differentiating factors Products that are a must-sell items (stock clearance) for whatever price they fetch Products for which there are very few sellers Products for which sellers are not able to decide the selling price Products for which a buyer is willing to wait as auction is a time consuming process Products which are otherwise junk till some buyer finds some value out of it ‘Buy it Now’ option with ‘Auction Style Listing’ A seller can put a product on auction but can also set a maximum price which he is seeking from its sale. A buyer who is not willing to go through the process of bidding and wants to make an instant purchase can use the option of ‘Buy-it-Now’. However, every customer has a reserve price for purchasing a commoditized product which is generally not more than the price of the product. Also, every seller may have minimum reserve price at which he is comfortable selling its product. - John Horrigan, Associate Director, Pew Hence, auction can provide with price discovery mechanism in which a seller may be willing to sell a product at his minimum reserve price and a buyer may be willing to purchase a product at his maximum reserve price. “People have a lot of information at their disposal and that sets a reserve price of what they are willing to pay. It makes sense for eBay to set prices to appeal to that.”
Auction style listing, which was the foundation model of eBay, accounted for just 32% of marketplace revenue of eBay in 2012, whereas major chunk of eBay’s marketplace revenue came from fixed price listing. Moreover, eBay has changed its pricing strategy in favour of sellers listing their products on fixed price format, suggesting eBay’s growing preference for fixed pricing format. This is a move to compete with other internet retailers like Amazon.com where most of the products are sold on the fixed price format. A retailer may have to incorporate multiple pricing strategies to cater to all genres of customers. Customers who enjoy bidding for a product and can wait can use auction to purchase a product whereas customers who want to make an instantaneous purchase can use fixed price listing. Source: All data from secondary sources; Sutherland analysis
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