I made a post a while back about my annoyance with buyers who request the reserve price during an auction and the sellers who actually reveal the reserve price. As I stated in that post, I think it’s ridiculous for buyers to ask the seller what their reserve price is and I think it’s even crazier for sellers to actually give it to them.
The post created some controversy as many experienced website flippers said I was crazy. They claimed that it’s a normal practice and that as a buyer, it’s good to know the reserve so you can determine quickly if the seller’s price is reasonable. If the seller’s reserve is out of line, a buyer can eliminate that listing as a prospect and move on, argue the proponents of revealing reserve prices. And some argue that reserve pricing is a strategy that shouldn’t be used in the first place.
I have always argued that reserve pricing is a good strategy for most auctions. In fact, I use it in all of my auctions. Here are the scenarios where I think it makes sense to use it (which I believe applies to 90% of sellers):
You’re Not Sure What Your Website Is Worth
This is the primary reason why I advocate reserve pricing. I track website sales on a daily basis and even though I’m buried in statistics, I still struggle in determining the approximate value of a website. The one thing I’ve learned is that website sales are unpredictable. One site that I think should sell at only a 5x multiple will sell for a 10x multiple and vice versa. In the end, a website is worth what a buyer is willing to pay – and many times the price at what a website sells for is surprising.
That being the case, reserve pricing is an excellent insurance policy. Unless you are willing to let go of a website for much less than you expected, a reasonable reserve price (more on that later) can protect you from “giving away” your site.
You’re a Nervous Nelly
Some folks just don’t have the stomach to put their website up for sale and let it go for whatever price a buyer is willing to pay. I would be one of those people. Unless I have an absolute dud of a website and I just want to get rid of it, I want to be sure I get what I think my website is worth.
If I think my website is worth $3,000 and that’s what I have my reserve at and it doesn’t sell, I would rather learn from the failure. Instead of giving away the site, which I would if I got less than my reserve, I would rather hold on to it a while longer and work it some more to increase its value.
Setting A Reasonable Reserve Price
I’m a strong advocate of using a reserve price on most auctions but ONLY if a reasonable price is used. The mistake sellers make is that they put a ridiculous reserve price on their auctions. Unfortunately, this practice has been going on so long that buyers today are so conditioned to inflated reserves set by sellers, they want to know immediately what the reserve is to determine if the seller is serious about selling or not.
What’s a reasonable reserve then? The answer isn’t that simple. What I always tell people is, ask yourself what’s the absolute lowest price you would be willing to let your website go for? And by “absolute lowest price,” I mean the price where you would be a little sick to your stomach and a bit disappointed – but you would still sell.
Let me give you an example. I have a website that has netted $500 in profit every month for the past twelve months. I believe I should get at least a 12x multiple so I want at least $6,000 for it. However, that’s not my absolute lowest price. If push came to shove and there was only one serious buyer interested in my site and he was only willing to give me $5,000 for it, I would probably sell – even though I’d be a little disappointed. That is my reserve price.
If you use a reasonable reserve price on your auctions, I think you should use it every time – unless you are unloading a dud or a website you just don’t care about. By using a reasonable reserve, you protect yourself from letting a website go for less than you want and you help restore buyers’ faith in reserve auctions.
