You Don't Want to Believe It But It Is a Zero Sum Game

[Archive]

Posted By: Al C.risafulli

"Have you noticed that auction houses take a much larger percentage than most retailers. "

Says who? In what business?

A retailer often bases its profit margin on dollar value. Maybe they make 2-3 points on a television, but 40-50 points on a remote control. They constantly squeeze their manufacturers and distributors for lower prices and better packaging. Manufacturers are required to submit planograms to tell the stores how to merchandise properly. They also have to produce signage and displays for the retailers. In many cases, they have to provide product training. They often have to pay money to advertise in the retailer's circulars. And on top of that, they need to provide market development funds to help the retailer defray the cost of marketing. They have to have co-op programs and volume rebates so that the retailer gets additional discounts and funding when the retailer sells a higher volume. All this costs money, and it's paid for by the manufacturer - which helps the retailer's bottom line beyond the margins they sell on the individual product.

The manufacturers take hits on their margins constantly. And then the retailer fixes a price, and any consumer who wishes to purchase the item needs to buy it at that price.

Furthermore, the retailer is dealing with products where there are multiple alternatives to buy. Want to buy a battery for your cellphone? Take your pick from 10 different aftermarket brands and 100 different styles and colors. Don't like the price at Circuit City? Walk down the street and buy it at Wal-Mart, Staples, Office Depot, Target, Best Buy, Radio Shack, Fred's Camera Shop, or any other store that sells the same item.

In the auction business, the auctioneer produces a catalog and (often) a website, and is solely responsible for presenting the item in the way that's designed to generate the most bids. They're responsible for going out and finding the potential buyers who are likely to pay the most for the item. They're even responsible for finding the material to auction. And since their reward is a percentage of the closing price, they are rewarded solely based on how good a job they do. The auctioneer takes a commission from the buyer and the seller, but doesn't ask the seller to chip in to cover marketing costs, or do training, or make signs and posters - once the item is in the auctioneer's possession, it becomes their responsibility entirely. And if they do a bad job, they're likely to lose the opportunity for all future business with the consignor.

Furthermore, with many items in an auction, the buyer doesn't have the choice to walk down the street and buy the same item - or a cheap knockoff - from another store. It's not like you can bring in a coupon for 10% off a Wagner, and then if you don't like the service, bring it down the street to a competitor who honors all coupons. The auctioneer usually doesn't have shelves and distribution centers stocked with identical items and multiple manufacturers from which to source them, either. And the seller of the card has a completely different scenario as well - they're not trying to sell their Goudey set in every possible distribution channel - they have just one, and they're choosing the channel that they think will get them the best price.

The only similarity between the two transactions is that the buyer ultimately has to pay for the item they're buying. Comparing a retail transaction of a commodity to an auction transaction of a collectible isn't even akin to comparing apples to oranges, because there are too many similarities between apples and oranges. It's more like comparing apples to hammers.

-Al

EDITED to rant a little further.