What is a Strike Price for your Auction?
If you have perused our site, you may wonder what exactly a “strike price” is.
Fear Not! Valuation of trips and experiences is an area many non-profits have little guidance on. You will often see the reliance on what is called “fair market value” to guide us toward an acceptable price point at which we would be willing to sell an item.
The Confusion Around Fair Market Value
Unfortunately, fair market value is a confusing equation that very few will agree on. Tax professionals will give you various opinions on what constitutes fair market value. Most confusion about fair market value comes from the lack of cohesive guidance on applying the concept. We believe that given a more modern and comprehensive guidance than is provided in the government’s revenue rule that applies here (ASC 820), using a term called “fair value” serves as a notably more robust concept as compared to “fair market value.”
Adopting a ‘Fair Value’ Approach
The valuation community should try to adopt the fair value concept more widely. We hope this will be eventually supported by legislative changes impacting the application of tax law in the U.S. for non-profits.
Understanding and Applying ‘Strike Price’
But back to strike price. While many of you reading this post have likely been asked to publish some value for any item purchased to support your fundraising event, many elements can make this extremely difficult. Here are a few that often apply:
Challenges in Determining Fair Market Value
Most travel destinations offer varied pricing depending on when you travel. Obviously, holidays and spring break can impact the cost, and for a ski destination, you will likely find better deals in the off-season. If you offer a trip that does not include a specific date to travel, how do you price it as fair market value?
Kids and Seniors
Most likely, you are selling auction items to a diverse audience that includes older donors and those with families with younger children. On public sites like Expedia, a resort typically offers a different rate for older and younger travelers, so how do you price fair market value without knowing who will purchase the trip at your event?
When a trip package includes a tour/excursion or a meal, how do you estimate the fair market value of these add-ons? Most excursions/events have different pricing based on the time you visit, the attendee’s age, where you sit, current specials/offers, etc. For a dining experience, there is likely no specific menu included that you may ascertain fair market value. Most likely, these variables are hard to quantify as you do not know exactly what will transpire on the trip based on who is using the experiences.
Multiple Choice Packages
Sometimes, a package offers the winner multiple destinations to choose from. These destinations likely have many cost differences, including currency values, labor costs, etc. Since you have yet to determine which destination they will be taking if they win, you are in a pickle!
Some packages will include meeting a famous person or allowing intimate access to an area that is unavailable to the public. There is literally NO pricing for the item established.
An example here is a signed basketball. The value of the basketball is $65 or so, but with the right signatures, it is worth thousands!
There are many more scenarios, but you get the point. There is no TRUE fair market value valuation that can achieve your desired goal. Regardless, you will likely have to complete this process as best you can to comply with tax rules in your community.
Beyond Traditional Valuation: The ‘Fair Value’ Method
However, are we asking the right question here? As stated above, a fair value is more likely based on the actual interest of the item you are selling. You may recall a few years ago, putting an iPad on your auctions would sell beyond its actual retail price.
Establishing and Utilizing Strike Price in Fundraising
Thus, we have since established a key metric for you to build your fundraising plan of action around called strike price. The strike price is an estimate of what an item should bring at your event based on the history of your event or similar events. This metric establishes an acceptable return on investment on any item and helps you quantify your fundraising potential meaningfully.
If an item sells for $2,500 at other events in your area, that is a strong indicator that your strike price should be at or near this target. If you have secured a donated experience that has sold for $1,000 in the past, you can use this history to estimate the strike price for future sales.
For each of our items, we have made a great effort to record historical data on what an item can sell for in the live auction.
This is IMPORTANT.
Selling that same item in a silent auction or as a raffle item will deliver a different result, and I will explain why in a moment. The good news is you can apply these same principles to any item you procure for your fundraising!
Case Study: Maximizing Fundraising with Strike Price
Let’s use this example to establish a meaningful strike price for your fundraising.
This trip to Mexico offers an affordable option for use in the live auction. It offers multiple destinations and can be used for two adults or with additional children at a cost of $1,095. The resort is private and does not offer its properties to the public; instead, it is available as a perk to its members.
They do share the room rack rate for their property, and for seven nights, that rate is $4,500. This could be your fair market value, which is great, except the resort clearly states this is a rack rate, and there are seasonal opportunities to get that room at a lower rate.
In the meantime, you will notice on the link above that we have established a strike price of $2,250. This is a great value for winning bidders and provides an acceptable rate of return when procuring an item to raise funds at your event. In addition, you can sell as many of these packages as you want at your event, so as many bidders as possible who want to purchase this trip, you will raise incremental results for every additional trip sold! Imagine selling ten trips at a great rate and raising over $10,000 on this one item!
Caveats and Considerations in Setting Strike Prices
Here is an IMPORTANT caveat.
The strike price we have displayed is a conservative fair value to help you avoid overestimating your fundraising results. Above, we discussed that we often sell this item for $2,500, but if you place this same item in the silent auction vs the live auction, it will likely not perform at the same rate. Conversely, you could use this trip in a raffle, sell 100 tickets for $100 each and raise $10,000! Wow!
It is also essential to set your strike price based on other mitigating factors, such as:
The money in the room – if you have an audience with a larger than typical capacity to give and bid, you will likely sell this item at a higher rate. We have seen this trip sell as high as $4,500! Conversely, a more modest crowd may not be as active in bidding and thus max out their bidding interest closer to $2,000.
Where the item is placed in your fundraising program – as stated above, an item will achieve different results in the silent auction compared to the live auction and the raffle option.
If you are using a professional fundraiser (auctioneer), there is a higher likelihood you will over-achieve the strike price target that has been established on our site. An amateur auctioneer with no fundraising experience may not know how to sell multiples or how to start bidding in a way that creates momentum for your audience to engage. Thus, you should dial down your expectations for each item without a professional supporting you.
Strategic Planning for Successful Fundraising
At the end of the day, your goal is to establish a valid expectation for fundraising results the night of your event. By establishing a strike price for each item sold, you can better predict how you will achieve your goals for fundraising. Our built-in Fundraising Plan of Action tool is a way to build and plan an effective fundraising strategy to meet your goals.
This tool can model all fundraising aspects, including donated items, ticket sales, sponsorships, and your paddle raise (fund-a-need). Having all of your fundraising elements documented in one place allows you to make logical decisions on how you want to execute a successful fundraising plan of action for your event.
Once you have modeled this tool, you can share it with others and collaborate, getting everyone’s buy-in on the plan to achieve your fundraising goal. Avoiding surprises and challenging your entire team, including staff, board, and volunteers, a plan will enable you to be better prepared for your event!
Embracing the Strike Price for Effective Fundraising
We encourage you to embrace the concept of strike price. You may still need to deliver fair market value for your donor’s needs, but for YOUR needs, understanding how you will meet your fundraising goal is what matters most!