Reposted from Pawnguru.com
More than 30 million Americans routinely rely on pawn shops. For them, selling or pawning their possessions is the difference between keeping the lights on and living in the dark. But for such a big industry – nearly $15B in revenue per year – there’s very little transparency in how pawn shops work. At PawnGuru, we began to ask questions.
Suppose you gathered every pawn shop in your city and set them next to one another. How much would you expect their bids to differ as you walked from one shop to the next, item in hand?
Far more than you’d think. Last year, we visited eight Detroit pawn shops with a violin, an iPad, a gold ring, and a diamond ring. Items that went for hundreds at one pawn shop got less than $100 at others, or didn’t even get an offer.
Different pawn shops make very different offers on the same item
For people who barely have the cash to make bus fare to a single shop, driving from pawn shop to pawn shop for half an hour isn’t an option. Yet that payout disparity could make the difference between making rent and getting evicted.
So we had to ask: is this normal for pawn shops? And if it is, what can we do about it?
The experience of going shop to shop inspired us to build PawnGuru, a website to bring customers offers from multiple nearby pawn shops. Consumers post items they want to sell, pawn or buy to our website, usually from their phones. Then pawn shops respond to these requests online, so consumers receive multiple offers.
Since July 2014 when we first went door to door, we’ve helped about 18,000 people pawn more than 24,000 items. The first version of our site was very simple: to make an offer, each shop would write down a dollar amount. Then we would display all of the offers on the item to the customer.
Shops used it but told us they wanted more ways to communicate with the customers. So we started to improve it: first, we added a way for the shops to ask a question or leave a comment (the customer had to call the shop to respond). Then we decided to add an important feature: a chat window, where the two parties can talk and negotiate.
We can illustrate just how much pawn shop offers differ by looking at a representative dataset from those conversations, which shows how much variance exists:
The higher the percentage, the bigger the difference between the highest and lowest bid.
The average spread for 2015 came out to 258%, very close to what we saw when we went door to door.
So why do pawn shops offer vastly different amounts of money for exactly the same item?
Early on, pawn shops told us they were seeing items that didn’t interest them. So we added item filters, and got on the phone and asked them why. It turns out that many pawn shops specialize in specific items. For example, roughly one fifth of our network of shops ignore designer clothes and handbags.
Some shops specialize even more narrowly. Some cities have a store or two that move TVs faster than anyone else. On the other hand, some pawn shops won’t accept smartphones or make very small offers on them, especially iPhones. Preparing a phone to be resold, particularly an iPhone, requires knowledge of removing personalization software like iCloud. Not all of them know how to do it, or want to take the time necessary to learn.
This all points to the first reason pawn shops offer different prices: they have different levels of product knowledge, and choose to specialize accordingly. E.g., not everyone knows how to tell whether a Tag Heuer is real or not.
Pawn shops have different expertise
Different kind of items show different variance in the bids they receive. Jewelry has the largest spread, while video game consoles display the smallest. But even the latter is substantial – hovering around 50%.
That ties in closely to the second reason: some pawn shops are better at selling some kinds of items than others. Because pawn shops are middlemen, they have to buy items with their resale margins in mind. While we heard stories about pawn shops that were unusually good at selling certain items, we weren’t able to confirm that until we added another feature to PawnGuru a few months ago – the ability to buy items online from pawn shops.
We found that shops that pay more for an item also charge more when they sell it. When pawn shops sell an item for a higher price on PawnGuru, it means they’re able to move that kind of inventory effectively in store, or have an effective presence selling it on eBay. Pawn shops also think about how long it will take them to sell an item, which takes up valuable shelf and storage space, and ties up their capital.
We discovered other reasons for disparities in pawn shop offers by speaking with many different pawnbrokers. One is that different pawnbrokers have different desired profit margins.
Pawn shops that seek lower margins generally have lower overhead – they’re leaner businesses. In addition, pawn shops that do a high number of transactions per month can also offer more up front, making up for the smaller profit margin with greater volume. But they all come to the negotiating table with their margins in mind.
The final factor is access to capital. Some pawn shops are self-funded while others take outside investors. But all of them are constrained by how much money they have to lend. As a pawn shop’s available capital declines, so does its ability to make competitive offers – which can result in fewer offers, smaller ones, or both.
Most people rely on their smartphones and laptops to research before they buy or sell an item. Why should the pawn world be any different? We built PawnGuru so our consumers could do just that.
By delivering multiple offers right to our user’s phones or laptops, we offer — for free — the ability to see all of one’s options.
Thanks to Kelley Campau, Chris Jenkins, Dale Stephens, Paul Richter, Michael Morgenstern, & Joseph Lindblad for reviewing early versions of this study.
The author, Jordan Birnholtz, is the director of marketing for PawnGuru. You can reach him at firstname.lastname@example.org.