What is an Online Reverse Auction?
Online Reverse Auctions are electronically managed auctions, typically hosted by a third party service provider or via leased software systems. During the event, multiple prospective suppliers bid against each other to see who is willing to offer the lowest price point for their good or service to the auction holder.
Auctions typically last 20 minutes per lot, during which the bidders can choose to lower their bid prices (1) at any time and (2) as often as they want, provided the successively lower bids meet the posted minimum bid decrement (commonly around .25%).
Reverse auctions are growing in popularity because they may be the single most effective tool available to quickly drive down supplier pricing
The managing software systems (by design) provide complete visibility to the buyers but strategically limit the amount of information provided to the suppliers. Specifically:
- The number of total competing Suppliers (bidders) is rarely provided
- Bidders may be given their current rank during the bid (i.e. “2nd place”), or they may only know whether or not they are in 1st place
- We have never seen a reverse auction in which the current leading bid price was given
As you can imagine, this withheld information makes online Reverse Auctions incredibly difficult for bidders to effectively manage and frequently results in poor or panicked decision making.
Why are They Growing in Popularity?
The simple reality is that reverse auctions are growing because they may be the single most effective tool available to quickly drive down supplier pricing. From my conversations with individual buyers, the specific drivers are usually:
- Pressuring the current supplier to lower their pricing
- Validating that pricing from the current supplier is competitive
- Identifying/qualifying alternate, low-cost supply options
- Preventing/delaying a pending price increase
In my experience the first time a piece of well-established business is put to Reverse Auction, the winning bid price is 10-25% lower than pre-auction pricing. Many auction hosting services or software providers publish average price reductions of 18-20%. Subsequent auctions, however, typically yield a much lower savings percentage.
Should You Participate?
The answer here depends on your current position in the process. If you are the incumbent, it is critical that you participate. Failing to do so will create a huge opportunity for prospective suppliers.
The most common outcome of Reverse Auctions is that the incumbent supplier maintains the business
If you are a challenger who does not currently have the business, you have decisions to make. While the bid itself can be completed in under an hour, challengers will need to input approximately 12 hours of total effort (this varies based on the service, buyer, and industry) to participate in the process, plus the costs associated with any sampling or product qualifications that must be provided and/or completed.
Managing the Auction
Strategies for managing Reverse Auctions before, during, and after the bid are completely different based on whether you are a Challenger or the Incumbent supplier.
There are a few key facts, however, that pertain to all participating potential suppliers. Unless specifically stated otherwise, the Buyer:
- Is not required to award the business to the supplier with the lowest bid
- Can pursue any desired follow-up negotiations with the suppliers (e.g. allow new pricing offers or other proposal enhancements)
- Can choose the ignore the auction results completely
As a result, the most common outcome of Reverse Auctions is that the incumbent supplier maintains the business, but at a much lower price point than before the bid. THIS DOES NOT HAVE TO BE THE CASE. When managed properly, Challengers can successfully gain new business through Reverse Auctions, and incumbent suppliers can effectively defend their hard-earned business and margins.
THERE’S SO MUCH MORE TO LEARN!
We hope this overview helps, but we’ve only scratched the surface of successfully managing Online Reverse Auctions. Check out our Resources pages for Challengers and Incumbents for more detail on specific parts of the process, or use our CONTACT page if you have any specific questions.