Few things are more dreaded than receiving notification from your customer that their (your) business is being put out for bid in a Reverse Auction.
While the incumbent supplier typically does maintain the business, selling prices are commonly reduced by 15% or more during the auction process, or the business is lost completely to a well-managed bid campaign from a competitor.
What goes wrong? Even with very large companies we see online auctions managed very poorly for the following three reasons:
- Lack of Training
- Poor Management of the Auction Process and Live Auction
- Overconfidence in the Customer Relationship
Understand this: Your competitors want to take your business away, and any variable contribution margin they can earn is a win for them compared to not having the business at all.
You, unfortunately, have existing margins to protect. So what steps can you take to leave the process a true winner?
Strategic Keys for Incumbents:
- Start High. Almost all bids allow each competitor to provide pre-bid pricing, which is automatically used as their opening bid price. Starting any lower than your current pricing is just competing against yourself: never a good idea. Bidders sometimes shy away from this strategy for fear the customer will be angry, but in our experience it simply demonstrates to the buyer the value you place on the supplied products. I have never personally seen a reverse auction lost because the starting prices were considered to be too high.
- Move Into First Place Quickly. While finishing in first place it is not absolutely necessary to maintain the business, losing to your competitors by a wide margin frequently creates a real opportunity for them to win the business, even if the buyer initially had no serious intention of taking the business away from you. Taking the lead early provides a critical data point you will need to strategically manage the remaining time correctly.
- Set Ground Rules and Stick with Them. As the Incumbent, you know better than anyone how much it costs to support the bidding customer. Don’t get dragged into an unprofitable position by outsiders who don’t understand the true costs of supporting this business. Online auctions are intentionally formatted to look and feel like a game, ramping up your excitement and feelings that you need to “win.” Just like casino gambling, getting caught-up in the moment can easily result in some very bad decisions.
After the “Close”
Whether or not you were the lowest bidder, from the Challenger’s “After the Close” section you’ll know there is quite a bit of mayhem to be made during this time you will need to monitor and potentially address.
If you were not the low bidder, will the buyer give you an opportunity to match the low bid? Based on your superior quality and service can you maintain the business at a higher price point?
As the Incumbent you have the greatest opportunity to leverage your knowledge of (and relationship with) the customer to make smart decisions, so take advantage of it!