What is a reverse auction ?
A reverse auction is an auction where the buyer and seller roles are reversed. The buyer is the auction organizer, he invites several sellers (suppliers) to compete for the best purchasing conditions.
Reverse auctions are an important negotiation tool often used in b2b negotiations for the final contract conditions for a specific delivery.
Electronic Reverse Auctions are the most often used type for these purposes, because these have the advantage of rule automation and transparency for the participants.
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Advantages of reverse auctions
Reverse auctions require a carefull preparation of the purchasing process, because your decision factors should be clear to the competitors. When properly preparation is done, you have a lot of advantages:
- leveled playing field for suppliers
- faster than meeting based negotiations
- better purchasing conditions (100% of the time)
- full transparency and traceabilility of the negotiation process
Check our whitepaper about the benefits of reverse auctions.
Myths about reverse auctions
Your suppliers do not like reverse auctions
» non incumbents do! if they feel that the rules are clear
You can only use reverse auctions if price is the only decision variable
» wrong! with weighted auctions you define several criteria and a scoring formula: delivery time, prices, average prices, warranty periods, or any other criteria you want to influence the final score of a bid.
Reverse auctions damage the buyer–supplier relationship
» it's healthy to have suppliers that know the rules, and why they were choosen!
Success factors for reverse auctions
The critical success factors for reverse auctions are quite intuitive and simple, follow these guidelines:
- Train your suppliers in a sandbox: show that you are interested in their participation and willing to invest time in a fair competition.
- Ensure participants understand the rules: avoid ambiguities or misunderstandings.
- Make sure the auction is not biased: make the winning rules clear to competitors.
- Provide help and assistance during the auction event.
- Follow through with published rules and procedures: do not change the rules during the auction.
- Get feedback: your suppliers are your best guides to improve the process.
Types of Reverse Auctions
English reverse auctions
» iterative process of adjusting the price in a direction that is unfavorable to the bidders (decreasing in price in a reverse auction with competing sellers).
» good for simple negotiation processes where the price is the only variable.
Weighted auctions
» iterative process of adjusting several bidding criteria that create a score (using a formula) in a direction that is unfavorable to the bidders.
» great for complex processes, where a mix of prices and other variables are to be considered to choose a winner.
Japanese auctions
» all bidders are considered in the auction with a continuously dropping price. The only action that a bidder may take is to drop out of the auction. Once the bidder drops out of the auction, he cannot not re-enter the auction. The instant in which the second-to-last bidder drops out of the auction, the auction stops immediately, and the last bidder to remain gets the contract at that price.
» good for auctions where competitition is not agressive.
Dutch auctions
» a type of auction in which the auctioneer begins with a low price which is increased until some participant is willing to accept the auctioneer's price, or a predetermined reserve price (the seller's maximum acceptable price) is reached. The winning participant sells at the last announced price. This is also known as a clock auction or an open-outcry ascending-price auction.
» great for fast negotiations.