Reverse Auction Meaning
A reverse auction is a type of auction where there are multiple sellers, and one buyer and the sellers aim at outdoing their competition by bidding the lowest possible price for goods and services that are put for auction. This type of auction reverses the role of sellers and buyers, which means instead of buyers, sellers bid prices for items.
Types of Reverse Auction
The types of reverse auction are enlisted below-
#1 – Ranked Auctions
These are one of the most popular types of auction. However, this type of auction might be effective for multiple projects and industries but not necessarily for all. Many businesses go for ranked auctions when they are willing to engage multiple bidders who, in their opinion, are most likely to bid at a similar price range. The position or rank of the bidders against other bids is the key information offered to all the suppliers in this type of auction.
The downside of ranked auctions could be that the potential bidders that are ranked in the second and third positions will feel really demotivated, and they might also feel that it is impossible for them to win the bid. Therefore, it must be intimated from time to time, that though the price is a significant consideration, yet it is not necessary that the contact will automatically be given to the bidder who makes the lowest bid.
#2 – Open Auction
Open auction is also known as an English auction or open outcry. In this type of bid, all bidders will be kept aware of the actual value of the winning or leading bid. In this type of reverse auction, bidding usually starts at high or at whatever is defined by the buyer as maximum and falls at a steadier pace.
This signifies that all the bidders have an equal chance of winning the bid as all get a fair share of chances. This type of reverse bidding is designed for such commodity items where the price is most likely the only key differentiator.
#3 – Dutch Auction
This type of reverse bidding is used mainly for public stock offerings. It offers a lot of flexibility, but it can even drop the prices and might complicate the supply chain process.
#4 – Japanese Auction
This type of reverse auction begins when the buyers send suppliers an opening price. Suppliers can only participate after accepting the opening price, which means that they completely agree with all the defined requirements.
Examples of Reverse Auction
- Construction companies or real estate companies often derive benefits of reverse bidding, since it provides a platform where bids can be directly placed on an upcoming project to a new customer.
- Public sector companies might opt for reverse bidding in case they are in search of a contract.
- Dutch auction example – let’s assume that A wants to buy 8,000 widgets at $100 each, then the suppliers get to have three choices:
- Place a bid for providing all 8,000 widgets at $100 each.
- Choose not to offer any widgets at that particular price.
- Or place a bid in order to provide a low proportion of the products for $100/widget.
How to Conduct Reverse Auction?
The reverse auction can be conducted in the following steps-
- Identification of the spend category, i.e., to ensure that the bid is appropriate enough to be used for the reverse auction.
- Ensuring that there are not less than two suppliers. It is high because of the fact that reverse auction functions with more than one seller.
- Ensuring that the participants have experience in handling business or they are or have been a businessman.
- Picking the perfect software for reverse bidding;
- Clean stating all the specifications;
- Having onboard sellers;
- Holding a mock auction;
- Ensuring sellers are given some time;
- Conducting the live auction;
- Thanking all the participants (suppliers);
The participants must incorporate the strategies like the use of precedents to their advantage, establishing a walkway, and the use of pricing software prior to their participation in a reverse auction.
Benefits of Reverse Auction
The following are the benefits of the reverse auction:
- Faster- This type of auction is very quick, and hence, the buyer and seller can save a lot of time researching the market.
- No wastage- The buyer can easily portray all his requirements, which will further aid in minimal or zero wastage of time and such other resources.
- Easy comparison- The buyer can also compare the products and services and according decide the best amongst all.
- Best price- The buyer can gain ownership of the products and services at the possible prices.
The following are the disadvantages of the reverse auction:
- Reverse auction may not necessarily be an appropriate method for all types of products and services.
- Since reverse auction requires multiple sellers, the integrity of the process due to excess competition cannot be confirmed.
- In order to secure the lowest possible bid, the buyer might stoop low and might choose the cheapest and unjust of all strategies.
- The buyer might be more interested in buying products and services at the lowest possible cost and might end up buying something which is not of appropriate quality or something that doesn’t comprise of all such features that satisfy his expectations and minimal requirements.
A reverse auction is also known as reverse bidding. Just like any other auction, this type of auction too is based upon three principles- price drive, the direction of approach, and information of the products and services.
- A reverse auction is of four types- Japanese auction, Dutch auction, Open auction, and Ranked auction.
- The best part about the reverse auction is that these are faster, eliminates the wastage of time, easy to compare, and offers the best prices.
- To conduct a reverse auction, there must always be more than one supplier.
- In this type of auction, the suppliers always aim at winning over its competition by placing the bids are the lowest possible price for products and services that are auctioned.
- Reverse bidding works with the set-up of single buyers only. The main motive behind opting for reverse bidding is to secure the auctioned products and services at the lowest possible prices and winning over the competitors.
- However, the focus on securing goods and services at the lowest possible prices influences the participants to opt for aggressive strategies and failure to secure better quality goods and services too.
This has been a guide to what is Reverse Auction and its meaning. Here we discuss the 4 types of the reverse auction along with examples, benefits, and disadvantages. You can learn more from the following articles –