Reverse Auction: Meaning, Types, Steps, Benefits, and Disadvantages

A reverse auction is defined as an auction where the traditional roles of both the seller and buyer have reversed hence the name.

In this type of auction, it is the sellers who are bidding and the buyer who is sitting in the driver’s seat. In a regular auction, you will find the highest bidder as the winner, but in a reverse auction, it is the bidder with the lowest price that usually wins the prize.

Meaning of reverse auction

Reverse auction as the name suggests is a type of auction where more than one seller offers his products for bidding at a price the buyer is willing to buy.

It is the buyer’s prerogative to accept any of the bids or reject them. Reverse auctions are also popularly known as

• B2B Auction
• e-procurement
• e-RFO
• RFP
• eRA
• e-sourcing
• Sourcing event
• e-auction
• Procurement auction

In a reverse auction, the seller with the lowest amount generally wins the contract. It has always existed but recently has gained prominence because of the internet.

Here several sellers can connect with the buyer with the help of online auction tools and interact to their mutual advantage.

A reverse auction is ideal when multiple sellers are offering their products or services for competitive bidding. The focus is more often on the lowest prices irrespective of its sub-standard quality.

Types of reverse auction

There are several types of reverse auctions. Some of the popular ones are described below-

1. Ranked Reverse Auction

This is one of the most popular types of reverse auctions as it is applicable for multiple project types and sectors.

In Ranked reverse auction, numerous bidders bid at nearly similar pricing points. The supplier who has placed the winning bid is the only person to know about the current best price.

An important advantage is that if the supplier is confident about the overall strength of his merchandise, then he feels strongly about his chance of winning as the price is just one of the criteria and not the only one.

A disadvantage of Ranked reverse auction is that the bidders who are placed at third, fourth, and so on positions lose the confidence and feel that they do not have a chance of a win.

If it is cleared at the onset that the price is not the only criteria for valuation, it can prove advantageous for everyone.

2. Japanese Reverse Auction

In Japanese reverse auction, the buyer will have to settle on an opening bid which he sends to the suppliers. The ones that want to participate accept it, and the bidding starts. The price gradually goes down at specific intervals, and the bidders are asked to reject or accept it.

The process continues until one winning bidder is left in the field.

3. Dutch Reverse Auction

In this type of reverse auction, the buyer offers a list that specifies the product, quantity, and the price he can pay. Now it is the suppliers who have the choice of offering to sell the full or a part of the quantity as required on that or nearby price.

If he does not want, he will not offer for any of the products. Sometimes multiple suppliers meet the needs of a single buyer at different price points.

4. Open Outcry or English Reverse Auction

As the name suggests in the Open Outcry or English Reverse Auction, each supplier has full knowledge of the leading bid. The bidding starts at the maximum point that has been previously set and then starts falling gradually. Every player has an equal chance to win the bid.

This kind of bidding is most popular for commodity items where price plays a most important role. Remember the outcome is not always influenced by price as quality also has a part of its own to play.

Examples of reverse auction

A reverse auction is also known as business to consumer auction, and one of its examples is supply contracts where the seller puts up their prices, and the construction company accepts or rejects the bid.

Governments and large organizations mainly use this type of auction for acquiring services, supplies, or raw materials. An example of a reverse auction is a government specifying the requirements and sellers who bid come up with a cost structure that they will need to finish a job.

Anand needs tires for his motorcycle. He posts his specifications related to the product on a reputed site and was flooded with genuine offers that were to his liking.

He chose one of the sellers who was giving him the tires at least possible price and as the tires had a lot of life still left in them.

Both the buyer and seller were happy with the mutually beneficial deal.

10. Benefits of reverse auction

1. A reverse auction is not limited to the people present at that time. It crosses the limitations caused geographical boundaries, and you can search anywhere and anyplace for a product that has the lowest possible price
2. A reverse auction helps to streamline the sourcing route
3. It does not require ample time for negotiations
4. Vendors can see the bids of others as they place their prices. The process is transparent, and there is no scope for underhand dealings.
5. It is the buyer who is a winner all around as he can get a product he requires at the lowest price
6. A buyer has access to a larger supplier base
7. Reverse auction leads to process efficiency
8. It results in significant savings for the buyer
9. Reverse auction helps to streamline the procurement process
10. It is a time-saving process as the buyer does not have to send requests to different sellers one-by-one

Disadvantages of reverse auction

The disadvantages related to reverse auction are as follows

1. The reverse auctions are based on prices. The buyer looks for the lowest possible prices and often does not give importance to the quality of the product.
2. A vendor is at the risk of placing a bid that is too low for his entity. Sometimes active bidding results in crossing the line and winning a project at a price that will be difficult for him to meet

Steps to conduct the reverse auction

The steps to conducting reverse auction are as follows-

1. Studying the marketplace

It is vital to study the marketplace and identify whether the existing condition is suitable for a reverse auction process that you want to conduct for your product.

2. Be particular about your requirements

Be specific in your requirements so that all the suppliers are on the same page and can bid as per your particular requirements

3. Set up the supplier expectations

Be specific and mention that the lowest price is not the only criteria for awarding the contract. When the suppliers feel that they have a fighting chance to win the bid most of them will participate

4. Do not skip any auctions

Sometimes buyers get comfortable with a supplier and think that continuing with his services is the best thing. Do not skip auctions as you might find a supplier whose products are of superior quality at the same or a bit lower prices.

Few discounts go a long way in changing your pricing structure hence be vigilant and be on the look-out or better terms

5. Emphasize on the pros

The reverse auction set-up helps the supplier to evaluate the current market and respond in a positive manner o all the accumulated information.

6. Conduct a pre-bidding

A pre-bid is a necessary tool to get everyone on the right track by ironing out any difference in opinions.

7. Go over the logistics

Make sure that suppliers have enough time to handle the process in an efficient manner. Go over the logistic details with them previously to smooth things over for the actual process.

8. Be prepared for last-minute extensions

Auto-extend the bid for few more minutes because sometimes the best bidding is at the closing time.

9. Always give the business to a participant

A buyer doesn’t need to have to award the contract to a supplier, but the intention should be there; otherwise, you will get a bad reputation in the market.