If you’re in the business of selling to other businesses, the competition to land the sale can be fierce. With 58% of B2B buyers doing their own research before engaging with sales reps, many buyers are over halfway through the sales process before even speaking with a rep. With customers having access to more information than ever, how can you make your offering stand out?
By knowing how and when to implement a reverse auction strategy.
Knowing how best to position your offerings in a reverse auction process can be an effective and efficient way to sell to other companies. First, let’s get clear on what a reverse auction is.
What is a reverse auction?
In a reverse auction, sellers compete with one another to win the business of the buyer. Unlike a traditional auction where buyers are competing to purchase goods and prices go up, in reverse auctions, prices tend to decrease as sellers aim to win over their buyer with the best price they can offer.
As a seller, you would be putting your offerings up for bid in a reverse auction, instead of having buyers compete to buy your goods as you would in a traditional auction. For buyers, there are many benefits of conducting a reverse auction, including:
- Competitive pricing — Because sellers are competing with one another to win over the buyer, pricing is a major factor in the decision-making process. This can result in the buyer getting a better deal than they would otherwise.
- Expedited procurement process — When sellers put in bids during a reverse auction, they’re putting the best features of their product or offering in front of the buyer for their consideration. This greatly reduces the amount of time buyers need to spend researching their options, expediting the entire process.
- Ability to meet deadlines — Since auctions often have a set date, many buyers are able to consider when sellers can provide their offerings in their decision. This means goods are typically delivered on time and production deadlines are met.
You may be wondering "What’s in the reverse auction process for me?" There are benefits to participating in a reverse auction for sellers as well.
- Increased access to buyers — With many reverse auctions now being conducted online, sellers can have the opportunity to bid for work from buyers around the world which gives you increased access to selling your product beyond current reach.
- All suppliers receive the same information — Because all sellers are responding to the same request for proposal (RFP), everyone receives the same information from the buyer, leveling the playing field in competitive markets.
- Small businesses can compete — In some traditional procurement settings, smaller companies have a hard time getting in the door with the contacts needed to make the sale. However with reverse auctions, no contact or "in" is needed, making them more accessible to smaller companies that may not be as well connected.
B2B Reverse Auction
Reverse auctions are commonly held in B2B transactions, with procurement teams sourcing goods and services for their respective companies. In this scenario, procurement teams take on the role of the buyer, and the suppliers of said goods and services take the role of the seller.
With many reverse auctions being facilitated online and B2B, the process is also referred to as:
- B2B auction
- Procurement auction
- Sourcing event
Let’s walk through the common process reverse auctions follow.
1. Buyer publishes a request for proposal or request for quotation
A reverse auction must start with either a request for proposal (RFP) or request for quotation (RFQ). This specifies what goods or services the buyer is looking for, the quantity they need, and the deadlines they are working under.
2. Sellers submit bids based on buyer qualifications
Once the request is published, sellers can respond by providing detailed information on what their product is, how much it costs, and verification that they can provide it to the buyer when required. During the open bid process, sellers can modify their offerings to remain competitive.
3. Buyer deliberates and selects the winning bid
Once the bidding process closes, the buyer goes through all of the information submitted by the sellers and can deliberate to make their final decision. Once they notify the winning bidder, the two parties can work together to determine the terms of their agreement to have the work fulfilled.
Reverse Auction Example
It is important to note that a reverse auction strategy may not be ideal for all industries. There are some industries and business scenarios the reverse auction model serves particularly well for both the buyer and the seller. Those include:
1. Government contract bids
When the government contracts work to outside suppliers, a reverse auction process is most commonly used. For example, if your company provides IT support to government agencies, your company could respond to a request for proposal from a government agency to submit a bid for the suite of services you provide.
Companies that manufacture their products often use the reverse auction process to source suppliers. For example, if an aerospace company is sourcing suppliers to provide batteries for a new aircraft, companies that make the needed battery could submit a bid to supply the battery for aircraft production.
3. Technology services
Organizations, such as school districts or companies that do not have internal technology support, can use the reverse auction process to procure technology goods and maintenance services needed for their operations.
While the price is often a factor for buyers during the reverse auction process, buyers tend to base their final decision on the entire package a seller offers to factor in product quality, delivery, and production schedule in their decision. On the other hand, a Dutch auction places greater emphasis on price. What’s a Dutch auction? I’m glad you asked …
In a Dutch auction, the price of a product or service begins at a high asking price and decreases until a bidder accepts the price. With this type of auction, the first bid is considered the winning bid marking the sale.
Dutch auctions are often used in an Initial Public Offering (IPO) to determine the appropriate price for a particular stock. For example, let’s say that during an IPO an auctioneer is attempting to auction off 1,000 shares of stock and receives no bidders for the initial high price of $100 per share. From there, the auctioneer incrementally lowers the cost per share initially high cost per share.
So let’s say the first buyer purchases 50 shares at $60 per share. As the auctioneer continues to lower the price, a second buyer purchases 60 shares at $50 per share, continuing on until all shares have been accounted for.
The auctioneer can continue to lower the price until all of the shares are purchased. The final cost of all shares will be equivalent to the value bid by the last buyer. So, if the final buyer purchased the last 100 shares for $45 per share, the final value of the stock would be $45 per share.
Participating as a seller in a reverse auction can help companies stay competitive and get on the radar of potential buyers. For more winning B2B sales tips, check out this post.