It is a type of auction in which the role of the buyer and seller are reversed, with the primary objective to drive purchase prices downward.
Reverse auctions simply are auctions where the bidder is the seller not the buyer. Companies today need to shave expenses wherever possible and that includes the purchase of goods and services needed to keep their businesses running smoothly and efficiently. In the old days, the process of finding vendors was extremely limited and was very time-consuming. Many businesses simply found it easier to pick one company and continue doing business with them indefinitely instead of hunting around for the best provider for each new project. Today, technology has changed that completely thanks to reverse auctions and the Internet.
The bid reflects how much the buyer is being asked to pay, not how much the good or service is being sold for. Web-based reverse auctions have become extremely popular for purchasing everything from accounting services to securing raw materials. The reasons for the popularity may not be immediately clear, but there are a number of benefits for both buyers and sellers.
Buyers' benefits involve cutting costs and time expenditures. In the past, buyers who needed work done had to send out a complete project description to potential sellers. Each seller submitted a detailed RFP, and the buyer had to go through each RFP in order to determine which offered the best deal. Comparisons between RFPs were easy based on numbers alone, but numbers never tell the whole story. With reverse auctions, buyers create a project description and post it online. Invitations are then sent out to potential vendors who place a bid and briefly describe their qualifications and the details of what their bid includes. Because all of the bids are lined up beside each other in a chart formation, comparing them is simpler for the buyer. Additionally, buyers can eliminate certain bids based on criteria such as price or deadlines, which makes the final selecting even easier. Most reverse auction software also allows buyers to communicate with bidders so that they can refine their bids or offer clarifications. All of these features combined allow the buyer to pick a quality vendor who can fulfill the needs at a good price and in less time.
Sellers also reap benefits from reverse auctions if they use them effectively. One of the benefits is that it makes projects more open to a wider number of sellers. Technology provides vendors from all around with the globe with equal access to the invitation and an equal shot at winning the work. While this is a benefit, particularly to offshore and/or small vendors, it can also be a drawback and has resulted in many sellers bidding too low on projects just to try to win the auction. The competition may seem negative, but it does provide an incentive for sellers to add value to their fees by providing a variety of other services, which will benefit buyers who are willing to look beyond price alone.
Buyers who are interested in using reverse auctions need to understand a few main points if they hope to use them effectively. As mentioned before, the buyer needs to think beyond simply the quoted price. Price may be an important factor in the decision but other elements, such as added services, must also be taken into consideration. Additionally, some projects are just not designed to work with reverse auctions. Goods and services that can only be provided by a limited number of suppliers will not be effective with reverse auctions since the vendor, not the buyer, will have all of the power in the situation and can actually drive the price up instead of down. Many buyers new to reverse auctions have failed to read the proverbial fine print involved in the bids. Some bidders will cut out normal services, use less quality materials, or extend deadline just to make it possible for them to place a more competitive initial bid even though the final bill may end up being much higher. Buyers need to be aware of this and also need to realize that treating with vendors with respect now can secure them a trustworthy supplier in the future.