Reverse AuctionAn auction where sellers bid instead of the buyer

Are you familiar with how a typical auction works?

In a typical auction house setting, the auctioneer will announce the product.

Then the potential buyers will take turns making bids. Whoever makes the highest bid wins the right to purchase the product.

This is common for artwork and other rare luxury products.

If you regularly watch TV, you’re probably with Storage Wars which is a show where buyers bid for delinquent storage lockers.

A common phrase that you would hear during auctioning would be “Going once. Going twice. Sold!”.

So in a typical auction, there is only one seller and potentially many buyers.

The seller benefits from the auction being successful, especially if the highest bidding price goes beyond the expected price ceiling.

In a reverse auction though, things are different.

Instead of having multiple buyers, there’s only one.

And instead of having only one seller, there are many of them. Lastly, the highest bidding doesn’t win… it’s the lowest bidding price that does.

I guess that’s why we call it a reverse auction, huh?

In this article, we will be talking about what a reverse auction is.

How does it work?

What are the steps to take when doing a reverse auction?

Does it apply to any product?

Is it always beneficial to do a reverse auction?

What benefits does a reverse auction provide?

When doing a reverse auction, what are the things to be wary of?

We will try to answer these questions as we go along with the article.

What is a Reverse Auction?

A reverse auction is a type of auction wherein there is one buyer and multiple sellers.

Aptly named reverse auction, it is the opposite of a regular auction where there are multiple buyers and only one seller.

Under a reverse auction, sellers bid for the prices that they’re willing to sell their products (goods or services) for.

Usually, it is the lowest bid that wins. Essentially, the role of the seller and buyer is reversed in a reverse auction.

Reverse auctions became popular when internet-based online auction tools emerged.

These online auction sites allow multiple sellers to connect with a buyer in real-time. They’re convenient and make the process of finding capable sellers much easier.

Large corporations and government agencies conduct a reverse auction to procure materials, supplies, and services at a competitive price.

For example, let’s say that a government office is planning to conduct an awards night.

This office will then look for caterers to serve the food for the event.

To save time and money, the office will conduct a reverse auction for food catering services.

The office will then award the contract to the bidder with the lowest price.

A reverse auction helps save time and money when looking for products for the cheapest price.

And it’s only made easier as the internet became more accessible.

There is a caveat with reverse auction though. In searching for the lowest price, the quality of the product might be compromised.

And this is only one of the things to be wary of when doing a reverse auction.

The Issues with Reverse Auction

A major issue with a reverse auction is that the buyer might compromise product quality by focusing solely on getting the lowest price.

They do say that quality often doesn’t come cheap.

By focusing too much on the pricing, the buyer may grant the contract to a seller that can only provide sub-optimal quality products.

Also, when you’re the one posting the reverse auction, be sure to provide well-detailed information about the product that you want.

Be as specific as you can so that there will be no misunderstandings when it comes to the fulfillment of the contract. This lessens the chance of a seller not capturing the full details and requirements of what you’re buying.

For example, you say that you’re looking for a TV unit.  That’s your only description.

This allows the winning seller to supply you with any kind of TV. In the worst case, they might provide you with a low-quality unit.

But if you wrote that you’re looking for an 18-inch LED TV (any brand), that leads to less misunderstanding. The sellers will know what exactly it is that you’re looking for.

Another thing to take note of about reverse auctions is that they do not work for all products.

For a reverse auction to be successful, there must be multiple sellers.

A reverse auction won’t work for goods and services that only a few sellers can provide.

Most often than not, having only a few sellers that can provide the desired product can compromise the quality and integrity of the process.

Types of Reverse Auctions

There are four types of reverse auctions in which you can participate:

• Ranked Reverse Auction
• Japanese Reverse Auction
• Dutch Reverse Auction; and
• Open Outcry Reverse Auction (a.k.a. English Reverse Auction)

These four types vary in their bidding process, but the end results are the same: whoever makes the lowest bidding wins.

Ranked Reverse Auction

In a ranked reverse auction, the bidders (sellers) will bid at a similar price point.

However, only the winning bidder will know the current best price.

This can produce both good and bad outcomes.

First, the good – winning the bid can boost the confidence of the winning bidder.

The bad – those who continually lose the bid might lose confidence and may no longer join the next reverse auction.

This type of reverse auction is probably the most popular among all the types.

Businesses go with this type of reverse auction when they want to engage with multiple bidders that are most likely to bid at a similar price range.

The bidders might know their rank at the end of the auction, but they won’t know the winning price.

To avoid the issue of bidders losing confidence, the buyer may communicate with them that the price isn’t always the winning factor.

The contract may still be given to the bidder who didn’t bid the lowest price under certain circumstances.

Japanese Reverse Auction

In a Japanese reverse auction, the buyer sets an opening.

The other bidders must agree, and from there, the bidding process actually starts.

In set time intervals, the price will automatically decrease (it is the buyer that sets the deduction rate). The bidders well then agree with the current price.

Those who do not agree will lose the bid. This process will repeat until only one bidder is left. This bidder automatically wins.

Normally, the bidding process will end if there are no longer bidders that accept the current price or if the current price has reached its minimum amount.

Dutch Reverse Auction

The bidding process in a Dutch reverse auction is more or less the opposite of the Japanese reverse auction.

The buyer will first state the price that they can pay for their desired product (they will also state the needed quantity).

The bid will then start at a low price and will increase at set intervals. It is the buyer that will set how much the price will increase and at what intervals.

The bidding process will continue until a seller accepts the price or if the bid price reaches its maximum amount. The first to make the bid (aside from the buyer) wins the auction.

Open Outcry Reverse Auction (a.k.a. English Reverse Auction)

In an open outcry reverse auction, the bidders can always see the current leading bid.

This is the opposite of the ranked reverse auction in which only the winning bidder knows the winning bid. It’s a transparent type of reverse auction.