Unlike traditional auctions, the participants on a reverse auction place lower and lower bids, until the lowest bidder wins. They are widely used in the B2B world to reduce costs and source services or products at the lowest possible price from the participating suppliers. Reverse auctions have both pros and cons for suppliers and for buyers.
A reverse auction provides buyers with the most competitively priced solution to their needs by pitching suppliers against each other to be the one offering the lowest-priced bid. It also streamlines the procurement process and reduces the need to send a different request for proposal to each potential supplier. Reverse auctions also save time in the procurement process.
The main issue with a reverse auction is that it is based solely on price. Unless the request for proposal is very clearly constructed and specific, the buyer may find that the lowest bid is not the one with the highest quality or does not offer all the expected features. The costs of performing due diligence on the winning bid and managing the project may outstrip the savings.
Reverse auctions are generally open, enabling entrepreneurs and small business to compete to supply firms that would usually overlook them, and access the same bidding processes as more established or bigger firms. A successful bid can lead to more business down the line with the same buyer.
Vendors intent on winning a reverse auction are at risk of placing a bid that is too low for their business. Aggressive under-bidding practices can result on winning a project that cannot be completed for that budget, souring the relationship with the client and potentially harming any chance of entering this kind of auction again.
Reverse auctions are a very effective way of optimising the procurement process and opening it to new businesses, but they can lead to problems when the proper safeguards are not put in place beforehand. Competition for the lowest price can lead some suppliers to cut corners to maximise benefit or even send them out of business when the project turns out to be a loss. In turn that will negatively affect the buyer.