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Oddly enough, bidding in a reverse auction and gambling are quite alike; they both require strategies that will help suppliers stay on track and eventually win (hopefully by making a profit). Luckily for you, we have gathered 6 bidding strategies that your suppliers might be using during a reverse auction.
Here we go:
#0: Preparation is key
Before you go into a reverse auction, you need to make sure you are all prepared. This is true for both buyers and suppliers. So you should expect a series of questions like:
How many suppliers will be competing in the auction?
What time will the auction start and how long is it scheduled to run for?
Will the bidding be online and automated? If the Internet connection failed during the auction, what would you do?
Is there an incumbent supplier?
What are the parameters that will be involved in the bidding: price, shipping, terms?
There might be other questions that will appear during the preparation stage as well, so you should be prepared to answer all of them.
Reverse auctions are designed for purchases that feature little collaboration, shorter-term contracts, products with common specifications and low complexity, and acquisitions where there are savings opportunities. However, strategic relationships with suppliers rarely meet these criteria.
A reverse auction takes a great deal of your time if it’s done correctly. You have to identify sellers, collect bids, evaluate, revisit to collect information, and then revisit again to negotiate a final deal. All this takes time that you may not have to spare. So one way to test your suppliers and see if you can establish a long-term relationship with them is to check whether they understand your needs and are willing to lift some pressure off of you.
Now that you know all this, you’re ready for your reverse auction.
#1: Starting very low
Whenever a supplier starts with a very low bid, he’s definitely trying to intimidate his competitors. However, this strategy is a double-edged sword: yes, it can work for them, but it can also do them more harm than good. Putting forward an extremely low bid before seeing how low other suppliers are willing to go is a very dangerous bidding strategy as it can really minimize their chances of a high profit margin.
You might think that this is a good opportunity for you as a buyer, but it might not be so. Often, suppliers will ask for a renegotiation of the contract, or they might lower the quality of their products to minimize their losses.
#2: Starting very high
In some cases, the supplier will start very high, in the hope that others will do the same. This might be a sign that there is a short supply in the market, or that some event affected the competitive situation.
#3 Fast matching
The "intimidation method" that is what is known as the "Fast Match," is the one in which the bidder IMMEDIATELY retakes the leading bid position whenever they are outbid. Fast Matches send a strong signal to the competition that a supplier intends to win at any price. Sometimes, this will result in a complete bidding stoppage after only 2 or 3 Fast Matches or, in the presence of an equally strong bidder, will accelerate the bidding process spiraling downwards.
#4: Bidding patterns
Accurately predicting competitors’ next bid amount is a key step for some suppliers in managing the overall process and determining their following bid amount.
Usually, there are a couple of patterns that can be observed in a reverse auction:
Bidders tend to work in round numbers.
As the action moves closer to the close, bidding typically moves in smaller and smaller increments.
Bidders tend to bid using exactly the minimum bid step when bidding during time extensions at the end of an e-auction.
If the reverse auction pricing is quickly spiraling downwards, someone has to stop the madness. Some suppliers will strategically try to stop to send a signal to other bidders or in the hope that a close second place finish will earn them a place in some post-auction negotiation process.
#6: The price floor
Once suppliers completed the proper pre-bid preparations, they have already determined the minimum acceptable price to profitably support their business. Or it might be that they have a mandate from the management to go as low as a certain price floor. If bidders have strong discipline, they will never cross that price. So keep that in mind.
Other bidding strategies to keep in mind:
If a supplier is known to have quality or delivery problems, other suppliers will not aim to be the lowest-cost provider - they will aim for the second best. Also, if the bidding web page shows the overall ranking based on a collection of factors, they will improve their price, shipping, terms one by one and watch to see how their overall ranking changes.
Incumbents will not aim to be the lowest-cost provider either because of the cost of switching providers.