When running a business, your goal is to make a profit. You want to sell your products at the best prices. As a seller, you set the price that customers need to pay to get your products. You will always go with the best price. This approach also applies in the auction where bidders state the price they are willing to pay for a product and service.
With technology, customers are becoming informed. This aspect is boosting competitiveness in the marketplace while empowering the customers. Customers can now decide the quality of the product they want and the price they are willing to pay for it. With this aspect, a new business model has come to the surface – the reverse auction business model.
What is the Reverse Auction business model?
As the term suggests, this business model is the opposite of auctions. In an auction, the seller offers a product, and buyers compete to place the best price they are willing to pay for it. This concept follows the opposite aspect.
The reverse auction business model involves buyers requesting a product and bidding with the best price they will offer to the buyers. As each seller focuses on winning the buyer, the product’s price goes down.
So, here is the seller who bids by offering the best prices to the customers instead of the buyers competing to get the product at their special price, as in an auction. This is the reason why the model has the name reverse auction.
How does it work?
Simply put, the parties in this model are similar to one in the auction approach. The only difference is their role shift. The main parties are buyers and sellers. Buyers are individuals seeking a particular product or service.
Unlike in the traditional auction, the buyers in this concept receive bids from potential sellers. Their role is to choose the best supplier offering quality products per the buyers’ expectations. The sellers submit the products they are offering and at how much. Also, they state the features in the products to try and win the buyers on their side.
Typically, the reverse auction business model has three steps. The first step starts with the buyer publishing a request for a quotation or proposal. This request states the exact product they need, quantity, and deadline the supplier should meet.
The next step is the submission of bids by sellers. The potential sellers submit their bids based on the buyers’ specifications. These bids offer details on the product features, the potential price, and willingness to deliver it to the buyer.
The last step is opening bids and selecting the most qualified seller. The buyer assesses all the bids submit plus the details before deciding. Once chosen, the seller gets a notification for a meeting on the way forward.
Examples of Reverse Auction business model
The reverse auction business model is becoming common in the modern marketplace. But it is good to note that it does not fit for all industries. The model may not be beneficial to parties in some instances.
Nonetheless, it can be a perfect choice in some areas. Several companies and institutions use this business model to run their business. Government contract bids are the best example of a reverse auction model in use. The government institutions and entities publish requests for quotations and invite suppliers to submit their bids. So, each supplier will submit the details of their supplies and how much they are willing to accept for it.
Priceline is another example of a company applying reverse auction as their operational model. This company operates in the travel industry. It allows buyers to request offers on specific hospitality and travel services. The service providers/sellers suggest their possible offers. If the buyer is convenient with the offer, they accept the deal, and the sellers fulfill their part.
This concept is also common in the manufacturing and technology industries.
Pros and Cons of the Reverse Auction business model
The reverse auction is a suitable model for the buyer. It allows you to get products at the lowest prices possible. However, it comes with a package of merits and demerits. Ignoring this aspect can have a hurtful impact on your business in the future. Here are some of the pros and cons to consider before implementing this business model:
Pros
Opportunity to enjoy a lower price
The purpose of reverse auction is to help the buyers get quality products at their desired price. It offers the buyers the power to decide their prices other than the other way. With this approach, buyers are likely to enjoy lower prices.
In particular, if you are a manufacturer, you can apply this approach when sourcing raw materials. Getting high-quality raw materials at a lower price means that customers will benefit by paying low prices for quality products.
Easy to create a pool of potential buyers
Participating in a reverse auction opens your business to a pool of potential buyers. With the internet, this model is becoming a common approach. There many reverse auctions are happening online. Being part of them creates a chance to sell to the global community. Hence, it is a powerful way to boost your products reach.
Offers leveled playing ground
In a reverse auction, all players get the same information on the buyers’ specifications. This aspect level the playing ground for all participants. So, whether you have a small or large business, your chances of qualifying are equal.
Cons
Sellers have no freedom to choose the product prices
This model disadvantages the sellers by taking up their power to set prices. The buyer determines how much they are willing to pay for a product. For this reason, you set a price to meet the buyers’ needs rather than considering the cost of production and related expenses. So, the seller is likely to suffer a loss as they try to offer the lowest bid.
Conclusion
In a word, taking part in reverse auctions can help your business get exposure to potential buyers. If you are the buyer, this model allows you to enjoy quality products at a lower price. However, the approach can be a disadvantage in some industries and sign loss-making contracts.
