Forward Progress Through Reverse Auctions
November 17, 2008
By Paul Conover and Cliff Wilson
The reverse auction is generally a fair and efficient system for buying and selling commodities. For more complex products and services, however, salespeople generally loathe the reverse auction—and there are considerable risks for the buyers, as well.
Can the precepts of strategic selling be effective in a process that seemingly reduces the competition to a one-dimensional playing field, where price is all that matters?
First off, it's important to understand the rules of the particular auction you are concerned with. Most of us tend to think of an auction as a binding process. At the end of the bidding, the two parties are obligated to complete the transaction at the agreed price.
A reverse auction, on the other hand, is often not a binding, two-way process. A reverse auction is the buyer's game, played by the buyer's rules.
In most cases, the buyer is not obligated to award the business to the lowest bidder. Sometimes, the rules say the buyer may choose from among the lowest three bidders; other times, the buyer is free to choose any bidder. "In many cases, the winner is pre-determined and this is an exercise to lower their price, and also to demonstrate due diligence," says Bobbie Thomas, a consultant with Zehren-Friedman Associates, a sales consulting and training firm. Buyers have even been known to negotiate a deal with someone else entirely, using the bid prices as bargaining leverage.
A Game of Strategy
Most of this is actually good for strategic sellers. The more leeway the buyer has in choosing the winner, the more the time-tested axioms of strategic selling come into play. The sales team that has taken the time to understand the customer's goals, develop the right relationships and make a compelling bottom-line case for its solution has the inside track in winning the business.
"The only way to get around the death spiral of a reverse auction is to make sure you are involved in the process before it gets to the auction stage," advises Chuck Sena, sales development specialist at Arrowhead Systems. Marc Buckingham, national sales manager at Blue Box Medical adds, "If the first you have heard of the auction is at bid stage, then you have already lost."
In the best case, you will be so close to the key players that you are in a position to help develop the specifications for the auction. Even if you are not that fortunate, you need not fear the reverse auction if you have laid the groundwork for a successful bid. Sometimes you are already a favorite and the reverse auction is strictly pro forma. Give your price and stick to your guns.
But, as with any potential business deal, you must be willing to walk away. If the process is biased against you, if you can't compete profitably or if the buyer is truly interested only in price, think very carefully before proceeding. If you opt out, politely let the client know why you are not participating, as this information could help keep doors open for future business. If you are the preferred vendor, you might still get the deal.
Risky Business
The reverse auction process has pitfalls for buyers, as well as sellers, and salespeople should make sure their customers understand the risks involved. The risks of giving business to the lowest bidder are obvious. Is the cheapest deal really more important than the right partner?
The buyer's risk in a reverse auction is especially high when services are involved. Services are by nature unique to each provider. Most likely, your customer's reverse auction is structured so that he has a fair amount of latitude in choosing the winner.
Keep in mind that your real customer—the end user of your solution—might well be no fonder of the reverse auction than you are. Just like the "bean counter" who drives this process, the end user cares about getting a good deal on the right solution, but their priorities are far from identical. You need to understand both perspectives.
It is also critical to make sure both you and your customer fully understand the total costs of changing suppliers. Buyers frequently award contracts to incumbent suppliers, even if prices are higher than the lowest bids, as the costs of switching to a new supplier are often higher than the potential savings.
Winning in Reverse Mode
Don't dismiss the legitimacy of the reverse auction. You want the procurement professionals on your side, too. They have seen the reverse auction process work for a wide variety of products and services, and they generally understand the trade-offs involved.
"A well-run auction rarely goes to the low bidder unless it is a true commodity," says John C. Hattery Jr., a consultant focused on supply chain strategy who has run large reverse auctions. "Even highly engineered products can be very effectively reverse-auctioned, the purpose being to establish a true and fair 'market price' for the product."
Hattery adds that sales professionals will need to counter effectively: "For almost every product there is a viable substitute available." Your job is to show why your solution is an exception to this notion.
To sum up, get involved early and get as close to the process as you can. Understand the rules of your buyer's reverse auction. The more flexibility the buyer has in choosing the winner, the more important your strategic selling methods are. If the process is unfavorable for you, be willing to walk away.
Paul Conover and Cliff Wilson are partners in Anatolia Group, LLC, a consultancy focused on helping clients win in the arena of complex, competitive sales. You can reach them at www.AnatoliaGroup.biz.
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