Understanding How Reverse Auctions Work

Learn everything you need to know about reverse auctions. 

On this resource page, we cover

• What a reverse auction is
• The different types of reverse auctions
• How reverse auctions work
• Why you’d want to use reverse auctions for your tender processes
• Benefits of reverse auctions

What is a Reverse Auction?

A reverse auction is a system where suppliers compete to provide their goods and services to a business, based on the purchase requirements of a company. As the business buying from suppliers, you set out your requirements for goods and services and then invite suppliers to bid on your purchase contracts. 

Unlike a traditional forward auction – the kind you might see at an auction house – where bidding goes higher and higher until somebody wins the item on auction, a reverse auction typically sees suppliers offering lower and lower bids until the buyer obtains the best value offer for their tender. 

The simple idea behind reverse auctions is that multiple suppliers have the opportunity to provide multiple bids on a contract tender. By having suppliers competing against each other, a reverse auction ensures the buyer pays the market value for the goods or services offered by the supplier for their tender.

Reverse auctions are known to be highly successful because of their benefits for supplier engagement and interaction. 

What are the different types of reverse auction?

There are several types of reverse auctions, for example Ranked, Open, and Japanese, each with its own strengths and limitations. 

Ranked auctions let suppliers know their position relative to others, encouraging competitive but measured bidding. Open auctions offer full transparency, allowing suppliers to see the leading bid and adjust accordingly, which is great for price-driven, commodity scenarios. Japanese auctions work through iterative price reductions where participants must actively opt in or withdraw, providing systematic price discovery and reducing the risk of irrational bidding behaviour. 

To understand how each format performs in different contexts and when to use them, check out our blog on this topic. Or, if you’re asking yourself How do I decide which reverse auction is best for my tender? Use our infographic to help compare the different types of reverse auctions.

How Reverse Auctions Work

After a reverse auction has been chosen as the method of negotiation the buyer will first outline the criteria for their contract. Essentially, they’ll create a specification for goods and services required that details the work involved in the contract, including expected deliverables, deadlines, qualifications, certifications, SLA’s required and so on.

They’ll then place this contract opportunity on a reverse auction platform, such as Market Dojo Sourcing, in a format that uses online questionnaires, supporting documents and lotting structures. Buyers can then invite suppliers to the reverse auction and allow them to place their bids for the contract. 

A reverse auction would typically last about 30 minutes.

Once the auction is finished, the buyer can make an assessment of the offers put forward and select the supplier they want to onboard for the contract. The buyer must be clear at the start of the bidding process what the award criteria is for their tender, be it lowest bid wins or buyer’s choice once all offers have been put forward. 

Buyers must be transparent on the way they intend to manage the reverse auction. A reverse auction based on a lowest price wins outline should not then be changed to fit different criteria. The process that will follow the auction should also clearly be laid out.

For best practices on running reverse auctions, download our eGuide.

When Should You Use Reverse Auctions?

While reverse auctions often focus on the lowest cost, they are not always about the lowest price. 

Many times, a reverse auction is based both on cost and quality of the contract opportunity offered. For example, a buyer conducting a reverse auction may pick a mid-level price that promises higher quality services from a more established business. 

Other times, however, a reverse auction is simply about price, normally when the supplier base used has all been vetted. 

Either way, a buyer would want to use a reverse auction when they’re looking to find the most competitive opportunity for their contract. Reverse auctions invite carefully considered and attractive offers because suppliers know, if they want to secure more business for their own company, that they have to present offers that are more appealing than rival enterprises.

Whether looking for the most cost-effective bids or offers optimised that balance budget and quality, reverse auctions can help buyers secure the best options for their business goals. 

Benefits of a Reverse Auction

The key benefit of a reverse auction is that it’s tied closely to a buyer’s spend management strategy. Savings are made through increasing competition for contract tenders, helping buyers extract optimised value from their supply chains. 

With reverse auctions, suppliers can be given full transparency by being shown their position against other bids, which helps suppliers with weaker offers assess said offer and present better bids of their own. 

Another key benefit of the reverse auction process is that it makes the negotiation stage of a contract far more efficient and less time consuming, thus saving money for buyers and suppliers alike.

Want to learn more…?

• Blog: From FOMO to Fearless: How to Use e-Auctions to Drive Cost Savings
• Blog: How to Deliver Real Business Value with eAuctions
• eGuide: Beginners Guide to Reverse Auctions

Get started with your eAuctions today. Market Dojo offers powerful, on-demand eSourcing and eProcurement tools to optimise your supply chain. Get in touch with our team and arrange your free demo!