What is an eAuction? Definition & Benefits

Learn the basics of eAuctions with Market Dojo’s learning resource. 

We’ll cover

• What an eAuction is
• The types of eAuctions available
• The benefits of eAuctions.

What is an eAuction?

The ‘e’ in eAuction signifies the electronic element of an eAuction. eAuctions can either take the form of a forward eAuction or a reverse eAuction. 

In a reverse eAuction, sellers compete online for a contract to supply goods or services and the price decreases over time. Reverse auctions can simply be run based on the lowest bid by a supplier, but you can also take other factors into account like experience or quality to find the best possible supplier, or you may leave the final choice up to the buyer based on your options. 

In the procurement space, reverse auctions are the main type you will encounter, as compared to a forward auction. It is also where we will focus these guides.

A forward auction is where goods or services are sold through a series of bids that increase in price until somebody wins the auction. eBay is a good example of a forward auction platform.  In the procurement world, forward eAuctions are commonly used to sell off excess stock or inventory.

Reverse eAuctions help buyers find the best suppliers, based simply on pricing or other benefits too. All of this is done online through electronic tools like Market Dojo’s eSourcing software. 

eAuctions are considered best practice for your procurement team as they allow for optimised development of supply chains. They present a better way for businesses to negotiate contract deals, both as a supplier and as a buyer.

Jacob Gorm Larsen, in his excellent book A Practical Guide to e-Auctions for Procurement, illustrates the difference between a traditional negotiating model and eAuctions, (illustration sourced from book, please click link for original).

Source: Jacob Gorm Larsen, A Practical Guide to e-Auctions for Procurement

The Different Types of eAuction

There are many different types of Reverse eAuctions, but we shall focus on ranked, open and Japanese.

The following three eAuctions are all subtypes of a reverse auction.

• Open eAuction – An Open eAuction is a reverse auction held within a bidding platform where all other bidders can see the leading bid, displayed anonymously. They are usually used when price is the only factor taken into account on the award as it’s a race to the lowest bid. Suppliers can only enter a bid that is lower than the current leading bid, which tends to quickly settle the negotiation, as participants can only bid for the lead. 
• Ranked eAuction – Ranked eAuctions, allow suppliers to see how they rank in comparison to their competition for each lot/line item. This tends to be the most popular eAuction type as it gives suppliers good market intelligence, without giving away the lead bid value. Suppliers can place as many bids as they want to in the eAuction to try and improve their position. It is an excellent way to develop options as bids from multiple suppliers allow you to identify the real market price.
• Japanese eAuction – a Japanese auction involves timed bidding rounds where the suppliers must accept the bid level to remain in the eAuction. The buyer sets a starting price (qualification price) and time interval for each bid round. The suppliers must either accept or decline the starting bid price, Thereafter, the suppliers remaining in the eAuction will continue to be asked to accept or decline the bid round at a % decrease set by the host. The eAuction will continue until the point where there are no bidders remaining, but can continue with just a single supplier remaining. This is a great negotiation method when you have low supplier liquidity.

For more help deciding which eAuction to use, see this blog and this infographic.

Forward Auctions: A Different Side of eAuctions

In addition to reverse auctions (where buyers solicit competitive bids from suppliers), forward auctions represent the mirror image: sellers offer goods or excess assets and multiple buyers compete to purchase them. Forward auctions are particularly effective when businesses need to dispose of surplus inventory, scrap or under-utilised assets, and want to realise the best possible price. This type of auction helps companies unlock value, reduce waste, and convert idle stock into revenue.

Key Advantages and Considerations

Some of the key benefits of forward auctions include

• Maximised returns: By inviting competitive bids from a global or broad buyer base, sellers can often achieve higher prices than through standard spot-sales

• Efficiency & repeatability: Forward auctions can be structured into repeatable marketplace models, allowing companies to streamline their disposal processes and improve throughput of excess stock over time

• Optimised asset release: It’s a fast way to convert surplus or scrap items into cash, freeing up capital and storage space

However, there are trade-offs to be aware of

• Time and resource investment: As with all structured auctions, setting up a forward auction takes some effort, for example defining auction rules, managing buyer registration, ensuring legal/contract compliance, and supporting logistics

• Achieving competitive pricing requires participation: For the auction to drive value, enough interested buyers must be engaged; otherwise the benefits are reduced

• Confidence & trust: Buyers need assurance that the process is fair, that items are as represented, and that the payment / delivery terms are secure. Sellers often rely on professional software and support to provide that confidence

The Benefits of eAuctions

Depending on who you are – buyer or supplier – there will be different benefits of eAuction platforms. 

eAuction Benefits for Buyers

• Encourage Healthy Competition – eAuctions allows suppliers to engage in transparent competitive bidding opportunities, which helps them optimise their service offers and ensures you get true market value. 
• Reduce Procurement Costs – eAuctions are a single platform that you can invite multiple bidders to. You can use eligibility criteria to immediately eliminate non-contenders and set up eAuctions to ensure certain parameters of quality are met. In doing so, you avoid wasting time on weak offers and reduce your administrative costs. 
• More Efficient Procurement – With eAuctions as part of the tender process, you can automate a number of processes, such as onboarding following successful contract bids. There are lots of ways to use eAuctions to connect your procurement to your wider supplier management network, making your entire procurement process more effective and efficient. 
• Acquire Valuable Data – eAuctions help your business acquire lots of valuable data. You can get an overview of your procurement processes, your markets and your costs. From historic information to current trends, there are some really impactful opportunities to be leveraged by using the data recorded through eAuction software. 
• Find More Suppliers – Using eAuction tools makes it easy for you to share your tender opportunities on a wider scale, potentially going national or even global. Through this practice, you can find and invite many suppliers to bid on contracts, inviting more options and leading to better deals. 

eAuction Benefits for Suppliers

Access New Opportunities – The online nature of eAuctions makes them easier to access, giving contractors and suppliers more chances to find work.

Understanding the Competition – Ranked eAuctions give the suppliers intelligence on how their bids compare to the market that they seldom get during a traditional RFQ process. They can see in real time where they sit in the market and can choose to improve their position by placing an improved bid.

Save Time & Money – Intuitive eAuction platforms make the bidding process far quicker and easier than traditional methods, improving productivity and cutting costs. Instead of the buyer having to negotiate with all of the suppliers individually, the eAuction creates a dynamic whereby the suppliers negotiate themselves.

Transparency – eAuctions tend to also be more transparent than other negotiation methods and independent research has proven it can strengthen supplier relationships.   

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!