In the world of negotiations, there are few tactics as old and as well thought of as the “reverse auction”. This is a powerful negotiating technique that allows a buyer to get the sellers to offer their best pricing for the most amount of work. Not bad if you are a buyer, eh?
Here’s how a reverse action works for you if you are a buyer: let’s pretend that you wanted to build a house. You go out and get three different offers from three different home builders. As you can imagine, when you get the bids they will contain a confusing mix of different options and time frames.
Your next step will be to call a “reverse auction”. You invite all three builders to meet with you. You have them show up early and have them wait in the same room before they meet with you. After they’ve had a chance to sit and glare at each other for a bit, you then call them in to meet with you one by one.
Each builder will then proceed to tell you why they are the best and why you should avoid selecting the other builders. After you’ve had a chance to talk with all three builders, you now understand the subtleties and the risks that are involved in building the house that you want.
With all of this new information, you are now able to more clearly refine your specifications because the alternatives have become clear. You can now provide the builders with an updated proposal that they can bid on.
You will end up selecting the builder who can provide the best price while providing the most house for that price. By using a reverse auction, you were able to learn a great deal about building a house and you were able to trade off options that you originally did not know existed.
Why does a reverse auction work for a seller? Simple, there are four reasons:
- Competition Works: when you allow sellers who are competing against each other to “see” each other, it increases the level of competition.
- Apply Pressure To Management: the reverse auction technique allows you to move beyond the salesperson that you are dealing with and actually put pressure on the company’s management.
- Almost There Syndrome: each of the sellers has already put a lot of time and effort into responding to your original proposal. This means that they all think that with just a little more effort they can close the deal.
- It’s Concession Time: you know that sellers are more adverse to losing a deal during negotiations than earlier in a deal. This means that they may make concessions that they normally would not.
This negotiating technique is not without its downside. You need to keep in mind that whichever seller you select is going to feel as though they were put through the ringer. They will probably resent the auction process and will want to make up for being forced to bid a low price.
What this means to you is that any changes that you want to make to the contact after it has been signed will probably end up costing you dearly. Additionally, the seller may end up delivering the product to you late and may even shave some corners on the quality of what gets delivered.
Have you ever had a chance to use a reverse auction during a negotiation? Was it successful? Were you happy with what was delivered in the end? Have you ever had to compete in a reverse auction process? Did you win? How did you feel if you did win? Leave me a comment and let me know what you are thinking.