Auctions are not a new thing. A bit of research will reveal to you that the first auction recorded happened 500BC. Chinese used them a couple of centuries later, and in the 17th century, they were a quite normal thing in Europe. Everyone saw on TV the rooms and people lifting their hands or the number. And the guy in a fancy suit standing on a podium and saying fast:
”Do we have 300, do we have 350…”
Why are they becoming so interesting now? Well, we added the e- to them. We can do them now faster, more efficient. Also, bidders are not sitting in the same place any longer, so we can play a bit with hiding information from them.
First things first. Back to basics.
Type of auctions
The first way to split auctions would be by the way we perform them.
In forward auctions, the price starts low and bidders are bidding for a higher price. Once there are no higher bids, the good is sold to the highest bidder. This is the most common type. Even online, this was the first technique, used by E-bay back in 1995. They added to this a bit of extra pressure with the clock showing the remaining time. I did purchase a couple of things back then, and it was so exciting. You would wait with your bid until the last 5 seconds, hoping that no one has the same idea and a 0.01 USD higher price.
The opposite is a reverse auction. It is exactly the opposite. The seller starts with a high price and goes lower until a buyer accepts the offered price. I have seen this at a Dutch flower auction house. Maybe this is why we call them Dutch auctions? Anyway, the point is that it creates additional pressure, as it is on the first come – first serve principle. If you intend to buy something you will stop the auction a bit higher than planned, afraid that someone will stop it earlier.
E-auctions work on the same principle. Additionally, they harness the fact that people are not sitting in the same room. So, bidders are not able to see how many people are participating. Also, they cannot get the feeling of how much the competition is interested in a particular auction. This allows You to run even an auction with a single bidder.
Live online auctions are the same as standard auctions. Everyone can see the best bid, and if we choose so, all bidders that are participating. I have organized a couple of them and they are so much fun. You can sense the pressure to win, especially if the contract is high. We were getting a couple of per cent extra savings based on auctions only.
Step auctions are a bit different. Here the price is not driven by the buyer or seller. The system decreases the price every 60 seconds, and the buyer has to accept or reject the price. Once the last buyer rejects the next lower price, the auction is over. The last accepted price is the winner. This would be called a Japanese Auction. Modern systems will allow you to set the start price at the original bid of the supplier. Hence the bidders start at a different level. The lowest bidder doesn’t know it, but at the start, he is bidding against himself. Only once he rejects the price, he is allowing other bidders to catch up on him.
Then we have the Dutch step auction. Same principle, but this time the price increases every 60 seconds. Again, first – come – first serve. And you are sitting in your office, hovering your mouse pointer over the “accept” button. Accept the price, or hope to wait it out for the next increase? Will someone accept it in between and grab the contract? To add to the pressure, there is no information about the – competition. How many are still in the auction? What do they discuss with their team? What is their target price? Are you even currently at the same price level? So many questions, and silence from the other side of the table.
Depending on the system used, you will find different variations of the names and ways. But the basics are the same. Master the system and use it properly.
Negotiations? They are good if you need to discuss details other than payment. When it comes to the price point only, e-auctions can perform better. As they are in real-time, there is no relationship bias between buyer and seller. The seller is under pressure, knowing that there is no second chance. And they are fast. For five suppliers the total time spend was about five hours. This includes setup, training before the actual auction and the auction itself. Negotiating with five suppliers, even if you go very quickly, will take at least double the time.
Try it out. There are so many tools out there. Just pick one and jump in. You will never go back.