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Dynamic Pricing - Reverse Auctions

Following on from the success of normal auction web sites it is not surprising that attention soon turned to reverse auctions where buyers name their price and invite suppliers to bid for their customer. Priceline is the most famous consumer reverse auction site and the others include WebHouse Club, Mercata. Respond.com, imandi.com,  and eWanted. For example, eWanted reported that it was getting 2 million unique users September 2000. In the recent dot.com bubble burst many of these failed including WebHouse Club, an affiliate of Priceline.com, that was selling petrol (gas) and groceries.

Travel Most Successful

The travel category has been the most successful reverse auction items, as it is for normal internet sites like LastMinute.com. The product is a commodity, uses well known brands (airlines or major holiday companies), is of high value with the potential for significant savings, it is easy to deliver the goods (the tickets), the item is perishable and there is over supply.
 

PriceLine Model In the PriceLine model (see right), the company selects generic categories such a s a weekend in Paris. It then negotiates with a number of suppliers who would be interested in selling to PriceLine's customers, i.e. the buyers. To give supplier flexibility, Priceline usually has restrictions on buyers or the product. For example, with travel tickets it does not allow users to use frequent flyer programmes, select a preferred airline, or receive refunds. eWanted on the other hand, is reported to let users negotiate for features such as more convenient flight schedules and the opportunity to use frequent flyer miles. We have yet to investigate PriceLine's charges but another competitor, Respond.com, was reported to charge sellers between $5 and $50 a month to be listed in a category. Sellers are also charged a nominal fee when they answer a prospective customer's e-mail.

Priceline.com allows customers to name their price Click here on on the picture for a full screen display Items include travel, car hotels, rental, long distance telephone calls, home financing (mortgages) and new cars. Once worth $1bn, Priceline saw its value fall to under $1bn. The UK site started in late 2000 and has less categories.

The Business to Business World

Reverse auctions are nothing new to the business world. They are quite use to specifying their requirements via an invitation to tender (ITT) / request for proposal (RFP) which often stipulates a maximum price. The internet provides additional benefits:

• the whole process is accelerated, in some instances such as electricity wholesale supplier, down to minutes.
• buyers can reach a much wider range of suppliers which should reduce prices.
• buyers let suppliers continuously out-bid each other whereas before they would need to have a number of rounds which would take time and be more of an administrative burden.
• suppliers, can equally address new geographical markets.
• where prices are open, suppliers can understand the various price points and make an informed decision whether to enter a market.

Many of the B2B electronic trading exchanges offer reverse auctions including Ariba, CommerceNet and FreeMarkets.com. The US Government, especially the military, are enthusiastically embracing reverse auctions. Examples of quoted saving include:

• Defense Finance and Accounting Service saved 21 percent - $2.2 million - buying several thousand computers and printers.
• Air Combat Command saved between 8 percent and 38 percent on computers.
• Coast Guard saved $1.4 million on aircraft parts.

The Downside of Reverse Auctions

Many companies have embraced reverse auction without considering the possible downside:

• relationship building takes a back seat. In times of plentiful supply this may be fine, but when products become scarce then suppliers are more likely to satisfy their establish customers first.
• further, there is a tendency not to involve suppliers during the design stage when significant saving or quality improvements could be made for the production stage.
• reverse auctions are being used for numerous small ticket items but when the quantities are high then much is at stake. Without clear specifications of requirements (for both the product and the service element) then buyers can be dissolutioned when expectations are not met.
• where many players in an industry use reverse auction then prices can tumble quickly without commensurate productivity improvements in manufacturing or the supply chain. Margins suffer and suppliers go bankrupt which reduces industry competition and choice.

Some of the above was sourced from ref.

Reverse auctions also raise ethical issues which will be covered later.

When Do Reverse Auctions Work Best?

Reverse auctions work best when:

• buying products where there is a clear industry specification for the item and recognised quality standards.
• the supplier and manufacturer are well known and have a proven track record.
• the industry does not suffer periods of shortages.
• after purchase service is minimal or very unlikely.
• distance is not an inhibitor to the supply or the service of the product.
• the required item is difficult to find.

Whilst the above implies more suitability for products, reverse auctions are also addressing services. For example, LegalMatch is offering legal services, presumably such things a house conveyencing.

Return to Modern Consumer Led Pricing

JS 

External Resources
 

1. Anon, Reverse Auctions Are Creating False Savings For Manufacturers, Manufacturing News, May 31, 2001 Volume 8, No. 10 - refers to a study by M.L Emiliani and D.J. Stec of Rensselaer Polytechnic Institute's Center for Lean Business Management in Hartford, Conn.
2. Matthews, William, Savings drive reverse auctions, Federal Computer Week,16 February 2001
3. Spring, Tom, Reverse Auctions: A New Spin on E-Commerce, PC World, 29 July 1999
4. Ritchie, Ed, The Status of Reverse Auctions, After Priceline.com's WebHouse closes, are they also about to face a shakeout?, Auction Watch Daily News, 13 October 2000
5. See the full list of resources for this web site for other related resources.

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