Reverse Auction Negotiations

September 6, 2015“What should we do if a big potential customer pre-qualifies us as a possible supplier, invites us to bid for its business, asks us to fly to its headquarters, puts us in a conference room right next to our competitors, and starts working us off against each other on price?”

This situation – which a client recently faced – describes the classic reverse auction. In regular auctions, a seller gets potential buyers interested and solicits bids from each buyer. In reverse auctions, a buyer gets potential sellers interested and solicits bids from each seller.

First understand the strategic implications of reverse auctions, in which buyers almost exclusively use their leverage to focus on their price goals.

If I’m looking to purchase goods or services and I am only negotiating with one qualified supplier (my Plan A), I likely have a bad alternative (my Plan B) to that supplier. This often translates to weak leverage.

But if I use a reverse auction to get numerous qualified suppliers to bid, I have developed stronger leverage as I will almost certainly get better Plan Bs.

So what should you do if you’re bidding?

1. Decide if you even want to bid

Initially decide if you even want to participate in the reverse auction, as they are often used to simply get the lowest price bids for commodity-like products or services. Is your goal to be the low price leader in your field and to succeed on volume and low margins? Do you sell a commodity? If the answer to either is yes, go for it.

Alternatively, if your product or service is more value vs. price oriented and/or can be substantially differentiated from your competitors, consider not even bidding.

Of course, the buyer may be a current customer or you may answer no to these questions but still want to bid. If so, consider the following.

2. Write down your goal

Auctions and reverse auctions are notorious for getting individuals to lose sight of their true goals. In fact, they’re designed to get your ego involved so you focus on “winning” it instead.

Don’t let this happen. It’s not about winning – it’s about achieving your goal. So write down your goal before the reverse auction (writing it will help you focus on it). Then stick to it.

The last thing you want is to “win” the reverse auction and be saddled with a bad deal.

3. Differentiate from your competitors

Reverse auctions work most effectively when buying commodity-like products or services. If I’m a buyer and I pre-qualify you and tell you the only variable in the negotiation is price, I have tried to commoditize what you sell.

If it’s not true, and often it’s not, push back.

I work with a lot of large law firms that are now facing reverse auctions. Companies running reverse auctions for legal services tell these firms that “you’re all the same.” But they’re not.

They have different value propositions, which include different lawyers, different types of expertise and knowledge, different levels of service and effectiveness, different cost structures, etc.

And don’t just say you’re different – prove it. Use data and independent standards like third party references, customer service studies, analytics proving your efficiency and effectiveness, and the list goes on.

The more you differentiate relative to your competitors, the less you need to concede on price and the more likely you will achieve your goals.

Recognize also that incumbents have a built in advantage in reverse auctions. There is almost always a cost to change if your client picks your competitor. So your competitor has to be better than you to displace you.

I recently heard that a law firm won a reverse auction even though they weren’t even close fee-wise to the low price bidder. How? They had offices and relationships with local judges in all the jurisdictions where this client had cases. The other bidders didn’t. That’s differentiation.

4. Develop a strong pipeline (your Plan Bs)

Finally, reverse auctions focus you on only one element of leverage - how you stack up vis-a-vis your competitors. The other element is what you’re going to do if you don’t get the deal – which is your sales pipeline/your Plan Bs.

The stronger your pipeline, the easier it is to walk away from the reverse auction. It gives you stronger leverage in it, too, so you never agree to anything worse than your best Plan B.

Latz’s Lesson: Reverse auctions usually favor buyers as they get better Plan Bs – except when you differentiate and/or develop your own better Plan Bs.

* Marty Latz is the founder of Latz Negotiation Institute, a national negotiation training and consulting company, and ExpertNegotiator Software, web-based software that helps individuals and organizations achieve better results with best practices based on the experts’ research. He can be reached at 480.951.3222 or