What is a reverse auction?

In a standard auction, buyers compete to buy a single product or service. As buyer demand increases, so does the price. The goal of a standard auction is to sell an item, property, or service at the highest possible price. A reverse auction is the opposite of a standard auction.

In a reverse auction, businesses compete against each other to offer their services to a single client. Instead of driving prices up, reverse auctions usually drive prices down. When businesses want to get the job badly enough, they keep underbidding their competition. This process provides both benefits and creates concerns. It is important to understand both.

Benefits

There are several benefits to reverse auctions. Reverse auctions allow clients to utilize the service of a business at the lowest possible cost. When businesses are actively competing with one another, they are forced to offer their lowerest rates if they want the job. If they try to price their services unfairly, they will be undercut by their competitors.

However, each business has a fair chance of getting the job if they are fair and transparent. Reverse auctions can get very competitive, and some companies are forced to offer rates lower than they are comfortable with.

The Downside to Reverse Auctions

Reverse auctions can also have a downside to the businesses and the client. In some cases, reverse auctions work out, and the client gets a great service at a fair price. However, reverse auctions can cause businesses to compete so fiercely they hardly make a profit from each transaction. Quality businesses usually decide how low they are willing to bid ahead of time.

When businesses provide quality services, there will always be people willing to pay extra. So, when clients utilize reverse auctions, they risk getting low-quality service. While this is not always the case, it is a possibility that should not be ignored.