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eAuctions: A deal too good to be true?

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Perhaps you have run an eAuction and one participant has undercut the field, leaving you wondering how sustainable that price is likely to be? Or maybe you are a participant who is about to take part in an eAuction and are worried about not having the lowest bid? Well, you’ll be relieved to hear that both of these issues are common practice when starting out with eAuctions, and more importantly, both are easily solved.

In this post we will be categorising these issues into three topics, for:

  • Hosts running a non-price driven eAuction
  • Hosts running a price driven eAuction
  • Participants taking part in an eAuction

 

So you’re a host running a non price driven eAuction…

When hosting an auction, one thing to consider is while the best price is, of course, an important factor, it does not have to be the defining one.

For example, if you were running an auction for a service, such as a tender with local builders, you might want to put a few hurdles in place to ensure that you are covered and are getting exactly what you want.

The first way to do this would be to run a Pre Qualification Questionnaires (PQQ) against an SLA (Service Level Agreement). In doing this you are clearly outlining the requirements of your tender, ensuring that only participants that are in agreement will be taking part in the auction. For the building services this might include; overtime rates, working hours, or basically any factors that need to be clearly agreed before engagement.

There is also the possibility of running a weighted auction. In this scenario, certain questions and their answers are of greater importance and hence are weighted. In this example of builders, you might ask whether they work to a certain quality standard such as a specific ISO. This would be a more important, and therefore higher weighted question than asking how many people are in the company.

When considering a service such as building, it’s imperative that you are considering factors other than price, such as the quality of work rather than the lowest possible price. An amateur could complete the job for half the cost of a professional to secure the work and win the auction, however, you are likely in this case to get a far worse outcome and final product.

 

What about hosts running a price driven eAuction?

Even if your auction is price focused, there are similar steps that can work as an insurance policy and help to mitigate the risk of an unsuccessful tender.

The first step, similarly to the topic above, is to run a Pre Qualification Questionnaire (PQQ) against the required Service Level Agreement. In case you bypassed the first section, the PQQ basically works as a filter by ensuring that participants are happy and willing to meet the requirements of your tender, before taking part.

By then running an RFQ you are also giving yourself another opportunity to filter out participants that might be unsuitable for a final tender. An RFQ is a request for a quote, doing this will give you a rough initial price guide and could eliminate the need for a tender entirely if you are happy with any of the initial quotes and need to save time.

If you do head into an auction, as almost all will at this stage, it’s a good idea to exercise your rights of buyers choice. We know that we have gone into the auction with a mindset of getting the best price possible. However if the market price is around £350 such as in the graph below, we know that buyer 6 with their bid of £250 is probably not going to be a long term sustainable option. The other bidders have displayed the true market price to us by bidding in the same area causing a price compression. Therefore as the host you should be looking at one of the buyers in this compression and using your buyers choice rights to make a decision.

Once you have run your eAuction and are happy with the winning bid and supplier, it’s a good idea to meet with your supplier before fully engaging, to understand exactly how, and if they are able to supply at the winning bid.

Below is a simple graph depicting both processes as a host running an eAuction.

And what about participants taking part in an eAuction?

When taking part in an eAuction as a participant, it’s important to approach any process with your best price firmly in mind. This concept is often referred to as BATNA.

BATNA stands for the Best Alternative To Negotiated Agreement. It is wise before entering any tender to be aware of this, as the value of knowing your BATNA provides negotiating power and also determines a clear reservation point (the worst price you are willing to accept).

The diagram above depicts both the buyer and seller’s BATNA and the area in between known as the ZOPA, Zone of Potential Agreement. This is an area between the worst case price, for both the buyer and seller where a potential agreement can be made.

It can be easy to get carried away with bidding, however if your product has a higher quality and slightly higher price, you also have ‘buyers choice’, meaning that you are still in with a chance of winning the auction even if you do not have the best bid.

Our Upcoming Webinar – “Is it time you questioned eAuctions?”

If you are still finding yourself questioning which eAuction is most applicable for you or are simply curious to learn more, then our upcoming webinar hosted by Market Dojo co-founders, Alun Rafique and Nick Drewe on Tuesday 30th April, 3pm BST, is the place to be.

The webinar will be discussing the ins and outs of eAuctions, offering expert advice from those at the forefront of the industry, as well as live demonstrations on how to run events using Market Dojo’s software.

The webinar is also aiming to be fully interactive including a Q&A and directly addressing attendees’ queries throughout.

So if you have any questions that need answering, why not sign up to join in the discussion and submit your questions through our follow up form.

e procurement system Market Dojo coowners, will be discussing eAuctions including reverse auctions

April 18, 2019

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