The business model of reverse auctions has many benefits for retailers.

December 9th, 2008

According to Wikipedia

According to Wikipedia, a business model is a framework for creating economic, social, and/or other forms of value. The term business model is thus used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies.

Often times during this author’s discussion with retailers the question comes up as to the benefits of the reverse auction business model or that of other e-procurement events such as Requests for Information or RFI’S.

This author will make the assumption that there is common agreement that price compression in today’s world is critical and that the reduction in cost of goods and services is the largest area of opportunity on a retail P&L. As such, there are a number of reasons that the reverse auction business model works well within organizations that should drive the strategic growth in utilization of this business model within retail.

A few and certainly not all are listed below in no particular order…

1. A larger number of buyers. Because of an increased number of suppliers bidding for a retailers business, getting a relatively low price is a given. The suppliers benefit because of the potential reduction is selling costs and easy access to new sources of business which encourages them to lower their pricing.
2. Location, Location, Location. In this case, location no longer matters. A supplier can participate from wherever they happen to be located. This opens up new potential markets for the supplier and new sources of supply for retailers.
3. It’s like a game: Participating suppliers wait to see if their price is the lowest much the same way a gambler would wait to see the turn of the next card when playing blackjack or poker. This is a social interaction and dynamic that builds on itself and can drive a larger number of bids and extensions while ultimately leading to lower pricing.
4. Early success drives a virtual circle for retailers and suppliers: The more a retailer uses the tool and the more success suppliers have with securing new business resulting from this process, the more the process will drive retailers to host new events and suppliers to participate in them again and again. Independent departmental successes can spread quickly within a retail company such that other departments not using the process do not want to be left out of potential savings opportunities and notoriety.

As always, we look forward to your comments.

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