Are retailers still using reserve price reverse auctions any more?

July 30th, 2010

In a reserve price reverse auction, the buyer establishes a “reserve price”, the maximum amount the buyer will pay for the goods or services being auctioned.

A reserve is also sometimes called the desired price, or a “qualification price”.  Careful thought is required on the part of the retailer in determining their reserve price. Quite often retailers just rely on their existing or current price from their last contract. If careful thought is not given, this may in fact create an unreasonable expectation that results in less participation from prospective suppliers, particularly if the market has changed dramatically in an upward direction since the last award of business. You have to be very careful that once a reserve is met that suppliers will stop bidding because you have already indicated your desire price point.

In a reserve revere auction if the bidding does not reach the “reserve price”, the buyer is not obligated to award the business based on the results of the reverse auction. This can also add risk to the participation level of suppliers. However once the reserve price is met, the buyer is obligated to award the business to a participating supplier or group suppliers based on previously published auction rules. Most reverse auctions today include terms and conditions that protect the retailer from awarding the business whether the reserve is met or not. This author would caution that if you are just trying to collect prices to analyze market conditions, tell the suppliers up front. If you set a reserve plan to award the business.

Additional pricing considerations can be given to adding other price points or qualifiers in a reserve price reverse auction such as entering a market price. In the case of fuel, this may be from a price index such as OPIS, Platt or Gulf Coast. This information can be visible or blind to the supplier, but let’s the retailer compare a suppliers mark up strategies. This also offers a nice opportunity to calculate cost avoidance during an up market.

We don’t see reserve auctions to often anymore, but understanding the different types of formats and tools available to you and assessing them in your event setup for their potential impact can add to the quality of the data collected and the event itself.

We look forward to and appreciate your comments

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