July 31, 2008
Those two words should make every salesperson shudder. I remember when we first encountered the phrase about 5-6 years ago at one of our customers. Their top salesperson’s top account is a local company that shall remain anonymous (retail giant with a bullseye for a logo). When this salesperson first mentioned “reverse auction” to me, I had no idea what he was talking about. Once he explained it, I was taken aback. It is the ultimate commoditization tool.
Dave Stein posted on this topic with an example of GE’s colossal IT budget for procurement. One of the quotes from GE’s CIO cuts right to the core of this issue:
On auctions, Reiner goes on, “The more commodity-like the part or service is, the easier it is to auction; and the more differentiated, the less easy it is to auction. By design, every year we try to make more of our business portfolio be products and services that are noncommodity – that are differentiated. So we have been fortunate not to be as auctioned on the sell side as we are on the buy side.”
The interviewer asked: ”I would presume that as much as you like to buy things through reverse auctions, you absolutely hate to sell things that way.” To that, Reiner responded, “That is correct.”
Did you catch that last paragraph? This exact reason is the drive behind clearly defining your value proposition. Prospects want to turn your solution into a commodity and then drive your prices down. Now, this is a problem if your solution lacks value. In that instance, you best be the low-priced option or you won’t be around for long.
Dave’s summation catches the core of this topic (my editing):
Unless you’re in a commodity business, participating in reverse auctions is about as defensive as you can get from a strategy perspective. By definition, the customer is determined to strip away any unique value from your products and services so they can buy at the lowest price. They’re not interested in your unique value, a long-term win/win relationship with you, or anything else that will increase the cost to them.
That should suggest not approaching reverse auctions tactically from the sell side.
He provides some excellent resources if you are forced to compete in a reverse auction format.