A reverse auction may land you a new client, but if you are the incumbent, it may be better to say no. Here’s why.

Recently, one of my clients was informed that the services they provided for a very large customer were going to a reverse auction, and they wanted my help coming up with a price. My first question to their team was: “Are the services and support you provide for this customer a commodity?” 

My clients answered no, which made the decision easy. I told them to refuse to participate. They were confused, to say the least, and wanted to know why. So, I told them the below story:

Over 15 years ago, I was the pricing director for a hard drive company. One of our customers, a top-five computer maker, decided to put out their quarterly demand to a reverse auction. Like my client, it was one of those moments when we had to consider our best move. And to do that, we had to understand the value we offered outside of the product itself. Our value list looked something like this:

1. We were the incumbent, and we had a great relationship with the buying decision maker.
2. Our product quality was best-in-class. We knew that other vendors’ lack of quality would cost our customer a lot of money in product returns and customer dissatisfaction.
3. We had just-in-time inventory hubs at their manufacturing facilities where we stored a two-week supply of our product. No other vendor could support their manufacturing to this degree.
4. We had field application engineers at their manufacturing facilities to ensure that their manufacturing lines ran smoothly. Our employees knew as much, if not more, than the client knew about their own manufacturing processes.
5. We staffed dedicated customer service reps to handle all their ordering needs, returns, and questions.

None of these high value services were in the reverse auction. So, why would our client want to lose all of that added value to save a few dollars upfront in a reverse auction? We didn’t think they did. So, we told them we didn’t want to participate. Upon hearing our decision, their procurement team communicated our decision to the buying decision maker, which was perfect. 

In front of the procurement team and the buying decision maker, we explained the extra value we offered point by point. We told them that if we were to participate in the reverse auction, we would eliminate all the value services we gave them.

It may sound risky, but it was an easy sell. The buying decision maker understood our total value and shut down the auction.

Even though the relationship between our two companies was impacted in the short term, the subsequent quarterly negotiations went smoothly. In fact, our volumes grew significantly with the customer!

I asked my client to make a list of all the additional value they offered their customer beyond the product. Turns out they provided a lot of customization that cost well over a million dollars to develop, and that the buying decision maker valued. They also provided several free services like 24 x 7 support, which would normally be a monthly charge, because the customer used the main service a lot. When we added it up, these free services would cost their customer more than six figures if they went with another company.

After going through all the value they provided, I asked again, “Are you a commodity?” This time, the “no” answer came back stronger and with conviction.

When my client notified their customer of their decision not to participate in the reverse auction, the procurement team threatened to pull their business. Luckily, procurement did not have that power. The decision resided with the buying decision maker. My client was able to present all the value that their services brought to the customer to the procurement team and the buying decision maker. Of course, the buying decision maker was not happy, but he understood that the auction only covered the transactional service and that both his company and my client would lose out in the end. Finally, a 9-figure contract was signed that satisfied the needs of the customer and was acceptable to my client. I believe that the relationship is now stronger than ever because everyone acknowledges the value that my client delivers every day.

Bottom-line: if your product or service is going out to a reverse auction, ask yourself if the overall product or service your company provides as the incumbent is a commodity. If the answer is “no,” then it is okay to not participate in the reverse auction. By not participating in the reverse auction, you will force a conversation with procurement and the buying decision maker where all the value that your company provides is documented. Value should never be given away.