B2B auctions differ considerably from online consumer auctions, such as eBay. The main differences are:
  • B2B auctions are usually conducted in a private forum between buyers and suppliers that know each other.

  • The auction can be a selling auction, where bidders come together to competitively bid the price up.Or the auction can be a buying auction where suppliers come together to competitively bid the price down. BOMweb has conducted both buy side and sell side auctions.

  • The transactions are usually high value, typically in the tens of millions of dollars.

  • The auctions are usually multi-attribute, in that the contract is not awarded to the best bidder on a single attribute - such as price. Instead other factors such as risk, commercial terms, delivery costs, and incumbency are factored into the bids in real-time.
The following design considerations apply to B2B 'procurement' (reverse or buying) and 'allocation' (forward or selling) auction platforms:

Ease of Use.The auction platform must be simple to use, and access via a simple web browser and dial-up internet connection. Bidders can't be disadvantaged during the auction because of technical issues. The objective of the auction is to award the contract to the bidder that values it the most, and not to the bidder that is best at using the technology.

Market Dynamic. The market dynamic needs to be understood before designing the platform and the auction rules. The market dynamic considers issues such as: the level of sophistication of the players, the traditional process used to assign and negotiate contracts, the level of competition amongst the bidders, the concentration of buyers and suppliers, and the cost of entry that will determine the likelihood of new entrants being attracted to the auction.

Auction Objectives. The objective of the auction platform needs to be clearly defined and agreed to by all stakeholders e.g. the objective could be allocation efficiency or revenue maximisation.

Bidding Format. The platform should include functionality for both reverse or downward bidding auctions used for procuring goods and services, and forward or upward bidding auctions used to sell goods and services (or in the case of Governments to allocate scarce resources).

Auction Rules. The platform software needs to be designed in accordance with the auction rules. These rules determine the success or otherwise of the auction. If the rules are perceived to be unfair or unworkable then bidders will boycott the auction. The rules deal with such issues as: how the contract will be awarded; what the reserve price means; how the auction will close; and how the bidders must bid to win the auction. Auction rules are not generic, and need to be custom designed for each application and industry.

Qualified Bidders. Only eligible bidders that have been carefully qualified should be invited to bid at the auction. B2B auctions involve high value contracts, often with considerable risk. Unlike typical consumer auctions, B2B deals are rarely done between strangers.

Reserve Price. The auction reserve price should be pre-set, and clearly communicated to all bidders when reached during the live auction. The reserve price should be the signal to all the bidders that the contract will be awarded to the winning bidder at the end of the auction as the buyer/seller pre-set 'walk away' price has been reached. Advanced B2B platforms have the capability to automatically adjust the reserve price during the auction based on the level of competition.

Proxy Bids. The platform should have the capability to accept proxy bids in the event that a bidder becomes disconnected from the auction platform. The proxy bid process must be fair to all parties and maintain the transparency and integrity of the auction rules. High value contracts should be awarded to the best supplier or buyer, not the bidder that is still connected at the end of the auction. The B2B platform should allow all bidders to automatically submit and manage their proxy bids.

Multiple Variables. Most B2B contracts are based on complex pricing formula used to determine competitive bids. The auction platform should allow the bidders to submit a price breakdown according to the pricing formula and automatically submit the bid for comparison against other bids.

Multiple Attributes. The auction platform should cater for multi-attribute (factor) contract award decisions. Very few B2B contracts are awarded based on a single attribute i.e. price. For procurement auctions, the buyer is always concerned about other attributes such as quality, speed of delivery, payment terms, transport costs, warranties, service, support etc. The buyer incorporates all decision attributes in the form of bid factors into the auction system before the auction commences. The system then transforms actual bids to arrive at a best 'best value' comparison taking into account the other non-price decision factors. A common myth is that auctions are a price only game; this might be the case in consumer auctions but very rarely in B2B auctions. Having the platform transform the bids in real-time allows the buyer or seller to make the commitment to award the supply contract to the best value bidder at the completion of the auction. This commitment adds to the transparency of the process and increases considerably the competition during the auction. Advanced auction platforms allow the bidders to change the attributes in real time during the auction process, and therefore change the value equation i.e. increase or decrease the benefits while keeping the price the same. This approach is commonly termed 'expressive bidding'.

Multiple Stakeholders. Stakeholders should be involved in the preparation process and are given the opportunity to signoff on decision attributes and bidder tradeoffs before the auction starts. For example, in a typical procurement auction the stakeholders need to agree on the financial value attributed to incumbency or the total switching costs likely if a new entrant wins the contract. If the buyer can't value the switching cost, then it is difficult to commit to award the contract at the auction to a new entrant.

Multiple Lots. The platform must support both single and multiple lot configurations. The buyer/seller needs to decide if the contract(s) will be bid as a single lot, or as multiple lots. Where the contract(s) is awarded across multiple lots, the buyer can choose either a sequential approach or a simultaneous auction i.e. all the lots are put up for auction at the same time.

Multiple Rounds. The platform must support both single and multiple round configurations. Where the auction includes multiple lots, the buyer would usually use a multiple round auction rather than a single round auction. For example, the spectrum auctions are multiple lot and multiple round auctions.

Multiple Options. The platform must support both single and multiple option configurations. Where the buyer chooses to split the supply contract into multiple lots, the buyer has the option to allow bidders to create and bid on packages of lots. The auction platform must compute the revenue maximising option in real time. These auctions are termed combinatorial auctions, and represent the very latest frontier in B2B auction design. The bidder will value a package of lots higher than the single lots separately when the lots are complements, and lower if the lots are substitutes.

Well-managed electronic auctions in the commercial arena have substantial benefits for both buyers and sellers. For all parties, there is the advantage of transparency; everyone including primary and secondary stakeholders (such as the taxpayer) will have full awareness of and confidence in the process.

B2B auction transaction volumes are growing rapidly as more organisations move to adopt online technology to secure the very best buying and selling outcomes.
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Page update: 27 Aug 2007