The Art of Negotiation: Reverse Auctions
The way auctions are set up in the United States, the buyer of the product benefits. The price goes low to high, meaning whoever wins the auction and buys the product often does not pay the full amount they were willing to pay. Instead, they pay a little more than the full amount anyone else at the auction was willing to pay.
What this means for the seller is that money was left on the table. If a buyer is willing to pay $100 for an item but the rest of the bidders are only willing to pay $80, there is no need for the buyer to pay more than $81, leaving $19 left on the table that the seller could have earned.
Now imagine the opposite scenario. In this auction, like some held in Europe, the price starts high and works its way down. The first one to bid wins the product. In this case the starting bid for the product would be $150 and would work its way down to $100 when the bidder would make the purchase. In fact, he may even pay more than $100 since in this form of auction, tension is built among the bidders as the first to bid wins so buyers are more likely to bid earlier at a higher price to beat the competition.
In this case no money is left on the table for the seller and he may even make more than he could have in the scope of a traditional auction. This information can come in handy when negotiating.
I recently purchased a new vehicle and went to two different dealerships. At one I tied the traditional negotiation approach where the dealership stated a price, and I negotiated down to a price we could both agree on, trying to get him to sell the car for the least he would let it go for. At the other dealership, I took a different approach, an adopted version of the reverse auction approach explained above. I started at the invoice price as I figured that’s the lowest he would sell it for and worked my way up. I told him I had a price in mind and if the negotiations went over the price I would have to leave. I ended up getting the car for $200 over invoice, where the other dealership said the lowest he could sell it for was $800 over invoice.
