Two pricing approaches that do not fit neatly into the price setting process we’ve described are auction and bid pricing. Both follow a model in which one or more participants in a purchasing transaction make offers to another party. The difference exists in terms of which party to a transaction is making the offer
Auction pricing is a pricing method where the buyer, in large part, sets the final price. This pricing method has been around for hundreds of years, but today it is most well-known for its use in the auction marketplace business models, such as eBay and business-to-business marketplaces. While marketers selling through auctions do not have control over the final price, it is possible to control the minimum price by establishing a price floor or reserve price. In this way, the product is only sold if a bid is at least equal to the floor price.
Bid pricing typically requires a marketer compete against other suppliers by submitting its selling price to a potential buyer who chooses from the submissions. From the buyer’s perspective, the advantage of this method is that suppliers are more likely to compete by offering lower prices than would be available if the purchase was made directly without competitive offers. Bid pricing occurs in several industries, though it is a standard requirement when selling to local, state, national, and many international governments.
In a traditional bidding process, the offer is sealed or unseen by competitors until the end of the process when bids are unsealed. The fact that marketers often operate in the dark in terms of available competitor research makes this type of pricing one of the most challenging of all price setting methods. However, many purchase situations are now adopting an auction method, called reverse auction, to make the bidding process more transparent. Reverse auctions are typically conducted on the internet and, in most cases, limited to business-to-business purchasing. With a reverse auction, a buyer informs suppliers of its product needs and then identifies a time when suppliers may bid against each other. Usually the time is limited and suppliers can often see what others are offering.