How a Reverse Auction Works
In most auctions, buyers bid the price up as they compete with each other to secure a known product or service. In reverse auctions, the roles are switched, as vendors bid down a price to sell to a single buyer or buying group. Reverse auctions are most effective in purchasing commodities in markets where price transparency is lacking. Electricity procurement is a perfect reverse auction application.
Our Auction Interface: Only Relevant Information Appears (Prices typical of customers in ComEd’s territory)
The graph above shows how the price has dropped during the auction. Watch as suppliers bid your price down in real-time.
Benefits of the Online Process
Putting reverse auctions online allows suppliers from remote locations to effortlessly compete and secure business quickly. Sellers can continually assess their positions relative to their competitors, and cut margins where necessary to secure your business. Online reverse auctions not only reduce supplier margins further (thereby providing a lower price to consumers), but also reduce the magnitude of transaction costs, bringing cost savings to more customers.
To see Satori’s Online Reverse Auction in action, watch this video:
The Story of Our Auction
In October of 1999, we issued our first RFP for non-utility electricity supply. It was a process based upon our years of experience securing price-competitive natural gas for our clients. The process worked well – we saved our clients millions of dollars. However, over the years, as the retail electricity market matured, competition for clients increased. One way for us to address the onslaught of competitors was to use a differentiation strategy for our product offering. Six years ago, we investigated injecting an online auction into our tried and true procurement process. A few companies seemed to be having significant success in getting lower prices for their clients by offering online auctions, where suppliers bid down offered electricity prices in real-time. As suppliers bid down prices, they cut their margins, resulting in lower prices for the customer. With few brokers providing online reverse auctions, offering an online auction seemed like a plausible differentiation strategy.
At this point we had a decision to make – either forge an alliance of some kind with one of the few auction providers or develop our own online reverse auction platform. So we analyzed their auction processes and measured their ultimate performance. We noted that each provider’s auction had some function that wasn’t optimized. We realized that if we built our own auction from scratch, we wouldn’t be constrained by what others had done in the past. With the young minds we have on staff, we determined we could build a better auction ourselves. Nothing is beyond the reach of these “kids.”
In early 2013, we ran our first electricity auction. Since that time, we’ve run auctions for a multitude of industries – universities, retail grocery chains, cold storage facilities, restaurants, etc. After each auction, we evaluate the responses of the various suppliers to get deeper insight into their bidding behavior. When we see something that needs to be improved, we change what we do. We just rolled out Satori Auction version 3.0. We are firm believers in continuous improvement. To this end, not only have we taken courses on the theory of auctions (at the University of Chicago), but we also regularly revisit the performance of past auctions so we can improve our auction process. With our extensive in-house IT team, we can make improvements in a time-efficient manner.
While lowest price is the number one objective of those seeking non-utility energy supply, the low price is long forgotten when problems arise during the delivery phase of a contract. That’s why the first action we take with our clients seeking supply is to sit down and talk with them to determine their objectives and risk tolerance for the many commodity energy products available. Cooperatively, in concert with the client, we develop a plan. Only then do we schedule an auction of pre-qualified suppliers. After the auction is completed we help our client decide on a contract length that best fits their needs and assist all the way through the contracting process. But our involvement doesn’t stop there – Satori stands by our clients, ensuring their billing is correct, handling any problems that may arise, and keeping them informed of energy market trends going forward.