By Cheryl Higley
In a snow industry already taking it on the chin in terms of pricing, some say larger customers’ fondness for reverse auctions isn’t helping matters.
Used in the snow & ice industry predominantly by facilities managers of large operations and those with multiple sites, reverse auctions by their very nature are designed to drive pricing down.
Rick Kier, CSP, president of ProScapes in Jamesville, NY, says some of his customers have been using reverse auctions for the last three to five years and has had to learn to navigate the process to protect his company. Contractors who are invited to participate in a reverse auction should be extremely careful, he says.
In a sealed bid, Kier says, you take the specs, evaluate the work and scientifically come up with the bid—being as efficient as possible. In an online reverse auction, if you bid $100,000 and then other people are put into the mix that may bid $96,000, the customer is hoping maybe you’ll go to $93,000. Right off the bat, he says, you’re losing money on the job.
“Reverse auctions are a psychological tool to get people to lower their numbers. Everyone starts lowering their numbers and now no one is using science—you’re just beating each other up to get to the lowest bid,” Kier explains. “In this industry, the profit margin is somewhere between 1 and 10% if you’re lucky. You can’t go dropping 10% off your price. Then you’re paying the customer to do the work or doing it for free.”
David Morel, senior product manager at Ariba, a provider of spend management solutions, says some companies may run an auction to lower their margins, but others have a better view of their spend and want to improve efficiencies.
“Just because they’re using the reverse auction doesn’t mean they’re just looking for the lowest price,” Morel said. “If they can collect the right information during the auction process, they can get an idea of what’s happening in the marketplace and can collect a value figure—not just a price.”
Any snow and ice contractor considering taking part in a reverse auction should consider the following:
Ask questions. Review the requirements in the RFP and ask for clarification in advance of the bidding. Never assume on specs since the people who write them often are from the procurement department, which may have no idea about the nuances of snow and ice management. If you see something faulty in the specs or how the bid is structured, Morel encourages suppliers to ask questions: “Professionals who reach out to the buyer can help educate them so they have a better on the marketplace. It will show your value beyond price.”
Know the company. Find out as much as you can about the company, Morel says. Have you worked for them? Is it a company you want to work for based on what you know?
Make sure they know you. What services do you provide that sets you apart? “Make sure that buyer knows what you’re capable of. They might be bidding snow clearing—what else do you do other times that they need to be aware of that would see the extra value in choosing your business?” Morel says. Kier agrees: “Reverse auctions dehumanize the process. When you’re invited to participate, contact the facility manager and inquire as to what they’re looking for—what are their objectives, why are they bidding, have they been happy with their past contractor? Don’t be afraid to send them information about your company. Send references, brochures, links to your website. Don’t just be a number—be a somebody.” Scott Smith, director of nation sales at Brickman Facility Solutions, says reverse auctions aren’t just problematic for smaller companies. Even companies as large as Brickman have struggled. Trying to forge a relationship in a commoditization process is tricky: “Position yourself with the client and built rapport in advance of the process. If you’re their choice but your coming in 10% higher, they’ll ask why instead of dismissing you because you’re higher. Those we don’t have a relationship with or who don’t want to build one, that’s not the customer we want to work with and we’ll walk away.”
Know your numbers. Barry Morton, president and CEO of Morton’s Landscape Development Co. in Ohio has been burned by reverse auctions, losing a client he had for years. You have to know when to walk away, he says: “I did my homework and knew what my costs were. The starting price was 20% less than what I was charging. The contract we had been paid $130,000 a season for (it was a large hospital) went for $36,000. The year before we spent $36,000 just on the salt. You have to make a decision on what your bottom number is going to be and remain diligent. If you don’t it can put you out of business.”
Cheryl Higley is Editor of Snow Business Magazine.