The competition for securing auction consignments gets more brutal with every passing month. Although auction houses are tight-lipped about the commissions they charge to sellers, their buyer’s premiums are publicly advertised. You can be sure that whenever buyer’s premiums go up, the commissions received from sellers have gone down. After all, it takes money to run a business, and if sellers aren’t paying for the cost of running an auction, then the expense falls to buyers.
In February of this year, in the wake of another buyer’s premium increase, Sotheby’s President Bill Ruprecht, told Forbes Magazine that competition for high-end consignments has resulted in lower commission revenue, and that an increase in buyer’s premiums was necessary to maintain profit margins and revenue.
Auction companies are getting creative when it comes to finding ways to squeeze more money from buyers; recent discussions have included charging bidders a fee each time they raise their paddle to make a bid (http://bit.ly/19dQFWv) and charging bidders an entrance fee (http://bit.ly/1dhBcsJ).
Some auctioneers prefer to call a mule a thoroughbred horse and refer to their buyer’s premium as a “service fee.” No matter what they choose to call it, U.S. taxing authorities call it part of an item’s purchase price, because whatever the fee/premium is, it’s rolled into the hammer price and the total amount becomes taxable.
So that there’s not any doubt, let me make my position on buyer’s premiums perfectly clear: I abhor them. They are an abomination. They are destroying the auction business. Do I pay buyer’s premiums? Of course I do; but I’m not an impulse bidder. I decide beforehand what items I’ll bid on and what my ceiling is for each item — a discipline gained from years of having to “eat” my bidding mistakes.
Most auctioneers don’t like buyer’s premiums either. But the same auctioneers who decry buyer’s premiums will sell their next consignment contract on the basis of their low commissions, telling the consignor: “We’ll pass along our costs to the buyers so you’ll pay less in commissions.” And guess what? The consignors believe that line. Never has there been a truer case of “the tail wagging the dog.” Rather than increasing the amount of money received by the seller, requiring buyers to pay premiums on top of their winning bid results in lost revenue. The auctioneer, however, still makes money.
Of course, rational people already know this. But rational people also know that buying decisions are made emotionally, not logically. When an auctioneer tells a potential consignor that he will receive higher prices for his goods because competitive bidding drives up prices, he is correct. But it’s what an auctioneer doesn’t say to the consignor that will lose him money.
• Most auction bidders adjust their bids down to compensate for buyer’s premiums.
• Buyer’s premiums are often a deterrent to attending an auction.
A study by Gerding, Rogers, Dash and Jennings at the University of Southampton (UK) titled “Sellers Competing for Buyers in Online Markets: Reserve Prices, Shill Bids, and Auction Fees” states, “Another popular type of auction fee is the buyer’s premium, which is paid by the winner of the auction and is a fraction of the closing price … note that a bidder with a given valuation will correct his/her bid … such that the bid plus the fee … is equal to the bidder’s valuation. Interestingly, since all buyers thus lower their bids, the seller ends up paying the fee even though the fee is originally charged to the buyers.”
An informal online survey conducted by Barbara Crews titled “Buyers Premiums – How Do They Affect Your Bidding” shows the following results:
- Won’t bid if there is a Buyer’s Premium: 40%
- Won’t bid if there is a higher premium for Internet bidders: 19%
- Will bid if Buyer’s Premium is 15% or less: 22%
- Will bid if Buyer’s Premium is 20% or less: 6%
- Will bid if Buyer’s Premium is 25% or less: 0%
- Buyer’s Premium doesn’t concern me if I want the item: 11%.
Although not a statistically significant sample, Ms. Crew’s survey does lead to two unavoidable conclusions:
- Some people won’t bid at all if there’s a buyer’s premium.
- As a buyer’s premium goes up, the number of bidders willing to participate in an auction goes down.
How do those two conclusions affect an auctioneer’s argument about competitive bidding bringing higher prices? It would seem that buyer’s premiums are actually a deterrent to auction attendance, and fewer bidders result in lower revenues.
Related Article: AT Inbox: Readers react to buyer’s premium question
Can auction houses survive if they don’t charge buyer’s premiums? Of course they can. They just have to change their consignor sales presentation and get sellers to realize that it’s more bidders, not lower commissions that results in more money in their pocket.
Legendary bank robber Willie Sutton, when asked why he robbed banks, answered “Because that’s where the money is.” In an auction, the money is where the big crowds are, and big crowds will gather when customers have an enjoyable and straightforward (read: No buyer’s premiums or other financial “hanky-panky”) auction experience.
Auction house owner Linda Balentine has built her business around her bidders, not around her consignors (http://vimeo.com/77931801). By virtue of the fact that she gets big crowds at her auctions, she attracts a steady stream of consignments. Typically, Ms. Balentine moves 1,300-1,600 lots at her monthly auctions – and she doesn’t charge a buyer’s premium. Her consignors keep coming back because they know that having more bidders results in higher prices for their goods, and her bidders keep coming back because – among other things – there’s no buyer’s premium. Linda’s not alone; there are other reputable auction houses across the country that don’t charge a buyer’s premium.
I suspect my position vis-a-vis buyer’s premiums won’t go over very well with my fellow auctioneers. I don’t care. Demographics being what they are, there will be a never-ending supply of consignments in the foreseeable future. The winners in the resale game will be the dealers – auctioneers, estate sale companies, antique dealers – who focus on the buyers’ needs. It’s a buyer’s market; don’t annoy them.
What’s your opinion about buyer’s premiums? Send a letter to the editor and let us know.