by Jim Olson
The Romans were said to have charged the first buyer’s premium at auctions, thus dating the charge back to around the time of the birth of Jesus Christ. However, the modern day buyer’s premium was re-introduced during the mid-1970s by Christie’s and Sotheby’s auctions. The introductory rate they charged was 10%. Often called by the slang term “juice,” buyer’s premiums have been around ever since—and are very common now.
What is a buyer’s premium (BP), some may ask?
A buyer’s premium is a charge or fee (usually a percentage) in addition to the hammer price of an item at an auction. The winning bidder is required to pay both the hammer price (winning bid announced) and a percentage of that price, AKA— buyer’s premium. This percentage may range from 1% to 10% in real estate auctions and from 10% to 30% in art and collectibles auctions. Equipment and car type auctions usually fall somewhere in the middle of those ranges. It is estimated today that over 80% of auctioneers charge a buyer’s premium. How exactly is a buyer’s premium calculated?
Let’s say a piece of art sold for $5,000 and there was a 10% premium at this particular auction. The price paid by the buyer would be $5,500 ($5,000 hammer price plus 10% BP). Taxes and any other applicable fees such as shipping and handling may be added on top of that. But why even charge a buyer’s premium at all?
Auction houses charge a BP for several reasons, but the bottom line is to stay in business and hopefully remain profitable. (As a side note, the main segment of the auction industry, making up most of the small percentage of auctions that do not charge a BP, is the livestock auction industry. Consequently, many smaller livestock auction business have gone under in the last couple of decades because margins were too small to remain in business.) So a buyer’s premium is basically a fee to help cover the escalating costs involved with running an auction business. There are many costs that go into the events that most people do not consider. And a whole new category of costs have evolved during the last few decades with the now, near-necessity, of having auctions offered online. For those who advocate against a BP, maybe try to think of it as a necessary evil in order for the auction to keep bringing you items to bid on.
“But don’t auctions collect a commission from the seller?” some ask.
Most of the time an auctioneer does collect a commission from both the seller and from the buyer. However, as competition for quality items has become greater, commissions charged to sellers went down over time. Before buyer’s premiums were charged, sellers usually paid higher commissions than they do now, even though it is now more expensive than ever to put on auctions. In some extreme cases, if a seller has a particularly rare or valuable item that several auction houses wish to represent, they may actually pay no commission at all and the only way for an auctioneer to cover expenses is through the buyer’s premium. The norm now-a-days, however, is for the auctioneer to collect a little something from each side (seller and buyer) as their profits from the seller’s side has diminished.
In the auction business, there are expenses associated with both the buying side and selling side of the transaction—and expenses associated with the buying side have skyrocketed. As mentioned, a prime example of expenses that did not used to be factors 40 years ago are fees charged by online providers who make it possible for an auctioneer to present items to buyers at their convenience, no matter where they are.
Think about this for a minute: Everyone who shops, no matter where they shop, pays a “buyer’s premium” whether they realize it or not. It may not be called such outside of the auction world, but I submit to you that every purchase has it built in. In a retail setting it’s called a markup, while in auctions, it’s called commissions or premiums—but everyone pays it no matter where they shop.
You see, in a retail setting, the sellers set a price. They factor in expenses and profit margin (and usually a little room for discounts or sales) and then set a price deemed appropriate and that the market will bare. Every retail outlet, from a big box store to a local Mom and Pop, has the overhead and profit margin built into the price a customer pays. Customers just don’t notice all the little fees added in because they are lumped into one number without being broken down.
At an auction, however, the buyers set the price. The price paid for an item will not go any higher than what two or more bidders are willing to bid up to. And the auctioneers’ jobs are to bring those sellers and buyers together. While facilitating these true market discovery transactions, they are typically paid on a commission basis. But just like a retail outlet, there are expenses and profit margins that have to be covered (if they want to remain in business anyway). What auction customers should remember (and factor in) is that even if you add up the fees, etc., the overall purchase price paid at auction is often less, or at least not more than, what one might expect to pay in a retail setting. And there’s always the chance it could be much lower! That’s one of the allures of an auction.
Savvy bidders know about the fees and factor them in. It is recommended to have your maximum bid amount in mind before bidding. That way, you can calculate the buyer’s premium, taxes, shipping, handling and any other applicable fees beforehand and know the amount you feel comfortable bidding up to.
To sum it up, everyone pays a markup/premium/juice or whatever you want to call it when you purchase items. That is the only way businesses selling the items can remain open. While some complain about the fees, the truth is that the market sets them. In an open, capitalistic marketplace, folks who charge too much do not remain in business long. If an auction company (or any other business) charges their sellers too much (or doesn’t pay their suppliers enough), before long they have nothing good to sell because sellers go elsewhere where they are treated better. The same logic applies to the buyer’s premium. If it is too high for the item(s) being offered, buyers will not patronize that auction (business) for long and will go elsewhere. Conversely, if a business does not charge enough, they will not be open long.
Jim Olson is a published author, historian and co-owner of historic Western Trading Post in Casa Grande, AZ, which traces its roots back to 1877! Visit www.WesternTradingPost.com to see what it offers.
Jim Olson © 2021