Psychology of the Buyer's Premium

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Posted By: barrysloate

A short article in this morning's New York Times reports that due to first quarter losses, Christie's will be raising its buyer's premium to 25% for the first $50,000; 20% up to $1,000,000; and 12% for everything over $1,000,000. Christie's states another reason for the increase is that consignors now demand the hammer plus a percentage of the final sale price.

It's the latter reason that interests me. What is the psychology behind raising the BP every time consignors demand a higher take? Soon we will see a 40% BP because consignors want hammer plus 20%. Wouldn't the same thing be accomplished by doing away with the BP and giving consignors say 80-85% of the hammer?

The BP made more sense when the buyer paid 10% and the consignor got 90% of hammer. In that example, the fees were equally split between buyer and seller. Now they are so skewed they seem a bit comical. It's a constant tug of war between consignor and auction house.

Anyone else feel it's time to reconsider this commission scale?

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Posted By: Rob D.

We'll never know the answer, but I always wonder how many people don't factor the BP into their bidding, i.e., if they want to pay $10,000 for an item, they'll bid that amount and then simply pay the BP, no matter what it is, and consider it the cost of doing business.

I'm the opposite. If $1,000 is my limit, I figure out what amount I can bid so that when the BP is added, I'm around that $1,000 mark.

My guess is that because BPs keep increasing, auction houses believe that many bidders don't let the percentage impact their bidding. But you'd think that consignors would realize that higher BPs at least have the potential of negatively impacting prices realized (before the buyers premium).

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Posted By: Anonymous

some people are just dumb and don't consider the BP when they bid. Others get fooled by accident. Most do consider it, but you only need a few stupid bidders to make it effective. But raising it too high will also get their attention sooner or later. I wonder if 25 percent cross the line. I would not be thrilled to own Christie's stock.

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Posted By: Jason L

the entire concept of a buyer's premium is completely asinine.

Think about it - paying someone to sell you something is pure insanity.

I understand that if there are premiums added all over the pace, the true cost of the item is still found in the market, but let's stop playing around. The house should take a commission of the final price, net goes to the seller, and let everyone bid to their hearts' content!

I am a very open and rational and nice person, generally; however, this is one thing that I truly don't think anyone will ever get me to change my mind about. Ever. Like eating babies. You just don't do that.

The cost/burden should be entirely on the seller/consignor relationship.

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Posted By: leon

In reality it IS on the seller if the buyer is smart enough to factor in the BP. There should be a reduced final price when the BP is factored in...but as King says...there are probably some that don't do that. I do as most BPs are significant....

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Posted By: barrysloate

I would prefer to go back to no buyer's premium and just take a fee from the consignor, but I don't think it would work. Seller's are reluctant to pay more than a small fee.

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Posted By: Ed Hans

Barry,

As always, an interesting and thought-provoking post. As usual, the answer lies in market economics. Two decades ago, sellers of high end sports memorabilia had a fairly limited number of choices when it came to liquidating their material. Today there are scores of auction companies with expertise in this arena and the resources to attract a large pool of potential buyers. Simply put, there is fierce competition for top end material. In order to woo potential consignors, auction companies have reduced their fees to potential sellers to the current point of negative percentages (ie hammer plus x%). All the while their costs have risen roughly in proportion to the rate of inflation. The only way they can stay in business is to make it up on the back end (the buyer's premium).

In theory, the market will factor the BP and shipping cost into the final bid, thus negating any benefit to the consignor, since the hammer price should depressed due to the back end costs. While this may not apply to museum quality, one-of-a-kind pieces, it usually does with 90% or more of the merchandise in auctions. At some point, we will reach the point where hammer fees simply can't be increased further. I suspect 25% is not the top.

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Posted By: Eric Brehm

Maybe I'm missing some subtle psychological effects, but to me this is simple.

As a buyer, the only thing I care about is the size of the check I have to write when the bill comes, which includes the buyer's premium. Not to take it into account is simply foolish. It doesn't really matter to me how much it is -- if the BP were 100% (i.e. doubling the hammer price), I would simply bid 50% of the price I am willing to pay. Not many people would want to consign to a seller than charged that much, but as a buyer, that is not my problem.

As a consignor, the only thing I care about is the size of the check I receive after my item sells. That would be the total amount the buyer pays, less the BP and the seller's commission (if any), both of which the seller keeps. It doesn't really matter to me how much the BP and the commission are individually; only the sum of the two matters.

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Posted By: barrysloate

Ed and Eric make good points, that in the end it is all about the bottom line. But there is something about charging the seller nothing that seems to entice consignments. And the auction house responds to this by raising the BP. So nothing really changes except how the commission is calculated.

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Posted By: Jim VB

The auction industry is one of the few that attempts to collect a fee from both sides of the transaction. Most industries (e.g. - car dealers, real estate, retail commission sales) collect their money from the side of the transaction RECEIVING the money.

The only other comparable I can think of is Wall St. where brokers collect from the buyer AND the seller. Interestingly enough, that industry is under pressure from discount brokers (who aren't doing so well themselves these days.)

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Posted By: Cat

Christies' economics doesn't make any sense. They state they are raising their BP because of 1) their losses, and 2) seller's are requiring a portion of the BP at this point. Seller's are making a statement on what Christies services are worth. Christies seems to simply be forcing sellers to chase that figure (sales price +) upward as their BP moves upward.

If I am a seller and believe that the auction house total commission is worth 15% (and this in a manner of words is what Christies seems to be saying), I am going to do the math and make sure that is their take - no matter what the BP is.

On a personal basis, as a buyer, I believe raising the BP has a negative impact on my bidding. When Mastro went to 20%, I thought it was egregious and didn't bid for several auctions because in my mind 20% was a rip-off -- even if mentally I was recalculating my bid to arrive at a sum-total bid which was the same no matter if the BP was 20% or 17.5%. As the title of the post reads, it's "psychology" and in this case "negative psychology." I have bought a couple items from Mastro since the 20% BP, but not as much as I used to.

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Posted By: Alan

Eric B. - Hell of a response. I agree 100 percent !!!

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Posted By: Wesley

I remember the same incident when Mastro raised it's buyer fees to 20%, that Cat is talking about. That increase to 20% caused quite a stir when that happened, with many collectors vowing to reducing their participation in Mastro or stop bidding in Mastro altogether.

What was more egregious about that incident was Mastro had already accepted consignments with consignors who thought the buyer fee was only 17 1/2 %. The 20% buyer fee was only revealed when the auction opened up for preview. Buyers can always factor in the fees into their bidding, but as a consignor I was unable to factor in this moving target.

This is exactly the type of disclosure and transparency that is crucial in the hobby and auction business.

I reduced my bidding for a few auctions, but like most people, I returned to bidding in Mastro taking into consideration the increased fees when placing my bids. But since that time, I have not sent additional consignments to Mastro.

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Posted By: boxingcardman

Reality, as others have stated, is that there are enough venues for sellers of really great stuff to allow them to demand 0% or even negative commissions (FWIW, I happen to think a total hit of about 20% is a fair figure for avoiding the hassle of listing, collecting, accounting, posting, etc. via Ebay). However, there are also enough sellers who won't have the leverage to get a cut of the BP. Raising the BP thus creates a pool of additional money from the people w/o the leverage to demand a cut; I suppose the auctioneer is thinking that the extra money from the BP will cover the commission and BP concessions needed for major items.

I think we are reaching a tipping point on BP, however, at least for "standard" cards. If the sum of BP and commission reaches a level that reduces the net to the seller to around the wholesale (dealer) price, it would make more sense for a seller to simply lay down his cards at a show and take cash from a dealer for them, rather than going to the trouble and delay of selling through an auctioneer.

Another "problem" is the phenomenon you see with car sales: customers wait for a sale. When the auctioneers started touting 0% commissions and the like, they started conditioning consignors not to consign at the rack rate.

Personally, since I can add, I don't care what the BP is as a buyer; I just deduct it from my bid. However, it seems to me that the auctioneers could greatly simplify their accounting by switching back to a commission-based structure.

I wonder if anyone has studied the various bidding structures empirically to see what works best for the auctioneer?

Sic Gorgiamus Allos Subjectatos Nunc

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Posted By: CoreyRS.hanus

Sensational issue, Barry.

In theory buyers should take the BP into account in deciding how high to go. In practice my guess is that some don't. Presumably Christies has been advised by people with expertise in bidder/seller psycology who probably opined one of two things: (1) a higher BP will generate a higher gross for auction, or (2) even if the BP reduces the auction's gross, that will be more than offset by the better consignments the auction house will garner by being after to offer (some) sellers a negative SP.

A really interesting subquestion is whether the auction format (e.g., (i) live or (ii) internet with lots closing after a certain period of inactivity) has any bearing on the profitability of a higher BP. My sense is that the higher BP would work better in a live auction. Such a format encourages more impulsive decision making and less time to calculate the impact of the higher BP on the final price, especially when a bidder has decided to exceed his predetermined limit on how high to go.

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Posted By: leon

Corey, my good friend, you sound like you have some experience here (on the sub question)....

edited to clarify

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Posted By: barrysloate

Good point Corey.

A live auction succeeds partly because bidders often have to make some snap decisions, most of those being to raise what they thought was their maximum bid. That's less likely to occur in an internet auction, when those final hours drag on (another reason why the 4:00 AM closing time may not be productive) and bidders are not fighting impulses, but instead fighting fatigue.

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Posted By: Bruce Dorskind

Whilst we agree with the observations of our esteemed colleague and respected
dealer, Mr. Sloate, as well as those comments so eloquently articulated by
legendary 19th century collector Corey Shanus, we would like to make two additional
observations.

Dealers. at least in the baseball card hobby, are quite ready to drop their "draws" and
eliminate their seller's premium for any graded item with a value of $500. We wonder,
for example, what percentage of the graded baseball cards sold in the last 10 M (Mastro, Mile High and MemoryLane) Auctions commanded a seller's premium at all?

In the few cases where we have considered selling an extremely rare and valuable item,
the major auction houses (not REA) offered us an arrangement where there would be no
seller's premium and we would split the buyer's premium.

Our friends in the rare coin business basically work on a total premium of 7.5% to 10%.
They waive the seller's premium and rebate between 1/3 and 1/2 of the buyer's premium
in order to secure a major collection.

The big question is which matters more the premium or the Auction House? Based on our experience,
non commodity items command a much higher price when one deals with a knowledgeable auction house.
Descriptions and marketing really matter. and they cost a great deal of money.

Both Christie’s and Sothebys have fallen short when it came to baseball items (at least post Copeland and Halper).

Accordingly, if one is selling a truly valuable item, regardless of the fee arrangement, one must consider the auction house's reputation, industry knowledge and marketing strategy.

As a buyer, we always consider the premium to be a part of the purchase price.

We appreciate your consideration.


Bruce Dorskind
America's Toughest Want List

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Posted By: Jason L

that i'd get someone to comment on my "eating babies" comment!!!
man, tough crowd.
too serious a subject, I guess, to tolerate my silliness.

Barry, we need some Seinfeld zingers soon.

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Posted By: JimCrandell

The buyers premium is a non-event.

Buyers factor it in all the time unless they are stupid.

Sellers kick back a part of the buyers premium to the seller.

There are enough auction houses that if one doesn't like the percentage kickback on the buyers poremium one can go to another auction house.

The only losers are those unsophisticated enough to not demand a split of the buyers premium.

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Posted By: barrysloate

Jason- maybe the dingo ate your baby!