The Buyer’s Premium was a creation of the two major English auction houses, Sotheby’s and Christie’s of London. The auctioneers at these two firms invented the premium, proved its worth, and ultimately exported it around the world. It was first introduced to North America in 1975, where Christie’s New York Gallery first implemented a 10% buyers premium (it’s now 20%). Within days, Sotheby’s Manhattan Gallery quickly followed suit, and since then it’s been a growing tool in use by all progressive auction companies.
Basically, A buyer’s premium is a marketing tool used by auctioneers to induce sellers to bring quality assets to auction. The premium is a stated percentage that an auctioneer adds to the highest bid for each lot sold to determine the lot’s selling price. It’s a price surcharge provided for in the terms of the auction and assessed against buyers on their purchases.
Here’s how it works. If an auction charges a 10% buyer’s premium and a lot is sold for $100, the lot’s selling price is $110. The price is calculated by adding the 10% surcharge ($10) to the $100 hammer price
Understanding a key principal of auctioneering explains a lot about the popularity and growth of the buyer’s premium. An auction equation has two sides, the buyer who comes to purchase the goods up for auction, and the seller, who offers the goods for sale. Since the Depression Era, the sellers have been more valuable to the auctioneer than the buyer. That’s because sellers of quality assets are much harder to get than are quality buyers for those assets. If this weren’t true, every auctioneer would be booked solid with quality auctions, and that’s far from being the case.
The foremost challenge facing modern auctioneers has nothing to do with conducting an auction. It centres on the constant struggle to attract sellers of quality goods. It’s much easier for auctioneers to attract these sellers if they can offer a worthwhile incentive, such as a reduced selling commission. The buyer’s premium makes it possible to provide this inducement when an auctioneer either (a) does not increase his commission rate, as business overhead would otherwise warrant, or (b) actually reduce the rate.
The buyer’s premium has become an invaluable marketing tool. It was designed to lure sellers to the auction markets by offering them reduced selling commissions. An auctioneer can afford to reduce (or at least not increase) a commission for a seller by offsetting the reduction with the use of the buyer’s premium, along with the seller’s agreement to pay the premium collected to the auctioneer as an additional selling commission. This commission flexibility is powerful bait that brings many desirable goods to the auction markets that would not otherwise be offered. Some buyers overlook this advantage of the premium, while others jump at the chance to buy goods that they would not otherwise see at auction.