Auctioneers charging those buyers with an additional fee?
Likely this is counter to the terms of the merchant agreement the auctioneer signed.
So, what can (and do) auctioneers do? They can charge everyone a “buyer’s premium” of, say 13%, and then discount that buyer’s premium to 10% for those paying by cash or check, and in essence recover 3% then for those using credit and debit cards.
Really, auctioneers can do that? Yes, they can. Except, a quick mathematics lesson may be in order. If the auctioneer is paying 3% to their credit card processor, then they aren’t really recovering their costs completely by this simple method.
- If Gail purchases $100 (hammer price) of goods at the auction, and pays cash, she will pay $100 + 10% or $110. Typically, the seller receives the $100 minus any seller commission, and the auctioneer earns the $10 in buyer’s premium.
- If Denise purchases $100 (hammer price) of goods at the auction, and pays with a credit card, she will pay $100 + 13% or $113. Typically, the seller receives $100 minus any seller commission, and the auctioneer earns the the $13 in buyer’s premium.
For Gail’s purchase, the mathematics are fairly straightforward. Since there are no processing fees, the buyer’s premium is simply $10.
For Denise’s purchase, the mathematics are not as straightforward. The auctioneer attempting to offset a processing fee of 3% (presumably thinking the charge would be $3 on a $100 charge) is actually charged $3.39.
In this latter case with Denise’s purchase, the auctioneer earns $13 in buyer’s premium but is out $3.39 in processing fees, so the net is $9.61 — not the $10 he thought he was netting.
The basics of this mathematical calculation are that if any number (x) plus a percent (p) is then multiplied by that same percent (p) — that product is greater than the percent (p) itself. That’s because (p) is being multiplied by (x plus p,) which must be greater than x times p.
But, that’s only $0.39 so it’s no big deal.
Okay, fair enough, but what if Denise’s purchases total $100,000? If she pays with a credit card, her total bill is $113,000. The auctioneer runs her card, incurring a 3% fee on the total charge of $113,000 which is $3,390. Yet, his buyer’s premium — in excess of the 10% he would have otherwise earned — was only $3,000. He just lost $390 in fees.
What’s the solution?
The key to covering costs is to correctly calculate the difference between the total buyer’s premium and the discounted buyer’s premium. This can be done one of two ways: Fix the total buyer’s premium, and calculate the discounted buyer’s premium, or fix the discounted buyer’s premium, and calculate the total buyer’s premium:
- If 13 represents the total buyer’s premium, and 3 is the true processing charge for credit cards, take 13-([(13*3)/100]+3) = 9.61. Therefore, the discounted buyer’s premium should be 9.61%.
- If 10 represents the discounted buyer’s premium, and 3 is the true processing charge for credit cards, take [(10+3)/(100-3)]*100 = 13.40206186 or about 13.4. Therefore, the total buyer’s premium should be about 13.4%.
Clearly, the second method resulting in two fees of 10% and 13.4% makes the auctioneer more money than the first method resulting in two fees of 9.61% and 13%. However, both equalize the profit for all types of payments.
As an auctioneer, are you charging the right charge for the charge?
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.