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mathIn my travels, I talk with various auctioneers around the country. Not surprisingly, those discussions often involve the “buyer’s premium.”

Such a conversation the other day recounted an auctioneer’s assessment of his community, and the general disdain for this additional charge at public auctions.

“There was only one auctioneer charging a buyer’s premium around here, and his crowds got so small, he closed his doors.” He noted every other auctioneer in his market (including him) only charged the seller.

However, he had an idea.

He wondered if instead of adding 10% to the final bids of his customers, if he could include a 10% buyer’s premium in their bids? In other words, instead of bidding $100 and then having to pay $110, if someone bid $100, such would actually be a bid of $90.91 plus 10% to equal $100.

I told him certainly could do that, but such would be the equivalent of charging a seller commission of about 9%. He concurred, but was curious if calling it a buyer’s premium, sellers would perceive it as a charge to the buyers, rather than a charge to their side?

His strategy was interesting to me. He could sit down with a potential seller and say that instead of charging him or her any commission, he charged instead the buyers — and to make that seamless to them — he even included it in their bids.

One thing this auctioneer will have to watch is how he figures his commission. If he on the one hand charges it as a built-in buyer’s premium, his commission on a $100 sale will be $9.09 versus as a 10% seller commission, which would be $10.

Of course, what’s $0.91? Well, it’s only $0.91 on a $100 sale, but what if he sells a $1,000 item? Then figuring his buyer’s premium as seller commission would give him $9.09 more. On a $100,000 auction total, the difference is magnified to $909.91.

I’m not convinced this is a prudent sales technique, or even a necessary one. In fact, some might consider it somewhat deceptive. “We aren’t charging you, the seller, anything?” when we are in essence charging you, the seller, a commission from the final bid price?

And it might be worth noting that even auctioneers who charge a buyer’s premium in addition to the final bid price are often times effectively changing the fee and profit structure in adverse ways. As we wrote here: https://mikebrandlyauctioneer.wordpress.com/2011/04/02/the-net-effect-of-the-buyers-premium/

So, what have we discovered:

If bidders disregard the buyer’s premium when bidding, the same buyer’s premium nets the seller and auctioneer more.

If bidders correctly calculate the effect of the buyer’s premium, the seller nets a bit more, and the auctioneer earns a bit less.

If bidders miscalculate the effect of the buyer’s premium, the seller nets about the same, and the auctioneer earns less.

It is material that only if bidders disregard the buyer’s premium does the auctioneer earn more than by charging the same seller commission. I wonder how many bidders are now still totally disregarding it.

And if bidders are disregarding it, why aren’t auctioneers charging a higher buyer’s premium? https://mikebrandlyauctioneer.wordpress.com/2013/09/12/the-buyers-premium-doesnt-matter/

Nevertheless, back to our original question: What about charging a buyer’s premium, but including it in the final bid prices as they are made? Certainly unusual, but allowable and permissible with the seller’s knowledge and consent.

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. He serves as Adjunct Faculty at Hondros College of Business, Executive Director of The Ohio Auction School and Faculty at the Certified Auctioneers Institute held at Indiana University.