BUYER'S PREMIUM: TO CHARGE OR NOT TO CHARGE

by Deb Weidenhamer

Buyer's premiums are increasing in popularity and yet, have created significant industry controversy. Some of this controversy has now spilled over into the auction press. In the May 2001 issue of the Auctioneer (the official monthly publication of the National Auctioneers Association), John H. Miles discusses the positive aspects of charging buyer’s premiums in an article entitled "Buyer’s Premium: To Charge or Not To Charge?". However, Mr. Miles praise of buyer’s premiums is rather faint and his rationalizations for using buyer’s premiums somewhat disquieting.

Mr. Miles' compares the use of buyer's premiums to the illegal marketing tactic of using false markups and markdowns to create the impression of a sale price. He chooses words that carry an implied perception of deceitful behavior ("…buyer’s sometimes fall for that type of gimmick.") Do we really want to promote an industry practice that requires customers to fall for a "gimmick"? Mr. Miles also admits that the introduction of buyer’s premiums into relationships between auctioneers and sellers can be deceptive ("Sellers will be approached with all types of buyer’s premium liquidation proposals that may sound good on the surface…").

Mr. Miles' article attempts to analyze the impact of buyer’s premiums on total auction revenue but does not do so in a balanced way. He focuses solely on the impacts of charging buyer’s premiums of 10% or under while buyer’s premiums of greater than 10% are dismissed as "typically not recommended". Buyer’s premiums of over 10% actually decrease auction revenue and result in 100%, or even 100+%, of the buyer’s premium coming out of the seller's final proceeds. The auctioneer who charges 3% straight commission and 15% buyer's premium may actually be charging the seller the equivalent of 20% straight commission!!

As a counter point to John Miles' previous article in favor of buyer’s premiums, I would like to discuss the negatives of buyer’s premiums.

Buyer’s Premiums Create Intense Buyer Dissatisfaction
I have never heard a single buyer say anything positive about buyer’s premiums. Bidders may become resigned, or even accustomed to paying a buyer's premium, but they don't like the premium. Buyer’s feelings about buyer’s premiums range from simple annoyance at having to constantly subtract the premium from their bid amounts; to rage at having been tricked into paying too much by the use of a "gimmick". In Arizona (my home state), where many auctions do not charge buyer's premiums, bidders will often choose between two auctions on the basis of which auction does not charge a buyer’s premium.If a consultant came to you with a proposal to increase your business revenue by charging your customers an additional 10% that would net you 3% in increased revenue but at the cost of dramatically increased customer dissatisfaction, would you even seriously consider the proposal? High levels of customer dissatisfaction seem a terrible price to pay for an additional 3% profit. Many auctioneers who are adamantly opposed to auctioneers bidding at their own auctions, because of the customer dissatisfaction it creates, don't give a second thought to charging buyer's premiums, which create at least an equal amount of customer dissatisfaction.

Buyer’s Premiums Also Create Seller Dissatisfaction
Educated sellers almost universally dislike buyer’s premiums. They feel, and accurately so, that the buyer’s premium is primarily coming out their own pocket. Sellers also understand that a buyer’s premium may cause a key buyer to skip their auction, costing them top prices for their items. The more experienced the auction seller, the more negative their opinion of buyer’s premiums. The only sellers that seem to like the buyer’s premiums are those that have been erroneously convinced that the premium is not costing them anything.

Buyer’s Premiums Add An Element of Deception to the Auctioneer/Seller Relationship
A candid auctioneer will readily admit buyer’s premiums are just another form of commission. An item worth $1,000 is only worth $1,000, so an informed bidder will not bid $1,100 for the item. The bidder will instead just subtract the buyer’s premium and bid accordingly. Some argue buyer's premiums are service fees and not truly a portion of the merchandise purchase price. The fact that most states require auctioneers to charge sales tax on buyer's premium included as a part of the total transaction amount shows, that at least in those states, the buyer's premiums are legally a portion of the total purchase price. Some auctioneers will even tell a seller they will conduct an auction at no cost because they are only going to charge a buyer’s premium. This assertion seems awfully close to fraudulent behavior considering the sales tax status of buyer’s premiums.When buyers reduce their bid prices to compensate for buyer’s premium, the seller's revenue is negatively impacted -- a fact rarely shared with the seller. The only way an auctioneer can be completely honest is to inform the seller that at least 70% of the buyer’s premium is additional auctioneer commission. It is the rare auctioneer who makes such an up-front announcement. If an auctioneer is not totally forthright about the nature of a buyer’s premium, they introduce an element of deception into their seller relationships.

Buyer’s Premiums Are Often a Tool of Unethical Auctioneers
Many unethical auctioneers use buyer’s premiums to underbid their competitors and to increase their profit margins at the seller’s expense. They fail to mention the buyer’s premium in their auction proposals but have every intention of adding them on sale day. If the seller later objects to the buyer’s premium, the unethical auctioneer explains that the buyer's premium is paid by the bidder and actually increases the overall auction revenue. If the seller is still upset, the unethical auctioneer simply refunds the buyer’s premium and moves onto the next unsuspecting seller.Additionally, a surprising number of sellers (particularly institutional sellers) do not attend their own auctions. Many sellers may never realize an undisclosed buyer’s premium was charged at their auction. If buyer’s premiums were prohibited, buyers could help police the unethical auctioneers by alerting sellers to undeclared buyer’s premiums being charged at their auctions. However, if even a small percentage of auctions charge legitimate buyer’s premiums, unethical auctioneers are free to add buyer’s premiums to every auction they book.

Buyer’s Premium’s Make it Difficult to Compare Competitive Bids
When multiple auctioneers submit competitive bids for the same auction, the seller must evaluate the bids to decide which auctioneer is the low bidder. This is not a simple task when comparing bids that also include the buyer’s premium. Let’s look a hypothetical example:

Most auctioneers would say that Auctioneer One has submitted the lowest bid, but who will actually be awarded the contract? Unfortunately, it is most likely the highest bidder, Auctioneer Three, who will win the contract. What recourse does Auctioneer One have when the contract is awarded to an auctioneer who submitted a dramatically higher true bid?

Auctioneer One could contest the award and declare that Auctioneer Three is intending to charge an undisclosed buyer’s premium. But how do you prove intent when Auctioneer Three would just deny it? If Auctioneer Two wins the bid, Auctioneer One could contest the award and try to explain that the contract was incorrectly awarded due to the complexities of buyer’s premiums. The contracting officer will surely perceive this as reflecting negatively on his/her competency and vigorously fight the effort. Auctioneer One could sue the awarding agency for awarding the contact in error and garner the undying hatred of the seller. The only alternative is for Auctioneer One to attempt to educate the seller about the negative impact of buyer's premiums so the outcome is different the next time the contract is awarded (unfortunately, probably years later). Ironically enough, Auctioneer Two will vigorously defend buyer’s premiums even though buyer’s premiums are what caused them to lose the contract to a much higher bidding auctioneer.

The award of the contract to the incorrect bidder, and all of the attendant negative consequences to both the seller and buyers, could be eliminated by forcing all of the bids to be made on straight commission (an increasing practice in government bids). I know auctioneers who have dropped out of bidding on government contracts because they were constantly losing to higher bidding auctioneers whose bids included declared and undeclared buyer’s premiums.

Conclusion
For the individual auctioneer, the biggest negative of buyer's premiums is that it puts a powerful tool into the hands of unethical auctioneers, who are capable of destroying ethical auctioneers. For the entire auction industry, the negative impacts of buyer’s premiums are even more disturbing. As an industry, we are intentionally creating a highly negative experience for our buyers, adding an element of deception to our seller relationships, and introducing complexity to the competitive bidding process that results in contracts being awarded to the incorrect bidder. As an industry, are these trends we want to encourage? Maybe not, but many auctioneers who are resisting charging buyer's premiums will admit, once even a small percentage of ethical auctioneers begin using buyer's premiums, all auctioneers will have to follow suit or go out of business. By charging buyer's premiums, are we all stepping onto this slippery slope fully understanding the long-term effects on our industry?