This article is taken from the July 2024 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

“We thought the protest was an extremely dignified one. They could not have done it in a nicer way,” said Graham Llewellyn, deputy chairman of Sotheby’s and auctioneer at a silver sale in 1975 after a walk-out of silver dealers during an auction following the introduction of the 10 per cent buyer’s “premium”, or fee. 

Though this event nearly half a century ago was certainly from a different era, it marked the shift in how business is done at art auctions. Auction houses have a fiduciary responsibility to the seller, not to the buyer. Surely, it makes sense to ask the seller to pay a fee. 

This is how much of the art market works : you go into a gallery, ask the price, maybe haggle a bit and pay. If there is a premium, or profit, it is already part of the asking price. But, at auction, when the hammer comes down the actual price paid by the buyer is much higher — as a huge fee is added, today often as much as 30 per cent. 

since it was first introduced in 1975, the buyer’s premium — or fee — has been the source of legal dispute, frustration and irritation, angst and, for the auction houses harvesting the premium, their source of profit. There were (and still are) geographic variations in the fee charged to the buyer which has crept up over the past 30 years. 

This inevitably puts downward pressure on estimates

Since 2013 the major houses have tweaked the buyer’s premium several times, usually by amounts small enough to not frighten the horses, but significant enough to affect auction houses’ bottom line profits. 

Sneakily, in August 2020 Sotheby’s added an extra 1 per cent “overhead premium” for buyers. This is important, as the net profits of auction houses are not public — Christie’s, Sotheby’s and Phillips are privately owned — yet it is well known that, for all the billions of dollars of turnover, expensive picture sales, international profile, large auction houses return astonishingly low amounts of net profit. 

Buyer’s premium matters as the viability of the auction house business model depends on its application. 

Today, at the lower end, sellers can expect to pay anything from 0 to 15 per cent whereas at the top end of the market, depending on the value, rarity, desirability of offered work or collection, the seller (or their advisors) may be able to sell for no fee and even scoop a hefty percentage of the fee charged to the buyer, known as an “enhanced hammer” deal. 

Thus, the auction house gambles on winning business at the expense of giving away a significant percentage of the valuable buyer’s premium. 

Those expensive pictures sold at huge prices by Christie’s and Sotheby’s deliver crucial marketing and exposure, but rarely deliver bottom-line profits. The “sweet spot”, where auction house profits are maximised, is usually much lower down the value scale, somewhere between $200,000 and $2m. And this is where it gets interesting. 

In May, Sotheby’s streamlined its buyer’s fees: 20 per cent up to $6m and 10 per cent above that. Radically, a 10 per cent seller’s fee for all items below $500,000 is now non-negotiable (and from $500k-$5m there is no commission at all). It has removed the “overhead premium” but kept the 2 per cent “success fee”, which is an additional reward for the auction house if something exceeds its high estimate. 

This inevitably puts downward pressure on estimates. For anyone following the art market, this is fascinating stuff : historically, Christie’s and Sotheby’s have man-marked each other, and the rest of the auction world has generally followed their lead, eyeing profits while lowering overhead costs. 

For now, Christie’s are sitting back, watching and waiting: will they be offered quantities of items below $500k, a traditional sweet spot of profit, simply by undercutting Sotheby’s fixed seller’s rate of 10 per cent? Have Sotheby’s fixed their business model on winning consignments above $500k, leaving the lower market to others? 

A recent newsletter from art advisor Josh Baer suggests it’s all about profit — at the seller’s expense: “in almost all sales at lower levels at Sotheby’s, we calculated [the seller] will receive less. Now this may be a good strategy for Sotheby’s as it raises their own profitability, but will their volume of consignments go down as sellers will choose alternatives (like private sales, Christie’s, or Phillips)?” 

The newsletter gives three examples of works sold at differing price points noting Sotheby’s profit from the new fee structure is greatest within the $200k – $1m price point (around 20 per cent more). Sotheby’s claims it has introduced a degree of “clarity when buying and selling property”. But it is to the detriment of the seller.