A Big Discount on the Premium: Sotheby's Radically Changes and Simplifies Fee Structure

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Not even a TI-83 calculator could spare you from the complexities of calculating the final sales price of a Sotheby's auction lot based on the current bid. Or worse, backing into the hammer price from the final sales price. We've been there. Often. It was way harder than it should've been, and for prospective bidders and consignors, tedious math doesn't appeal.

But that's all set to change.

‍In a surprise move revealed last week, Sotheby's announced that it's simplifying both its buyer's premium and seller's commission schedules, removing mental gymnastics from a needlessly complicated process. On the whole, buyer's premiums will decrease, while commissions will be more transparent and uniform. The move ensures greater simplicity, lowering confusing barriers to entry for new auction participants, and, ideally, boosting overall activity. As houses seek to attract new, younger bidders and consigners, simplicity and clarity are calling cards worth leaning on.

Let's break down the changes, which will go into effect in May.
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Currently, the buyer's premium adheres to a dizzying, three-tiered schedule:

• Hammer price under $1 million - buyer's premium of 26%. That's the easy one.
• Hammer Price between $1,000,000 and $4,500,000 - 26% buyer's premium on the first $1,000,000, as well as a 20% premium on the portion above that level. Get those calculators ready.
• Hammer price greater than $4,500,000 - 26% on the first $1,000,000, 20% on the $3,500,000 between $1,000,000 and $4,500,000, and 13.9% on any amount of the hammer price above $4,500,000. Probably time to crack open Excel.

In addition, all lots incurred a flat 1% overhead fee. Because why not?

See? Complicated.

With the proposed changes, bidders will now incur a 20% buyer's premium on the hammer price up to $6,000,000 and a 10% premium for the portion of the hammer price above $6,000,000. The pesky 1% overhead premium is no more. So, the vast majority of lots will have a simple buyer's premium of 20%, in line with many smaller auction houses. You can put the calculators away, move the decimal point to the left, and double it. Then add it to your hammer price. Voila: your sales price.

What does that mean in practice?

A lot that hammers for $1,000,000 will now have a final sales price of $1,200,000, $70,000 less expensive than $1,270,000 previously. A lot that hammers for $6,000,000 will have a final sales price of $7,200,000, $28,500 lower than $7,228,500 previously.

And what about the big dogs? A $50,000,000 hammer price will now translate to a $55,600,000 sales price, a savings of $2,184,500 versus the old schedule. Of course, maybe "savings" is the wrong word choice here. Because here's the thing: to a buyer, the sales price is the sales price. The buyer cares little about how that price is divided up between hammer price and buyer's premium, or between the seller and the auction house. Their total willingness to pay shouldn't change materially as a result of changes in the coefficients of those variables. When they receive their final invoice, they're not really "saving" anything, unless you believe bidders are focused solely on hammer price and are surprised each time their winning bid is inflated by 27% or thereabouts.

While we're sure that happens from time to time, it's more the exception than the rule. Bidders are generally at least approximately aware of the projected sales price with fees as they're bidding, and that's the number that matters to them.

‍The changes do, however, mean more cash in consignors' pockets than before, because if sale prices remain roughly the same and buyer's premium is lower, that means hammer prices will be higher. It's the hammer price that informs proceeds to the consignor, though seller commissions are sometimes deducted. Perhaps the least transparent and most closely held economics of the auction world, though, have been those seller commissions, meaning the percent of the hammer price that goes to the auction house (not to be confused with the buyer's premium, the percentage of the hammer price added on to what the winning bidder must pay, also directed to the auction house).

These commissions are oft-negotiated and rarely known to the bidding public or prospective consignors. Basically, the consigning conversation starts with the consignor revealing what they have and negotiating toward a commission structure from there. That contributes to vulnerable feelings for the consignor, who's left unsure of the fairness of the deal they're getting, encouraging them to shop it around.

The negotiations are all but over now. Here's how the seller commission schedule breaks down:

• Low estimate lower than $5,000,000 - 10% commission up to a $50,000 maximum (reached at $500,000 hammer price)
• Low estimate between $5,000,000 and $20,000,000 - Commission waived
• Low estimate between $20,000,000 and $50,000,000 - Commission waived and 40% of BP paid to the seller
• Low estimate above $50,000,000 - Bespoke (translation: room for negotiation)

Imagine the resources and hours that will be freed up for Sotheby's employees who no longer need to have those cumbersome commission negotiations. While there will no doubt be attempted haggling, the establishment of a concrete schedule removes considerable friction from the process. And less friction is welcome to the house and prospective clients alike.

One area where the haggling will surely continue? Estimate setting.

Sotheby's will now receive a 2% performance fee for any lot that hammers above the high estimate. Consigners already want to see expensive estimates on their treasures in many cases. That desire will only be amplified now that Sotheby's is directly compensated for hurdling the high estimate. Contentious conversations lie ahead.

Overall, though, simpler and more consignor-friendly terms should, in theory, mean more consignors and better consignments. Better consignments attract more bidders. Those bidders become repeat bidders and eventually consignors. Sotheby's has made the bold move first, and while the house may sacrifice on fees in the short-term, it's betting that the share gains, particularly among newcomers to the auction scene, will make it more than worthwhile.

‍After enjoying a very slight fee discount to its chief competitor in recent years, Christie's is officially on the clock...and in an unenviable position. Follow suit immediately and look like a copycat? Or hold firm and look greedy by comparison?

First mover advantage.

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