The buyer's premium is the fee added to the hammer price at auction, but don't be fooled by the term - it's really paid by the seller. Buyers decide how much they want to pay, and take off the premium to work out the maximum hammer price they're willing to bid. If the buyer's premium increases, they compensate by reducing the hammer price they are willing to pay. If a dealer is willing to pay £20k for a picture bought directly from a collector, they're not going to pay £25k for the same picture from auction because there's a 25% premium - the dealer can't sell for a higher price just because they had to pay a buyer's premium.
The seller is paying for the auction house for its services. A higher buyer's premium means that the seller will receive less of the proceeds - so if you're selling through an auctioneer, focus as much on the buyer's premium as on the seller's premium. Over the past few decades there has been a shift from charging seller's premium to charging buyer's premium. Indeed, the average premium income at Sotheby's (buyer's premium plus seller's premium) was just 16.6% in 2011 and 16.3% in 2012, according to their annual report (p.25). Sellers sometimes even pay a negative premium - i.e. they will receive a share of the buyer's premium. Christie's doesn't publish these data because it is privately owned, but I suspect theirs is a bit higher because they sell more lower-valued lots that attract a higher premium.
The shift to buyer's premium has been driven by competition to win consignments. Buyers can't negotiate - it makes no sense to agree a deal where the buyer pays a low premium, but the underbidder would have been charged the full premium. Negotiation takes place with sellers. But auctioneers don't make it easy for buyers to see what they're paying. Estimates reflect only the hammer price, but results include commission, making it hard to compare. Premiums are on a sliding scale, with different rates applied at different price points (e.g. 25% on the first £37,500 at Christie's, then 20% to £750k and 12% thereafter).
As the old master sales are approaching, I've made this handy Excel calculator, currently covering only Sotheby's and Christie's in London. You choose the venue from the drop-down box and enter the hammer price, and it will calculate the total price including commission, and also with sales tax on top of the commission. Some lots attract sales tax on the hammer price as well - you're on your own there I'm afraid! I can't embed the calculator in the blog (probably technological incompetence on my part), but email me at michael dot j dot savage17 at gmail dot com and I'll send you the sheet.
|Auction Premium Calculator|
|Price including premium||£122,500|
|Price including premium and tax||£127,000|
And the other way around, this one calculates the hammer price from the premium:
|Auction Hammer Price Calculator|