What it means
The firm traces its origins to London in the eighteenth century and has operated internationally for a long time. It was publicly listed for many years before being taken private, and its financial results are therefore not as widely reported as they once were.
An auction house acts mostly as an agent. A seller consigns an item, the house advertises it, experts value it, and buyers bid in the saleroom, online or by phone until the hammer falls on the highest bid, which is called the hammer price.
Revenue comes from two main sources. The seller pays a commission, usually a percentage of the hammer price, and the buyer pays a buyer's premium on top of the hammer price, so the house is paid twice on each sale.
Some houses also charge sellers for insurance, photography and catalogue space. Auction houses also use financial tools.
They may offer a guarantee, promising a seller a minimum price whatever happens in the sale, or advance cash to a seller against an item they have consigned, and both bring risk if the work sells for less than expected. For a non-finance reader, the main lessons are about market structure.
Fees and the final price depend on the quality of the item, the number of bidders and the economy, which makes revenue lumpy from one season to the next. Auction fee rates are set by each house and change over time, so always check the current terms before consigning or bidding.
Taxes, shipping and insurance usually add to the total cost, and international buyers may face import charges as well.
In practice
Real-world examples.
Example
A family decides to sell an inherited collection of antique watches. They consign the pieces to an auction house, which values them, markets them to collectors and handles the sale. After fees, the family receives less than the hammer prices but avoids searching for buyers alone. The sale also gives the family a clear, public record of the price achieved, which helps with estate accounts and tax.
Example
A corporate art adviser bids on a painting on behalf of a company that wants to decorate its new headquarters. The adviser's budget of $300,000 must cover the hammer price plus the buyer's premium, so the bidding limit is set well below $300,000. Shipping and insurance are added to the budget as well. She sets the bidding limit at $240,000 so that the premium and extras stay within the approved amount.
Example
An investor weighing collectibles as an asset class studies past auction results for wine. The investor adjusts the returns for buyer's premium, seller's commission and storage costs, and finds that a rise of 12% in hammer prices is worth much less after those costs are deducted. He concludes that collectibles need large price rises just to break even.
Formula
Calculation
Total cost to buyer = hammer price + buyer's premium
Net proceeds to seller = hammer price - seller's commission
Auction house revenue = buyer's premium + seller's commission
Assume a painting sells for a hammer price of $400,000, a buyer's premium of 20% and a seller's commission of 10% (illustrative rates). The buyer's premium is 400,000 x 20% = $80,000, so the buyer pays 400,000 + 80,000 = $480,000. The seller's commission is 400,000 x 10% = $40,000, so the seller receives 400,000 - 40,000 = $360,000. The auction house earns 80,000 + 40,000 = $120,000, or 30% of the hammer price.Case study
Seen in the real world.
Marlowe and Vance is an illustrative, fictional auction house that sells fine art and jewellery. In a strong season it earned $50,000,000 in total fees, but a slowdown cut the following season to $32,000,000 because owners withheld their best items.
Most of its costs were fixed, including staff, salerooms, catalogues and insurance. When revenue fell by $18,000,000, profit fell much more sharply, since only commission-linked costs reduced along with sales. A cost base like this is called operating leverage, because small changes in sales lead to large changes in profit.
The illustrative finance director responded by growing online sales and by adding valuation services that earned fees whether or not an item sold. This made the business less dependent on a few headline auctions and smoothed its earnings. The board also started reporting results over a rolling twelve months rather than by individual season.
Watch out
Common mistakes.
- Forgetting the buyer's premium when setting a bidding budget, so the real cost is far above the hammer price.
- Assuming the auction house owns the items it sells, when it usually acts as an agent for the owner.
- Treating auction prices as a guaranteed measure of value, when they reflect who happened to be bidding on one day.
Questions
People also ask.
How does Sotheby's make money?
Mainly through commissions charged to sellers and premiums charged to buyers, with additional income from services such as valuation, financing and private sales.
What is a hammer price?
It is the final winning bid called at the auction, before the buyer's premium, taxes and other charges are added.
Why do sellers use an auction house rather than selling privately?
Auctions create competition between bidders, give public price discovery and add credibility through expert authentication, which can raise the final price. Sellers also benefit from the house's marketing reach and its access to international collectors.
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