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March 2015

Yikes! Avoid Auction Pricing Confusion

US-Fundraising-Auction-Terms

During a recent series of posts about Fundraising Auctions,
 readers asked for clarification on some terms often associated with auctions and pricing practices. In addition, many of us enjoy watching Antiques Roadshow and listening to their "experts" who use various terminology for the items being appraised such as "at auction", "replacement value", and "insurance value".
 
Us-eye-with-tearYikes this is potentially confusing
.... and when each of us is left to our own interpretation, the misunderstandings may lead to disappointment, frustration, and pricing disasters for artists, makers, and sponsors.   

Part of being an advocate for the arts is trying to avoid confusion. As artists we want the pricing of our work to be consistent across all contexts (if possible).  Consistent pricing is a worthy objective.  Erratic or inconsistent prices may confuse potential customers, collectors, or clients -- or may cause them to question their own judgement if prices seem to vary arbitrarily.  This is especially true when price comparisons can be made at a moments notice by looking at the internet on their phones.

Here are the most common and generally accepted pricing terms and definitions:  

Us-RETAIL-PRICE
"RETAIL PRICE" 
is what the gallery/store/exhibition sponsor lists as the selling or retail purchase price in the catalog or on the “price list.” 

 

Us-wHOLESALE-PRICE
The "WHOLESALE PRICE" is the cash amount that the artist expects to receive as payment. This is sometimes called the “artist price”, but I'd recommend never using the term "artist price" because it may imply different things to different people.  The "wholesale price" might be calculated with a formula (such as 50% of the Retail Price or a 50/50 split with gallery, or 40/60 on consignment), but ultimately wholesale price is the payment that the artist expects to receive.  If the gallery/store is purchasing your work at wholesale, then they may decide to mark up your work with a different formula all together. 

 

Us-INSURANCE-VALUE.
Insurance value may change depending on the circumstances, so be sure to clarify precisely what is intended by both sides.  If there is ever an actual a claim for damaged work the insurance company will demand proof or documentation to validate the amount of the insurance value.  Documentation could be an invoice for selling similar items at a wholesale or retail price depending on the circumstances. A photocopy of a check or even a credit card invoice for a purchase can work. Another option is an appraisal.

Typically, "INSURANCE VALUE" for most artists, galleries, and exhibition sponsors equates to the wholesale price. Most insurance companies will only pay the artist the wholesale price if the work is lost, damaged or stolen during shipping or at an exhibition because this is what the artist would receive if the work had sold.  

However, "Insurance value" steps up to the retail price IF the artwork is sold at retail. The invoice for purchase at retail will be the documentation an insurance provider wants to see to establish the insurance value at the retail price.

Insurance Value is a term often used on Antiques Roadshow and in that context it is equivalent to what it would cost to replace the item. In that case, it is usually a high retail price because of the difficulty in finding a replacement for a rare or unusual item. 

 

Us-rESERVE-pRICE
"Reserve Price"  

The Professional Guidelines Committee recommends that the auction sponsor set a “reserve price” for work offered in an fundraising auction. The “reserve price” is the price below which the artwork will not be sold. This reserve would ideally be 80% of the retail price. The artists should be offered 40% of the retail price for their donations. The art organization will receive 40% of the retail price for fundraising and the collector has the possibility of receiving a 20% discount. Work sold above the retail price (as a result of generous bidding) creates additional revenue for the auction sponsor.

 

Us-MINIMUM-BID
"MINIMUM BID" is the starting point in the bidding of a “live” or “silent” auction. The Professional Guidelines recommends that the minimum bid start at the wholesale value. In practice this is rarely done. Bidding often starts very low, so make sure to clearly specify a reserve price to avoid having your work sold at auction at an embarrassingly low price. 

 

Us-BID-to-OWN
BID TO OWN” is usually full retail. If the bidder decides to place a “bid to own” early in the auction, no further bids are accepted. This is the winning bid.

 

 

US-At-Auction
"At auction"
 is often heard on Antiques Roadshow when they are giving a value for an item. Most of the appraisers are talking about a competitive live auction scenario at an auction house specializing in that type of work.  However, in practice, most winning bids at auction houses are often closer to wholesale (unless is it a rare item with a lot of competitive bidding). 

Don't let Antiques Roadshow terminology or their references to rarified auctions mislead you as an artist participating in local area fundraising auctions. These are two different animals.  

Antiques Roadshow has a whole page "Understanding Our Appraisals" that is worth reading. They also have a page How to Speak Auction. Keep in mind they are not talking about Fundraising Auctions, but the terms do sometimes overlap or they are confused. It is definitely worth taking time to understand the auction pricing terms in all contexts to be informed.

In the future, I would avoid use of the following terms because the definitions are vague or interpretations vary irrationally. If you are invited to a show or exhibition and see these terms in the prospectus, ask for clarification.  

  1. Minimum Value
  2. Artist Price
  3. Fair Market Value


 

 


RELATED Posts:

In$urance Value, Whole$ale Price, Retail Price - Under$tand the Money

What is "Fair Market Value" at a Fundraising Auction?

What Does Minimum Price Mean?

Fundraising Auctions & Conflicting Interest

Tis' the Season for Fundraising Auction Requests


A Mistake in the Last Post

I made a mistake in the recent post. The link to the video for the email version was to the wrong video. 
OOPS-FLOWER-Front copy

Go to post on ASK Harriete "Perceived Risk vs. Actual Risk of Speaking Up Counter to the Status Quo?" and watch the video there....

OR...here is a link to the youtube video titled,  “One Simple Skill to Overcome Peer Pressure” by The Behavioral Science Guys  
https://www.youtube.com/watch?v=1-U6QTRTZSc

Sorry about this mistake.

EXPLANATION: The email version of the post doesn't seem to embed videos, so I have been trying to include a text link.  That link was wrong. 

Goof-Off-Flower-Pin-404

Flower Pins by Harriete Estel Berman are all one-of-a-kind. Find the entire collection of Flower pins available for purchase on my website.  


Perceived Risk vs. Actual Risk of Speaking Up Counter to the Status Quo?

Perceived-Risk-vs-Actual-Risk
Given the many facets in the career
of an artist and maker, there are always instances when reality diverges from expectations.

During 35+ years of experience, I have learned and witnessed the benefits of well written contracts with galleries and exhibition sponsors.  Contracts certainly help to clarify anticipated circumstances, but alas, not every possible scenario can be or will be anticipated. 

Most recently a misunderstanding arose with a Fundraising Auction where the pricing format was far outside the usual parameters.  I was deeply committed to participate and had already shipped my work, so it was a surprise (shock!) to learn that I would be negatively affected by an unexpected auction structure.   

Harriete-turning-her-backSo the question arises...Should I speak up and risk alienating the auction sponsor, primary donor and staff? What are the perceived risks or actual risks for speaking up? Should social pressure cause me to just be quiet, conform and follow the status quo?  

This video "One Simple Skill to Overcome Peer Pressure" from The Behavioral Science Guys offers amazing insight into the social dynamic of peer pressure. And remarkably, it suggests a method for speaking up that might work next time. 

Honestly, at the time, the fear of perceived risks was stressful -- very stressful.  All the possible risks seemed to outweigh the immediate benefits.  But I did speak up -- and ultimately the outcome of my effort changed the pricing, not just for my work, but the pricing policy for everyone.  Actually, by raising the issue in advance it gave the sponsor time to consider the merits and choose a different plan.  

Was it easy? No. Did the other artists benefit? Yes. Did the sponsor benefit? Yes.

Speak up for your community.



RELATED Posts:

What is "Fair Market Value" at a Fundraising Auction?

What Does Minimum Price Mean?

Fundraising Auctions & Conflicting Interest

Tis' the Season for Fundraising Auction Requests


What is "Fair Market Value" at a Fundraising Auction?

An upcoming fundraising auction informed me that they intend to use the term “Fair Market Value” as part of their auction pricing structure.

This term - "Fair Market Value" -  was a huge surprise.   Frankly, I had never heard of it in art auction, it confused me and gave me great cause for concern.  I wondered why would they use the term "Fair Market Value" instead of the much more familiar "Retail Price?"

I wonder... 

Has anyone ever heard the term “fair market value” when pricing art or craft?

Have you ever seen the term "Fair Market Value" used at a Fundraising Auction?

I’d like to hear your comments or opinions about the term "Fair Market Value" under the given circumstances. 

Your comments and reply are most welcome.

  Shopping-cart-Fair-Market-Value-Gavel

Background surrounding the circumstances.
I had never heard of the term "Fair Market Value" used instead of "retail price" in a art/craft retail context
 and it leaves me concerned that the use of this term sets an awkward and misleading precedent.

Then of greater concern, the sponsor also said that they intend to use an automatic formula to calculate "Fair Market Value."  In the original invitation, artists were asked to state a specific price as the artist's "minimum price," however, the term "minimum price" was never defined, and the artists were not informed how the "minimum price" would be used as a factor to automatically calculate a "Fair Market Value" as 3 times the artist's "minimum price."   

 Minimum-price-fair-market-value

It is as if the auction sponsor believes that every artist is identical and the pricing of every work is reduced to a fixed formula -- with no prior knowledge of the artist's comparable prices for similar work. 

Using the term "Fair Market Value" at an auction has further irony when you consider that most Fundraising Auction sell artwork at below normal retail prices potentially eroding  the "Fair Market Value" for all work by the artist.  

 

If you are not familiar with the term Fair Market Value, a description of this economic term is provided below.

"What does Fair Market Value mean?"
For this question, I pursued some diligent research and asked a qualified, entrepreneurial, business expert, my husband, to provide further insight into the term. 

To define the term "Fair Market Value" we need to differentiate between a liquid market and an illiquid market." 

“Fair Market Value” is easily determined in a liquid market when there are multiple identical items sold repeatedly, such as gallons of gas or mass manufactured items. Thus the transaction price of multiple purchases indicates the Fair Market Value.  Common examples include the real estate market, valuation of cars, and stocks.

FMV_large-for-blog.001-300x225This rather pedestrian description of "Fair Market Value" was taken from a website that focused on appraisals of machines and equipment."...the consensus was that the “fair” part of “fair market value” is redundant. Market Value, by definition, is impartial, honest and legitimate."

“Fair Market Value” is not easy to determine when selling an item that has never sold before such as one-of-a-kind art or craft. When there is a very small, very limited market (i.e. with no previous retail sales of identical items), the situation can be described as an illiquid market. When selling art or craft, "Assets in illiquid markets still have value and, in many cases, very high value, but are simply difficult to sell."  In such circumstances, an estimate of Fair Market Value may be reasonably determined by negotiation, or an impartial third party, a gallery that represents the artist/maker or a qualified appraiser. 

  Never-Let-Your-Eyes-deceive-Truth