With apologies to Shakespeare’s Hamlet and before we get to the “D” word, first a couple of rhetorical questions, then a primer on art pricing.  1) Why would an undisclosed buyer pay $140 million for “No. 5, 1948,” an oil on fiberboard painting of Jackson Pollock?  It sold in 2006 through Sotheby’s, in a private sale and the new owner remains unknown.  2) Why did Vincent van Gogh’s “Portrait of Dr. Gachet” sell for $82.5 million to a Japanese businessman in 1990 (a record breaker at the time), yet the artist couldn’t sell a single painting during his lifetime, even with the help of his influential brother Theo, a leading Paris art dealer of his day?

Of course, art is subject to the laws of gravity, the greater economy and the market forces of supply and demand at any given point in time.  When the economy is robust and an artist’s work is both singularly unique (aesthetically pleasing and in limited supply) and in so-called "favor,” demand and price will move upwards.  When the economic cycle is contracting, prices will move in the opposite direction.

So an artwork’s value, or to be more precise “fair market value,” is a function of “who, what, where and when.”   As San Francisco art consultant Alan Bamberger cogently notes, fair market value  is the “dollar amount that a willing buyer pays a willing seller under normal circumstances, or would reasonably be expected to pay under normal circumstances (both with reasonable knowledge of the art and neither being unduly influenced or required to act in any way), not in the rarified, controlled environment of a gallery, nor in the amount of a potential insurance claim. For example, a painting priced at $10,000 in a gallery, may have a fair market value on the open market that's only a small fraction of that amount…

THE PRICE THAT SIMILAR WORKS OF ART SELL FOR AT AUCTION IS GENERALLY ACCEPTED TO BE A REASONABLE ESTIMATE OF FAIR MARKET VALUE, or perhaps somewhat lower, assuming the auction is reasonably well-publicized and that bidders familiar with the art being auctioned are in attendance. At auction, art is generally required to sell immediately, with no fanfare or restrictions, to the highest bidders. Another good estimate of fair market value is the price that a retail gallery pays for a work of art BEFORE they mark it up, or perhaps somewhat higher. This "dealer price" is considered to be the WHOLESALE VALUE of the art, and is generally considered a reasonable indicator of a work of art's fair market value.

A private party selling art has no reason to charge art gallery prices (and certainly not replacement or insurance value prices); that person has none of the expenses associated with owning and operating a gallery -- which are priced into the art galleries sell. Pay a "fair market value" price for any art that you buy from private parties. That price should be as close to the wholesale price, dealer price, or auction value of that art as possible.”

Which gets me to the “D” word, as in D for Discounting of fine art as a marketing concept.  The argument against it goes like this:  original works of art are a luxury item and discounting luxury items is a mistake, since you’re asking people to pay a big premium for something that they don’t need and then changing your mind.  The claim being, that it’s very confusing to buyers and equates to shooting oneself in the foot, where the bullet ricochets and can hit the entire art market…

But truth be told, fine art is an asset class - not a luxury, although many may consider it such.  Besides providing pleasure and beauty to those who view it, high-quality fine art is indeed a tangible asset.  It provides an opportunity for portfolio diversification into an area that has historically provided high returns and shown a low correlation to other asset classes.

According to The Fine Art Fund Group (a leading art investment house with assets of approximately $100m under management and a track record IRR of 25.51% p.a. on sold assets), since the end of World War II the value of art works has appreciated enormously. Quality works of art have proved to be a remarkable store of value. This is predominantly due to increasing rarity caused by an expanding demand from museums and collectors, and dwindling supplies.

As I’ve written in previous posts, the Internet is fundamentally changing the structure of the art market and its channels of distribution.  It’s a profound shift in the business model and well underway.  It’s a movement confirming the global democratization of art and its opinion leadership, and away from the subjective arbiters of taste and pricing heretofore established by a group of elite art insiders in New York or Paris.

These changes are already affecting not only the marketing and distribution of fine art, but it’s pricing as well.  The relentless move away from “bricks and mortar” storefront galleries to their cyberspace alternatives, must of necessity, discount (read lower) retail gallery prices.  What would justify higher prices in an online sale of art if none of the expenses associated with owning and operating a storefront gallery are present?

Specifically, if an online seller of  artwork doesn’t have the expenses associated with a retail gallery or auction house, i.e. storefront overhead, middleman costs, markups and/or buyer’s premiums – expenses that otherwise drive up prices -- why is it unfair to “the entire art market” to not  pass these savings in operating costs on to online collectors?  Why is the online seller “shooting itself in the foot” by lowering prices vis-a-vis comparable works in a retail gallery, if the online seller has a legitimate lower cost basis in the particular artwork for sale?

In the secondary art market, I believe it’s not at all unfair or unwise to discount.  It’s simply an effective marketing strategy that promotes immediate buyer action (and survival of the fittest sellers).  Well, thanks again for stopping by!  Please share this post with other like-minded readers and spread the information contained in this article.

-TS 

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