Let’s talk about the price yacht builders add for “dealing with buyers”. A large portion of this added price is unnecessary as it is the result of poor communication between buyers and builders or gaming by one side or both. Buyer behavior can add or subtract to the selling price. Note: For the purposes of this discussion, the term “yacht” primarily refers to boats, sail or power, between 35 feet and 100 feet in length, built on a production or semi-custom basis.
In my January 6th blog post I offered my view of a yacht builder’s value calculation.
New Yacht Builder Value = (Gross Profit + Brand Enhancement) – (Sales Costs + Buyer “Interface Costs”) “Interface Cost” is the builders actual and perceived cost of dealing with boat buyers.
Yacht builders add price for dealing with buyers. Most builders think the cost of working with buyers does not scale with the size of the boat. I’ve heard it said many times, by many different builders, over many years, that they would rather sell a 50 footer instead of a 40 footer, or a 75 footer instead of a 50 footer, etc. because the customer is the same amount of work.
Some of this cost for dealing with customers is included in the base price and more may be built into change order pricing. If a builder thinks a buyer is going to be difficult to work with, the buyer will pay for it. Builders calculate the price added for dealing with customers in many ways and call it many things but the amount is based on staffing costs, overhead, service costs and perceived risk created by buyer behavior. The builder’s perceived risk can be mitigated by a properly crafted purchase and sales agreement that can result in a lower purchase price on a boat, keeping mind that the builder is not going to risk the brand (see Brand Enhancement in the formula above). I will discuss crafting the sales and purchase agreement to minimize the added price of dealing with boat buyers in a future post.
Don’t get me wrong. Yacht builders love customers, but the challenges and costs of working with each buyer varies greatly and is often unpredictable by the builder at the time a builder signs a sales contract with a buyer. Most yacht builders in business today are the “best of the best”. They have decades of experience and have satisfied many buyers, but often neither the buyer nor the builder believes they got the value they anticipated at the conclusion of the deal.
The amount a builder includes in a negotiated selling price is based on the status of the yacht builders overall sales backlog, the order backlog for a particular model, the builder’s current cash flow and the perception of the type of buyer with which the builder is dealing.
Boats built for stock and sold without modification have a lower portion of buyer costs included in the pricing, but stock boat pricing includes other inventory related costs. Boats that are tailored to buyer preferences may have a higher amount of buyer costs included in the base price and also in change order pricing formulas.
Builders have different attitudes toward customizing boats for buyers and these attitudes may change based on market conditions. Even those builders with a willing attitude generally prefer to do less customizing than more. I’ve heard it said by yacht builder executives, in many different companies, “can’t you just tell the buyer to give us the order and we will call them when the boat is ready”.
There are many valid reasons why builders worry about and price for the costs of dealing with buyers. A common friction point between yacht buyers and yacht builders is the cost and production schedule effects of change orders. Builders feel they cannot charge enough for changes and buyers regularly feel ripped off. Some buyers do not care what change orders cost, as long as the pricing is “fair”. They want their boat the way they want it. These buyers are willing to pay a fair price and to wait extra time when necessary. This is fine for that buyer, but in a series production or sequenced production situation, delays from change orders can ripple through production schedules, causing delays to customers following in the queue. Delays cause accumulation of overhead costs on all boats in process and reduced production value throughput. In some cases, there is no way a builder could justify charging a single buyer what extensive change orders or customizations really costs for a single buyer. Builders willing to customize boats run a significant risk, especially if they encounter a domino effect of production delays.
The definition of a change order is often not clear between builder and buyer. The yacht buyer believes a change order is added features after the purchase and sales agreement is signed. The yacht builder looks at a change order being any buyer instruction that requires execution. Buyers often argue that instructions are merely defining the specification. Buyer instructions can include moving a thru hull a few inches, re-routing a hose, modifying cabinetry or locating machinery among other things. I’ve witnessed Buyer instructions exceed 300 items. Buyers rarely expect to pay the builder for implementing their instructions.
Buyer Types
I offer below, my own characterization of some buyer behaviors I’ve observed. Some buyers are composites of these types. The purpose for including this list is that buyers can save money for both themselves and the builder by identifying the type of buyer they intend to be and documenting it in a properly crafted purchase agreement.
Smartest Buyer – The builder perceives this buyer will ask questions, request quotes and make changes for the sole purpose of gaining recognition as the smartest boat buyer that the builder has ever worked with. The builder perceives minimal, if any, merit in many of these time consuming buyer requests.
Helicopter Buyer – This buyer wants to constantly be in the yard, is in daily contact with questions and information requests which are often based on what they “just heard” from a friend, forum or supplier and is frequently looking over shoulders challenging ongoing work or outcomes. The build process is slowed owing to daily uncertainty on how to proceed and frequent rework.
After the Fact Buyer – Does not reveal intentions to be deeply involved in fine details of the boat build until “after” things are done, then surfaces with experts and opinions requiring explanation, re-work and back tracking.
Disengaged Buyer – Does not respond in a timely manner to the builder’s information requests leaving the builder uncertain as to execution details causing delays as production milestones get missed and build costs to escalate.
Easiest Buyer – When a buyer states to a builder they are going to be the easiest buyer the builder has ever worked with, the builder usually assumes the opposite. This buyer seems to understand that there is a price to be paid for not being an easy buyer. This buyer often wants to “make all the changes” up front and will “forget about the boat” until it arrives. Builders rarely see a Buyer actually behave this way.
Experienced Buyer – Once a builder has had experience with a buyer, the builder knows what to expect and can price the deal accordingly. Buyers and builders that have built a good relationship with one another on prior yacht builds generally price a deal with minimal “interface costs”.
The overall goal of this blog is to find radical new ways to increase value for both yacht builders and yacht buyers. A key element of that effort is builders and buyers “declaring” what kind of relationship they will have and effectively documenting it in the yacht purchase and sales agreement. A properly crafted agreement can minimize the initial price, minimize change order costs and increase schedule reliability for the benefit of both the yacht buyers and yacht builders.
All comments are welcome.
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