Getting the Most of Consignment Sales
By: David Parker
Peak performing dealers are achieving gross margins of 15% to 20% on consignment sales. On the other hand, some boat dealers routinely and deliberately only make 10% or less on consignments.
Why do some dealers make nearly twice as much as other dealers on consignment sales? Many of the dealers with only 10% margins have imported a yacht broker’s business practice into their boat dealerships. Yacht brokers customarily earn a 10% commission for handling a sale.
A brokerage fee of 10% works well for a yacht broker because they have a much higher average selling price than does the average boat dealer. Typically, the yacht broker’s average selling price is well above $100,000, 10% of which produces $10,000 or more in commissions. However, for a boat dealer, the average price of a consigned boat is closer to $10,000 or $20,000, 10% of which generates only $1,000 to $2,000 in commissions. In both cases it takes a similar amount of effort to clean, show, demonstrate and deliver both types of boats. Yet when it comes to having the gross margin dollars to pay commissions and overhead, 10% of $10,000 or $20,000 is not very motivating for either the dealer or the salesperson. Consignment boats, on which a decent profit will not be made, will languish on the lot collecting dust while the boats on which the sales people can make the most money will get lots of attention.
There is a better way. It is called by several names, the more common of which is the Purchase Option or Net Price Agreement. A Purchase Option is an agreement in which a net price to the customer is established and everything above that in order to sell the unit quickly is the dealer’s commission. It is explained to the owner that all price negotiating comes out of the dealer’s side of the pricing, not the owner’s.
The Purchase Option gives a dealer more flexibility to sell a consigned boat quickly and at a much greater gross margin for the following reasons.
1. It allows the dealer to price the unit in such a way as to better facilitate taking a trade-in. This is accomplished by quoting a retail price that is higher than the targeted 15% to 20% gross margin, which then allows room for a trade-in over-allowance.
2. It also allows for negotiating room when the dealer encounters the type of buyer who feels cheated unless he or she gets a “discount” from the asking price.
3. If the dealer gets the tough negotiator who offers a price lower than the dealer desires, call the customer back and say something like “I have an offer on your boat and I can sell it today if you will agree to take $ XXX for your boat.” Make sure to note the date and time of this conversation and the name of the authorized person who OK’d the net price reduction.
4. If a customer’s desired net price is too high, then the dealer has the option not to consign the unit at all, or to take it on consignment and try to get the higher price. Often the boat will sit on the lot for a while and the dealer then could convince the owner to lower the price.
5. You may consider charging a “Marketing Fee” for consigned boats of $350.00 to help offset the cost of advertising the various media, such as print and the internet. Be sure to include at least 5 or 6 pictures or better yet, a video, of each boat.
6. You may also consider a boat “Check Out Fee” of $150.00 in order to assess the boats condition before selling the boat. This does two things. A.) It helps prevent the surprise at delivery of items not discovered before the sale and then you having to absorb the cost. B.) The “Multipoint Checklist” can be used as a selling tool to give the customer more confidence that this boat is in good condition.
There are some general rules to follow when dealing with consignment boats:
1. Make sure the Purchase Option is in writing, explaining all the terms of the agreement and signed by both parties. Also, get any other necessary paperwork and Power of Attorneys signed at the time the boat is consigned. Be sure the agreement includes a requirement that the owner maintain the boat insurance policy.
2. Check out the mechanical condition of the boat with at least a compression check and a fluids check, looking for water in the engine or drive units. Numerous times a boat has been sold and, as the boat was readied for delivery, a major mechanical problem was discovered. This could have been easily avoided with a pre-consignment checkout.
3. Whenever possible detail the boat before putting it on the market. Clean boats sell quicker and for more money than dirty ones. Don’t be afraid to ask the customer to pay for this service.
4. Verify the lien holder and pay off amount so that you don’t have any surprises at delivery, such as the owner owing more than they thought.
5. Don’t provide a “house” warranty on any used boat. Do not even provide a warranty that says “30 days 50/50”. Due to the Magnuson/Moss Act signed into law in the early 1980’s, if a dealer provides a warranty on a unit and does not specify certain legal language required by law, then they are in effect warranting that unit for life. It is much safer to use language like “All used boats are sold as is, with no warranty. However some units are eligible for a third party service agreement. Ask your sales representative to explain your options.”
6. Have one salesperson responsible for managing all consignments for the dealership. This person can solicit consignments by searching the internet; Craig’s List, Boat Trader, etc, looking for boats “for sale by owner”. In follow up phone calls, the salesperson can explain the benefits of consigning the boat with your dealership. This person should also be good at convincing the owner of the realistic value of the consigned boat before the Purchase Option is signed.
If a dealer needs some good reasons to convince a customer to consign a boat, here are a few that are successfully being used by many dealers.
1. A dealer can generally sell the boat faster than the owner because of greater exposure to potential buyers on the dealer’s lot and websites than at the owner’s home.
2. Consigning saves the owner the costs of advertising and the hassle of answering phone calls, showing and demonstrating the boat to multiple potential buyers and “Tire Kickers”.
3. Since the dealer is more likely to sell the boat faster, consignment potentially could save the owner numerous monthly loan and insurance payments.
4. A dealer can help the owner avoid selling to a friend and then damaging the relationship by arguing over who will pay for the problems with the boat that show up after the sale.
5. A dealer can sell an extended warranty for the used boat, eliminating the need for the customer (or the dealer) to pay for repairs after the sale.
6. A dealer can arrange financing to make it easier and more convenient for the new purchaser to buy the boat.
7. A dealer can take a trade on the sale of the consigned unit where as an individual probably would not.
8. Also, if the dealer has the financial ability, they can offer to purchase the boat for an offer of 10-20% less than the net purchase price. Often times, a customer will turn this offer down at first, then come back a couple of weeks later and accept it or something close to your price. This is especially effective during the fall and winter months.
By replacing the yacht broker’s 10% commission arrangement with a solid Purchase Option targeting a 15% to 20% gross margin, a boat dealership can add significant dollars to the bottom line.
Editor’s Note: The Marine Dealer Conference & Expo will take place December 10-13, 2017 in Orlando, Fla. If you find value in this blog post, just think of the value you could receive at MDCE.
Get registered here.