Why some homebuilders are like cruise ships

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As a student of business and as a consumer, I have always enjoyed analyzing and learning about other industries.  Recently, as I took a hard look at our industry, homebuilding, I realized that many homebuilders in our industry have adopted a business model that is well known in other industries such as the cruise ship industry and the newly reformed airline industry (Think baggage fees and fees for extra leg room). 

altThe business model is basically an ‘up sell’ or ‘loss leader’ model, where a particular homebuilder prices their base product offering at an artificially low price with the intention of ‘up selling’ the customer on many over-priced options.  This practice has become more and more common and extreme. 

In homebuilding, this practice tends to be executed with the use of a ‘Design Center’ of some sort, where, usually after the initial contract, a sales person or ‘decorating professional’ will attempt to up sell a customer on expensive upgrades.  This is often a crucial part of profitability for these builders, so these ‘decorating professionals’ tend to be well trained.  This process can be taken to an extreme depending on how much the builder ‘strips down’ their base product offering; the more they strip it down, the more opportunity to ‘up sell’ on upgrades.

So how does this make some homebuilders similar to cruise lines?  Well, this is almost the exact strategy utilized by some cruise lines, where the ship often leaves the port with a negative profit (we have all seen those $299 three day cruise tickets!). 

However, many cruise lines are profitable, and they make profits by ‘up selling’ us on excursions, alcohol, and gambling (see CNBC’s special Cruise Inc).  The cruise line knows, once they have you on the ship, they have a captive audience.  They get you on the ship with a low base price; just as some homebuilders get your attention with low base price. 

So, the moral of the story for consumers: 

Make sure you know what you are getting… compare alternatives before you make your purchase decision.     

 

* This Post is intended for editorial purposes only.

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