Everywhere I turn today I am inundated with impressions of “on sale”, “special sale”, “limited time offer” and similar promotions. The messages arrive via email, on my television and radio, in the mail, in newspapers, everywhere I look. It does not matter what consumer item is being sold – automobiles, televisions, furniture, travel, clothing, food (in grocery stores and in restaurants), jewelry, office supplies, etc., they are all available, if I were believe the messages, at some price or special value that is extremely advantageous to me if I act immediately.
For the most part, I admit that I have accepted that as the new reality and seldom buy anything at retail or “sticker” price. Fortunately I live less than 10 minutes from one of the world’s largest outlet malls so I have the continuous opportunity to buy “on sale” but the fact is that I have become so accustomed to that proposition that I have difficulty, even at the outlet mall, in buying anything, even though the merchandise is already heavily discounted from the original “retail”, unless there is a further “on sale” discount.
The result is that I have become an opportunistic shopper, purchasing not by need (which at this point in my life seldom exists), but primarily “on spec” – exclusively when the deal is too good to pass up. Christmas shopping is usually completed by June, birthday presents have been stockpiled as much as one year ahead of time. And while I may be the extreme example, I firmly believe that every American consumer is similarly and continuously blasted with these impressions and offers and the result is that each of us now expects to receive the “sale” price for whatever we buy.
Now we come to housing. From the 1950’s when production housing entered our world until very recently, the prevailing wisdom in our industry was that new homes are a “retail” full-price commodity. In those days, the “On Sale” or “Open House” philosophy (here we are, come and get us) often was all that was required and it worked.
Even in the face of the existing housing “difficulties”, many builders and industry gurus have strongly resisted discounting the sales price suggesting that it depreciates value and makes future price increases difficult if not impossible. They have instead tried to create additional value through special financing or including more features as standard and often they have trained their sales staff with a script on why there is no need to discount as their homes are “better values”, “built by a better builder”, etc. In a few cases, where a truly unique community or home was created with a valid and visible “USP” (unique selling proposition) some success was achieved. But for the most part, the market has simply not bought into that premise and those homes did not sell until they were “On Sale”.
I admit that housing is different from furniture and clothing which have substantial integral markups (50% or more) allowing deep discounting. Even electronics, if the product is new, also carries hefty profits at list price. And travel is really a unique commodity for there is often little incremental cost for the next passenger or hotel guest as the capital expenditure has already been made. Housing, on the other hand, has historically had only a 9% (production) to 20% (custom and resort products) budgeted profit margin so there was very little room to absorb a discount, especially in the current market where it seems that buyers are demanding a minimum 10% reduction as a starting point to their negotiations.
So possibly now is the time to take a fresh look at our business, the underlying philosophy and the business models which we utilize. Although the housing market has or almost has reached bottom in many areas of the country, it will be several years until we are back to anywhere close to what could be considered a “normal” market by historical standards. There will be, for the short term at least, continued pressure from foreclosures and we still have a great deal of overpriced land inventory to work our way through so I see very limited opportunities for price increases.
I do have faith that we will survive and that in the future there will be a return to a “normal” housing market. But in that future “normal” market, the rules will have changed. The days of the typical “for sale” message creating any interest has long passed and will not return. So we must face that reality now and plan for the future. Let’s accept the fact that the American consumer will continue to be seeking “on sale” and price our product accordingly so that we have the ability to make that sale without negative impact on our bottom line. Acceptance of that paradigm will impact land acquisition, purchasing of materials and labor, decisions on included and optional features, virtually every aspect of the homebuilding business.
I have been recommending for several years, starting well before this current downturn, that builders’ budgeting include a “pack”, a built-in allowance for necessary discounts or negotiated extra inclusions to create urgency at the point of sale. That allowance provides the sales staff with the opportunity to utilize one of the most effective closing questions ever devised, “If I could…would you…?” And the current economic and market conditions certainly have created the need for special incentives to be utilized in our promotion and advertising to even get the market’s attention, with an additional incentive usually still required at the point of sale to satisfy the market’s expectations and create immediacy of action.
While the market’s eventual recovery will hopefully allow us to rely less on the “on sale” incentive to generate traffic, I believe that we will still require the “on sale” tool to maximize conversion of traffic into buyers. Certainly the current 10% reduction as a starting point to the purchase negotiation will no longer be the norm but we will still need to provide a meaningful closing stimulus so we must adjust our business model accordingly if we are to prosper in the future.
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