I have always been a fan of the Beatles, starting in 1963 when I first heard “I Want To Hold Your Hand”. Their innovative music and cultural impact helped define the 1960s, and their influence on pop culture is still evident today. One of my personal favorites of their songs is “With A Little Help From My Friends” which I always found to be upbeat and, although containing a rather counter-cultural bent, seems especially appropriate to our industry today. So in honor of the “Fab Four”, and as the market is still “away” from where it should be, here is a little help.
Several years ago I had the opportunity to serve as principal editor for a revision of the course content for the Institute of Residential Marketing’s Course “Marketing Strategies, Plans and Budgets (IRM II)”. The revised course had been written by Chuck Graham, my good friend and one of the brightest minds in our business, and had presented “Graham’s Law” which proposed the hypothesis that the optimal financial model for marketing a residential community required a balanced allocation of investment in “Price”, “Promotion”, “Product” and “Place”, forever known to all of the Members of the Institute of Residential Marketing as the “Four P’s”.
To simplify a somewhat complicated lesson, Chuck suggested that if a community was not equally competitive in all of the Four P’s, it would be necessary to compensate by contributing disproportionately to one or more of the factors and thereby incur a greater cost (and lower profit). That premise has certainly proven valid and is, perhaps, most visible in the current market where heavy discounting of prices has been necessary to sell what otherwise might be considered as competitively inferior product.
I decided that if Chuck was to be forever immortalized by virtue of his law, and with a touch of my somewhat dry humor, I included “Levitan’s Corollary to Graham’s Law” in the edited text so that I, too, would have my place in history. But the publishing staff apparently had not taken (or had forgotten) their geometry lessons and when the course book was published Levitan’s “Corollary” became Levitan’s Law©.
I wanted to share that concept here because as I travel around the country I see throughout the markets an improper pricing strategy which needlessly results in lost sales. To properly satisfy a target market segment, pricing of homes within a neighborhood should fully cover the pricing spectrum of that specific segment. If the price spread is too narrow, segments of the market are not being satisfied and sales are lost to the competition. If the price spread is too wide, the value of the higher priced homes is perceived to be lowered, advertising dollars are wasted because one segment cannot be effectively and properly targeted, and sales are lost to the competition.
Most of the housing analysts agree that typically one “quintile” is equal to a market segment. A quintile is one fifth of the total number of sales ranked by price (equal numbers of sales, arranged in ascending order by price). When I analyze a housing market, I typically examine data from both new home sales and resales to provide an even more detailed picture of the pricing of housing being sold as often the new home pricing is at a premium above what the resale market would suggest is affordable.
Levitan’s Law© states that the optimal pricing spread within a neighborhood should approximate +/- 12½% to 15%% from average creating a total price spread of 25% to 30% and thereby covering an entire quintile. The somewhat wider spread is appropriate at the upper and lower quintiles while a somewhat narrower spread should be utilized at the middle quintiles. In a community with an average price of $250,000, the optimal spread would be $218,750 to $281,250. This concept has proven to be equally valid in every market, from the more affordable to the more expensive housing markets, and in every geographic location:
In the Huntsville Alabama metro area, a relatively affordable housing market, the 3rd Quintile (middle) housing prices range from $137,900 to $189,999 with a median of $163,950. The pricing spread is 0.841 to 1.159 = +/- 16%;
In Fairfield/New Haven County, Connecticut, an average priced housing market, the 3rd Quintile housing prices range from $212,000 to $274,499 with a median of $243,250. The pricing spread is 0.872 to 1.128 = +/- 13%;
In Palm Beach County, Florida, a relatively expensive housing market, the 3rd Quintile housing prices range from $425,000 to $550,499 with a median of $487,750. The pricing spread is 0.871 to 1.129 = +/- 13%.
The second element of Levitan’s Law© suggests that within that pricing spread every price element should be equally and proportionately represented. Using the above example of an average price of $250,000, and assuming seven different models, the individual base model homes should be priced (with rounding to create proper “retail” prices) at $219,900, $229,900, $239,900, $249,900, $259,900 $269,900 and $279,900.
In one market which I recently analyzed, I came across a community by a major builder that offered 12 different model homes with base pricing from $251,900 to $279,900. The overall price spread (from a median of $265,900) was only +/- $14,000 or 5.3% and the spreads between the individual homes ranged from zero to $10,000 and averaged only $2,500. It was obvious that this overall pricing spread limited potential absorption and the tightly clustered price points failed to create an obvious differentiated choice by price for the buyer, thereby further limiting sales potential. By simply optimizing the pricing spread the builder could potentially satisfy an additional demand segment equal to 11% of the total potential housing market or more than twice what he was currently achieving.
Pricing of homes should combine both art and science to create the optimal strategic tactic to maximize both absorption and profit. The market challenges are simply too tough these days to do anything less. So hopefully you will find this beneficial to your sales and profits because, as they say in another song that came out 20 years later, “That’s What Friends Are For”.
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