LIFE IS NOT A “ZERO SUM” GAME BUT HOMEBUILDING MUST BE!

royal flushI have always enjoyed playing games. From the time my grandmother taught me canasta and gin at age five, and we started playing for money, I have enjoyed winning even more than just playing. So learning about how games worked seemed a natural investment of my time. Although I never became as involved in the study as did my high school bridge partner who ended up as a full professor of mathematics and computer science at two well respected universities (we were done with classes at noon three days a week and that hobby kept us out of trouble), I have found that what I learned has had benefits far beyond the bridge table and the occasional friendly gin or poker game.

Basic economic principles state that in regard to housing, the supply side (i.e. homebuilders) cannot create demand, only manage and satisfy it. Housing demand is created by household formations deriving from population growth which in primary markets typically follows employment growth. As we cannot create meaningful amounts of new jobs, we cannot create more people and we cannot form more households, therefore we cannot create additional demand.

Housing is different from consumer goods – it is expensive, and you can only utilize one primary residence at a time. You cannot create demand for a product (a second primary residence) that the market cannot afford, probably cannot finance and cannot use. In the recent “boom” years, the premise of an exceptional value created by the expectation of continuously rapidly rising prices did create artificial temporary demand, to which some of the market responded by purchasing homes as investments. But we see now that success was both temporary and artificial and came back to haunt us with foreclosures, short sales, etc. The value of housing has been and will always be through its use – as a residence.

Since we cannot create demand, we are forced to rely on demand being created naturally for our business to grow. In the present economy, job formation is negative and housing demand has declined. And while the economy appears to have bottomed out, a full recovery could take several years.

However, if we understand the concept of the “zero sum game”, we find another and perhaps more effective method to grow our homebuilding business, regardless of the underlying economy. In game theory and economic theory, zero-sum describes a situation in which a participant’s gain or loss is exactly balanced by the losses or gains of the other participant(s). If the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero. Obviously, zero sum games are “strictly competitive”.

To benefit from this concept we must be able to take market share from our competitors and we can do that only by offering superiority in one or more of five specific areas. That is the goal of a thorough and professional marketing analysis and strategy – to research and analyze the market, the competition and the builder’s operation and create a strategy that creates competitive superiority that will produce more sales.

To achieve results in any of these areas requires investment of both time and capital:

1. Price. Without question, price is the ultimate amenity and if we can offer our homes at a superior price position (lower price) than the competition we will take sales from other builders. Successful “price” builders have redesigned and refined their home designs to create maximized cost efficiencies and forged partnerships with their suppliers and subcontractors making them true “trade partners” to deliver lower cost without sacrificing necessary quality.

2. Product. With new markets emerging and substantive changes in the economics and psychology of the marketplace, new home designs are required. Those builders who have introduced new home plans reflecting the lifestyles of the current buyer segments and included the features that the market wants today are selling, again taking sales from their competition and gaining market share.

3. Place. In the “housing gold rush” that recently ended many homebuilders forgot the basic rule of real estate that all value derives from location; they purchased land wherever it was available. It is time to return to that proven principle, building only in those areas in which the market wants to live and thereby earning incremental sales. And often those “prime” locations require innovative site planning and site-specific new housing designs to work.

4. Promotion. Those that can reach more prospective purchasers on a cost-effective basis, thereby generating increased visits first to their web sites and then to their homes and sales offices, and then provide superior sales experiences will beat the competition. This is the age of “e-marketing”; success comes with a great web site, search engine optimization, pay-per-clicks, banner ads and links, aggressive and consistent social media efforts and blogs, web concierge services and, perhaps most important, great sales people that are trained and retrained and retrained again.

5. People. The right people, both internally and externally, are the key to success. Certainly you need the best internal staff – talented sales people and managers, excellent construction and service personnel, dedicated support staff, strong leadership. And assembling a team of external professionals with expertise in architecture and site planning, research and strategy, operational and systems excellence, advertising, merchandising, promotion, sale training and motivation will allow you to successfully implement your strategy.

Market ShareAnd that is how the “game” is played. If you are not taking someone else’s market share then someone is taking yours! And that is more than just my opinion.

Please visit our company website for more information on how Levitan & Associates can help you with your residential marketing efforts.

3 thoughts on “LIFE IS NOT A “ZERO SUM” GAME BUT HOMEBUILDING MUST BE!

  1. Promotion is key in today’s market and luckily for builders and developers there are lots of great low cost promotional tools and tactics available today. It is important to keep an eye on the 4 Ps, perhaps everyone should say thanks for the refresher?

  2. Everything you say is true and I’ll use a line that I originally learned in the early 90’s during that slowdown while working for a large national builder “STOP MAKING SENSE”.

    I keep hearing about “The Rebound” or “When it Recovers”. That is not the field we are playing on currently. At best we can hope for some growth in jobs and household formations fueled by population growth both internal and external (immigration).

    Another line I have always used is “Evolve or Die” (can you tell I like cliches?) and for anyone to succeed in the next few years they will need to use common sense and evolve. Two items which have historically been hard for our industry to practice.

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