Strategy can be defined as “the combination of science and art to create an intelligent plan to realize a future goal”. An effective strategy for the homebuilding industry must include an examination of the current and anticipated factors associated with customers and competitors (external environment or, if you prefer, supply and demand) and the company itself (internal environment) and a resulting alignment of policies, practices and resources to realize that goal. And that simple process is the key to success in any market. Yet all too often as I travel across the country I find builders whose operations are suffering not because of market conditions but by their failing to create and execute a proper strategy thereby resulting in structural deficiencies that create a needless loss of sales.
Here is an example from an assignment last month. This market was relatively healthy; in fact, current and near-term demand is anticipated to approximate the average of the past twenty years. Yet this builder, who we will call “Builder T” (for torpid), has seen its market share continuously declining. Here is what I discovered:
1. Builder T builds a quality home with attractive exterior elevations that distinguish themselves in the marketplace. The interior spaces are certainly acceptable but the current standard included finishes are well below the levels provided by the competition, even the “price” builders, and are apparently below the expectation of quality by the marketplace as evidenced by comments from both consumers and Realtors®.
The “price” position in this market is already firmly established with three other builders aggressively fighting it out while the “value” position, consistent with the builder’s overall design and quality of construction, is wide open but cannot be achieved and secured with the current basic included features.
2. One local quadrant of the market accounts for less than 30% of all new home sales yet is the location of 75% of Builder T’s operations. With an extreme concentration of operations within a limited geographic area, absorption is being lost due to the failure to serve other specific geographic areas and cannibalism of the limited local market that does exist must result from the builder’s excess of opportunities available within this single market area as the communities are competing directly for the same buyer with the same price points and also, in several cases, the same products.
It appeared evident from just a cursory review of the market that merely by replacing one of the existing communities with a different location (one not currently being served) that total market share could be increased by as much as 25% while simultaneously increasing production efficiency and lowering G&A.
3. Builder T is further cannibalizing its own potential market, both within several of their communities and between several of their communities. The offer the same home plans in three proximate developments with little price or amenity variation. They also offer the same home plans within two neighborhoods in two of their same communities needlessly confusing the customer and failing to force a buying decision by creating urgency or unique opportunities for purchase.
Our builder also has failed to implement a proper pricing strategy (please see a previous blog for details – http://www.residentialmarketingblog.com/2009/11/a-little-help-for-my-friends-in-the-homebuilding-industry/). In the majority of their communities the overall pricing spread is insufficient thereby losing as much as one-third of the target market. Substantial gaps exist in the pricing spread in all of their communities leaving an additional 20% of their potential market unaddressed by price. And in many other cases the prices are so close together that the buyer is not forced to make a price/value decision to purchase.
And the majority of their homes are priced in the 5th quintile of both the “new” and “total” home market which is especially challenging for a production builder as competition includes the semi-custom and custom builders (which offer almost unlimited choice for the dollar) and therefore is often best to be avoided, especially by a builder that also offers far more affordable housing, does not have an exclusive upscale market position and is therefore constantly subject to competitive attack.
It’s painful enough for builders today without having to endure self-inflicted wounds. But lack of an effective strategy is exactly that.
And one of the best ways I know to learn how to create an effective strategy is by taking the Institute of Residential Marketing’s Course “Marketing Strategies, Plans, and Budgets” (IRM II) (http://www.nahb.org/generic.aspx?genericContentID=74821).
Please visit our company’s website to learn more about our services – http://levitanassociates.net.