Most home builders know they are capable of building almost any structure imaginable, but simply saying, “I can build anything!” is an ineffective marketing strategy. Production home builders must provide their customers with appropriately priced options that accurately represent all of their building practices, materials, product specs - without providing the buyer with any expectation outside of the implied result. Poorly managed expectations and pie in the sky promises are one of the leading causes of bad reviews left for production home builders. Generally speaking, consumers are not fond of paying for the things they need, and will give their first born for what they want.
COMPULSORY OPTIONS
Many options are considered fundamental for production home builders. Not drawing these options before releasing the plan for purchase will lead to them being drawn under customer pressure. These are the options that most home builders are typically compelled to create for the sake of plan reproduction and automation. These include options such as: foundation options, garage load options, & porch options.
These options get most of their measurable value from their compulsory nature; however, the value of these options do vary based on the local market’s perceived value of the option, lot conditions, and lot appraisal. Market researchers should study local markets and anticipate lot conditions to estimate the perceived value for individual options within the proposed markets.
The perceived value should be considered side by side with the estimated cost of construction to negotiate the final option price with each individual customer. If these options are added because something about the project compelled them, the perceived value of the option is often reduced to reflect the necessity of the feature. If they are added electively, the perceived value is increased to reflect it’s elective, luxury, nature.
ELECTIVE OPTIONS
These are the non-essential options that are considered luxury or ornamental. Because of their superfluous nature, elective options add substantial perceived luxury value to each plan. Elevation options, kitchen options, primary bath options, aux room options, fireplace, and finish options can be considered elective. Adding design options in Revit also adds utility value by reducing the utility needed to replicate the option.
Sometimes the highest priced option doesn’t reflect the estimated construction cost. Often, the emotional response a luxury option provides can override all rational economic responses. Products and materials can be shuffled between options to balance the value, or intentionally create an option that is perceived as much more valuable than the others.
Offering a multitude of high quality, pre-designed, and trendy elective options consistently on all plans can substantially increase the perceived luxury value of the entire company.
ESTIMATING PERCEIVED VALUE
The perceived value of an option can be estimated by subtracting the estimated construction costs from the price market research suggests customers are willing to pay for similar features. A high-low range should be provided to account for geographic popularity/trend fluctuations, neighborhood/home appraisal, and customer enthusiasm/ability to pay.
The cost of options can be estimated using typical practices, but the value of options can only be uncovered by dedicated market analysts. No company wants to price themselves out of a contract; nor do they want to leave money on the table. Case studies, polls, web analytics, and other tools can help researchers accurately estimate the perceived value for features or options. The perceived value of dependent products and materials should be used to support estimates of the perceived value for the parent option. Similarly, the total perceived value of all options should be used to support the estimated value of each plan.
NEGOTIATING PRICES
Option price can then be negotiated individually within this high-low range. Including a visible variable (1.00+/-) which represents the percentage variation from the target price can help analysts uncover fluctuations in supply and demand, perceived value, and used as leverage when negotiating option cost. Plotting this variable on a graph can also help visually illustrate the perceived luxury value of the home builder as the company matures.
KEEPING THE SCALES BALANCED
Ultimately, the quality of research will determine the effectiveness of any given pricing model. Knowing what is popular, where it is popular, and what it is worth to customers will allow home builders to appropriately, and ethically, capitalize on every contract. Thorough research into the value of all dependent elements can provide companies with the ability to manipulate option value and influence customer choices by moving products and materials between options. Graphs and diagrams are vital to illustrating value estimates and pricing options effectively. Following this value-pricing model gives contractors a greater degree of control to “balance” the margin between costs customers don’t value, and the ones they do.
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