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Maximizing Home Builder Profit Margin: Option Presentation & Selection (Part III)

By Mary Lindeman 7 min read

 

There is no question that the option and upgrade selections that a home builder offers can have a monumental impact on the overall business. Not only can these be implemented to set them apart from the many competitors in today’s market, but utilizing a few key strategies can increase the overall gross margin of a home in addition to the profitability of the entire operation.

To view other parts of the article series, please click on the links below.

Know Who You Are and Who You Cater To

Knowing your core competency is critical in today’s competitive selling environment. This helps set the stage for the customer to know who you are, what you can offer them, and why you are ultimately the right builder for them. Playing inside the box will help you strategically select the best options to offer your consumer. For instance, if you cater to different target consumer groups (TCGs), consider segmenting inclusion levels catered to these specific groups of consumers. This will not only help streamline the options you need to offer (economies of scale equals reduced cost), but it will cater to your intended audience which will prevent you from including features that your customer doesn’t ultimately value. When you over-option your inclusions, this leads to unnecessary discounts and decreased profits.

Track the Frequency of Options Selected

Tracking data as it relates to options is a non-negotiable for many reasons. As a standard practice, it is recommended to evaluate options on a quarterly basis. First, using a frequency report can help increase margins two-fold. By examining the options that are selected most frequently, you can identify several aspects that will help you throughout the sales process. Key questions to consider include: Are they being chosen because they are priced too low? Are they priced right? Is there room to increase the pricing without impacting frequency? The goal here is to find the balance between maximizing margin without stalling the sale of these options.

Next, the frequency report can also help identify the least selected options and allow you to challenge why they aren’t selling. Can you increase frequency by lowering your option margin? Is the option irrelevant to your target consumer group? Asking these questions will help determine whether it makes sense to reduce the price to increase the take-rate or if eliminating the option entirely, or replacing it with something more relevant, is appropriate. Removing unnecessary options allows your production and purchasing teams to spend less time maintaining a catalog that isn’t producing revenue and allows them to set their sights on more meaningful tasks that can impact the bottom line. Moreover, trade partners are often inclined to provide better pricing when there is less for them to manage as well. Time does equal money.

Select What Sells

If you’re going to implement an inventory home strategy, tracking data is again critical to maximizing profitability. The inventory homes selected must be intentional. By tracking the most popular home plans, you can build the homes that you know statistically customers want to buy, which decreases the likelihood of carrying a home past completion or having to discount. In fact, in today’s market, inventory homes can absolutely sell at a premium if positioned correctly. By taking it a step further and analyzing the average option dollars selected per plan, you can ensure that not only will you build a home that the consumer desires, but also at the appropriate price point they are willing to pay. When the depth of market is opened up and targeted so specifically, it can lead to an opportunity to put a premium on something so desirable in a market that has low inventory and limited options.

In the instance that discounting is needed in the marketplace, options can be used strategically to help sell homes without impacting margins as significantly as base price discounts. Using options as an incentive strategy often allows customers to get a home with more options than they could afford originally, or wanted to spend, and feels like a value-add. This is also ideal from a builder perspective as option margins trend higher than base house margins and can also help keep the value of a community from eroding.

Make Pricing Make Sense… Period

There are a few different areas to consider as it relates to pricing options and upgrades. First, look closely at the pricing of options that are hard to change post-close or have a high perceived value to the consumer. For instance, structural options, kitchens, and bathrooms tend to be the most valued to the consumer and also the hardest to change after closing due to the complexity of demolition and reinstallation. This often provides an opportunity to capitalize on a higher margin on these items as a customer is more willing to pay for them in the home purchase price over out of pocket. Some of these options may not even be possible post-close, so it’s essential to determine their value in the sale upfront and price them appropriately.

On the contrary, it is also important to consider what features should be priced competitively in order for them to be purchased at all. For instance, refrigerators, washers and dryers, and blinds are items that consumers inevitably need. However, they have many tools at their fingertips today to know the most cost-effective place to purchase them. This means it’s important to have a comparable value to outside vendors, even if that means the option margin is well below target, or else the take-rate will be dismal. Moreover, focusing on the other non-monetary advantages can help in this situation such as the concept of the home being turn-key at completion, not having to risk damage from an outside vendor, no sales tax, and any potential warranty benefits.

Lastly, option pricing needs to make sense and be easy. This keeps the customers in the most favorable thought process which is critical for them to come to a buying decision. Select a strategy that all options will be priced to such as to the nearest $5 or $10 and round up when able. This makes the options catalog easier to present for the sales associate, and it can help pick up incremental revenue which can make a big difference when multiplied over the entire business. It’s also important that you don’t leave room for customers to question the validity of the pricing of the options. For instance, if you are going to tier options, make sure the quality or perceived value from tier to tier is justifiable. This will allow customers to choose favorable upgrades with less resistance because the cost to upgrade is less painful than settling with a base house option and changing it out down the road.

Be Educated & Get Credit

The final piece, and often the most important one, is ensuring that your sales agents are educated on what you offer, the whys behind the offering, and how to build value in your product. This will allow them to overcome objections as it relates to the inevitable custom option request as well as not only making the customer want the options offered but making them feel okay to have it. Make sure your salespeople can communicate the impact that set options can have on a house payment long-term; this will make the decision easier for your buyers. Lastly, it’s critical that sales agents demonstrate important included and optional features to get credit for the option in the first place. If the customer doesn’t assign value to the features you offer, the framed strategy cannot be executed; therefore, you cannot realize the full impact of margin optimization.

Originally published May 23, 2018 under Explore the latest topics, updated February 2, 2024

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