New Tools to Avoid Panic Pricing in a Down Market
For Builders and Developers few decisions impact the bottom line more than panic pricing in a down market. Given the pressures it’s understandable that a builder will want to dump existing inventory as fast as possible at almost any price. Indeed the errors in pricing in down markets are almost always on the low side and that can mean a significant and unnecessary loss in profits given a recent McKinsey Group study that shows just a 3% increase in price can mean a 33% increase to the bottom line
How does a builder get it right when a decision needs to be made in a few weeks and existing comparable pricing data is no longer relevant in a shifting economy like the one we are now facing. The hard truth is that even in steadier economies there are very, very, few exact comparables. Rear view mirror analysis does not by any measure represent what customers would be willing to pay in the present day. And static and aging market data is even less valuable when you consider a rapidly changing market like this summer’s in Seattle where housing prices dropped $70,000 or almost 15% in a three month period.
The good news is that newly available on-line polling technology has made real time predictive pricing analysis that measures a customer’s present day willingness to pay, affordable and quickly available. What used to cost $500k or more, now cost $40k or less and what used to take at least six months, can be accomplished in two to four weeks; and what used to require thousands in a research cell in a fuzzy target audience, now counts hundreds in a very tight demographic polling panel that mirrors the builders exact buying zone. It may sound too good to be true but more reliable predictive pricing data is now available faster and at significantly less expense.
Polling precision matters much in residential construction given the variables in offerings within each and every individual builder project such as number of bedrooms, view, stories, etc. It means that predictive pricing analysis can accurately guide you to the premium price for every type of unit in a given project at any given time. It can accurately allow you to gap price your two bedroom with a view versus your three bedroom with just a peekaboo horizon. It means putting more profit in your pocket. Indeed the ROI for a predictive pricing project is now positive for any building project of a few million dollars or more.
It’s typical in down markets that builders will reduce the price by the same percentage amount across a variety of building units. This of course seldom makes good business sense because it assumes all buyers of every income bracket and demographic are equally impacted or stressed in a down market. Predictive pricing can now guide builders to which types of units need to be reduced the most and which not so much or even remain at the original price. Predictive pricing can even help builders manage their cash flow by providing insights on how long it will take to move the existing inventory.
Pricing has historically been the forgotten P in the four Ps of marketing (e.g including product, place and promotion). Forgotten because in most cases pricing intelligence was too expensive or took too long or was insufficiently precise to be of value. New massive on-line polling panels in the hands of seasoned pricing experts has essentially put an end to the guesswork. Darwinism exists in many forms and in the high stakes, volatile world of construction, especially during the make or break periods of high inventory, those innovative builders that utilize the latest technology to minimize their risk and increase their profits will eventually end up at the top of the food chain.
Swedish born Per Sjofors is an author and authority on all things pricing and the Founder and Chief Scientist of the international consulting group Atenga Insights. He can be reached at per.sjofors@atenga.com or 1-818-512-9133