Profits of Choice

Once upon a time, a home of one’s own, however humble, was the dream of every American. The cookie-cutter Levittowns that began popping up in the 1960s satisfied, en masse, that universal longing for a place to feel at home. No matter that consumers’ design choices were few. With a house came an emotional connection, hard won and felt with a fierce sense of pride. A new home is still an American dream. But now, that emotional connection is far more complicated. Even consumers who are solidly in the middle of the economic spectrum are striving not just for a house but for the definitive house, detailed just so. As design choices have evolved, so too have expectations. In a recent Yankelovich survey, 70 percent of consumers said they would be more concerned about making their house fit the way they live than about its resale value. “The average consumer expects to be treated like a VIP whether or not they’re wealthy,” says Barbara Caplan, a partner at Yankelovich, the market research firm based in Chapel Hill, N.C. “They have this level of control in the marketplace and expect to have a dialogue about their options.” Design centers dovetail neatly with the mind-set of the American consumer, which is “make it for me.” That attitude is evident across the board, Caplan says. “You see the concept wherever you go. At Starbucks, it’s, Which size, which flavor, which foam?” The housing industry has responded to this uptick in attitude and abundance. Rather than make design decisions in a sales office, today’s buyers are likely to visit a showroom. Instead of simply selecting carpets, countertops, and the color of appliances, they’re confronted with a dozen different walk-in kitchen and bath vignettes, half a dozen fireplace surrounds, and a slew of entertainment-center options. The volume of product possibilities means bigger and different space to show them off, epitomized by K. Hovnanian’s 17,000-square-foot mother of all home design centers in Edison, N.J. “We made a move to enhance our presentation and choices, both because of customer demand and because as the customer buys more, we make more,” says Michael Villane, vice president of marketing and sales for the Northeast region. Upgrades vary from $20,000 on a low-end house — typically costing around $150,000 — to more than $350,000 on the high-end houses, which might cost $1 million. Since the design center was built, he’s seen a 25-percent increase in what people spend on options. A 1990s Evolution Options and upgrades, and their savvy display, are now an integral part of the building business. But it wasn’t always so. During the 1980s, production builders began offering options simply as a way to attract buyers who might otherwise choose custom builders. Bob Strudler, COO of Miami-based Lennar Corp., dates the advent of the stand-alone design center to the 1990s. By then, it had become inevitable because of the sheer volume of products that flooded the marketplace, he says. That’s when options packaging took a strategic turn. “All of a sudden, builders started realizing that if they did this on a systematic basis, they could enhance profitability and the experience for the buyer,” Strudler says. “As the material world grew, tracking systems grew up to match it. What used to be a production problem has been solved with sophisticated computer software.”

Best Sellers: In our surveys by Readex, 679 builder executives tapped these categories as offering the most selling potential in 2002. This year, security/home automation systems were followed by faucets and lighting, respectively. (Source: 2002 BIG BUILDER Study)

Toll Brothers still sees its options program as a way to draw luxury buyers away from small custom builders while profiting from greater economies of scale. “We prebudget and predesign every option we offer, so if we’re adding a second-floor playroom over a four-car garage, our architect can plug it into a computer and know how much wood has to be ordered and in what sizes,” says Fred Cooper, vice president of finance for the Huntingdon Valley, Pa.-based builder. As the number of options Toll offers has increased, so has customer spending. Five years ago, options and premiums averaged $60,000 per home. Last year, the average Toll buyer added $90,000 in extras to her home, Cooper says. (The average Toll Brothers home sells for about $510,000.) The trend plumps up the bottom line for builders, whose average gross margin on options and upgrades is about 33 percent, compared with standard housing margins in the low 20-percent range, according to Strudler. Upscale Image The spotlight, long trained on baby boomers, will continue to follow them up market as their children leave home and head out into the world. Multiple fireplaces, his-and-hers bath suites, high-tech media rooms, and smart wiring systems are just a few of the upscale features that builders have begun offering in recent years. While consumer choices have followed the prevailing design trends over the years, flooring, kitchen cabinets, and countertops remain the categories in which customers spend the most time pondering their choices, according to Strudler. At K. Hovnanian, kitchens receive the most attention from consumers, who frequently are opting for gourmet appliances and granite countertops, says public relations director Doug Fenichel. But the 1990s also saw that affluent attitude drift down to the middle class, causing builders to shift their marketing once more. Just as luxury-car makers like Mercedes and BMW are spending billions on new, lower-priced models to lure less-well-to-do buyers with the cachet of quality, builders are spending huge amounts of time researching ways to bring value to every price point. “We like to surprise people by offering more options than they would expect,” says Cheryl Schuette, senior VP of home building for Village Homes in Littleton, Colo. “It’s a constantly moving target.”

Who’s Selling: More builders are setting aside space and specially trained personnel to manage the selections process. (Source: 2002 BIG BUILDER Study)

Selection Venues (Source: 2002 BIG BUILDER Survey)

In 2000, the Colorado home builder teamed with Masco to create a design center that not only offers options but captures valuable marketing information. A display called “future possibilities” is devoted to testing buyers’ responses to new products. A two-page survey plumbs their ideas about what they’d like to have that’s not offered. Other questions relate to mock-ups, such as a current display of ceramic roof tiles, and visitors are asked what they’d be willing to pay based on a description of the product’s features. To prevent sticker shock among middle-income buyers, the price is presented as the amount the purchase would add to a monthly mortgage payment. Village Homes works hard at offering entry-level products that look upscale. Research and development director Hope Marie Dunlavey travels the Parade of Homes circuit, scoping out features in custom homes that might be duplicated at a reasonable cost. Says Dunlavey: “We talk to our suppliers and say, ‘Where can you start with this, finding parts and piecing them together in a different way?'” After spotting an intricately detailed staircase rail made of oak and powder-coated iron, for example, Dunlavey asked a supplier to re-create the look in various price points, using standard hemlock and black iron as the entry-level choice. “We offer the least expensive variation all the way up to the more luxurious design, giving low-end buyers a similar look without spending a fortune,” she says. Despite this, Schuette says many of the company’s clients are migrating upscale, toward premium goods. Whereas oak cabinets used to be the upgrade, there’s a higher demand now for cherry and hickory. Other hot items are 12-by-12-inch granite tile countertops, professional-style appliances, warming drawers, and electronics. Village Homes’ average buyer adds $2,000 in technology upgrades, a statistic that’s climbing. What Price Choice? A decade of fine-tuning the selections process has led to smarter packaging of products, better systems to manage them, and more adept execution. While buyers have proven their willingness to pay more for what they perceive as good value, builders face an increasingly competitive environment, not only from other builders but also from home improvement centers. “We have to maintain the quality and prices our customers demand, and that’s a tough balance,” Fenichel says. “We have people whose sole job is to make sure we’re getting the best deal on the broadest spectrum of products we need, to maintain the actual and perceived value of our homes.” At Lennar, Strudler, too, believes that the ability to control costs — and thus the number of choices the company offers customers — is the challenge for the future. “We try to offer our customers a wide selection, but not every selection,” he says. “You don’t want to increase your production time by permitting the selection of items that are not readily available. You’re maximizing choice, but within the limitations imposed by production.”

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Option Overload

Cheryl Weber is based in Severna Park, Md. Published in BIG BUILDER Magazine, August 2002