Supply Chain Initiatives: Growth Options

For most division chiefs, the metrics of growth are usually measured in the number of communities started, new homes ordered, and the average price paid for each home sold.

But increasingly, one of the most important variables in the equation is how successfully builders’ sales, marketing, and design center teams can increase the value of options and upgrades that eventually become part of those homes and communities.

Option and upgrade sales, on average last year, represented 11.2 percent of the total sales prices builders grossed on new homes sold in 2003, according to a new Big Builder industry report. Builders say they believe that percentage has room to grow. Fully one-third of home building executives surveyed expected that figure will increase in the next 12 months. (About 60 percent expect the proportion will at least stay the same.) The study represented firms building at least 100 homes a year.

Extrapolations may be deceiving. But given NAHB figures for the average sales price of a new home—which in December reached $261,100—and the 1.085 million new single family homes sold last year, options and upgrades sales represented something approaching a $32 billion business within the new home construction industry in 2003.

It’s a business, however, that many builders concede they are still struggling to manage more effectively. Among the biggest challenges: Managing buyers’ expectations and determining the right investment in staffing and showroom displays.

According to the study’s findings, a majority of big builders continue to concentrate their sales efforts on big-ticket upgrades on flooring, cabinets, appliances, countertops, faucets, fixtures, and lighting (see chart). But these same categories remain widely promoted—and often more completely merchandised—at big box retail outlets. As a result, builders are still refining their pricing strategies, sales tactics, and training programs to overcome buyer apprehensions and the inevitable question about why these same products seem to cost so much less at the big box retail stores.

Asked how builders expected to upgrade their options sales, roughly three out of four said the most influential factors would be increased investment in their design centers, followed by increased sales efforts. High production builders—building at least 1,000 homes a year—who have already made those investments, believed the biggest factor influencing potential sales increases was the simple fact that customers continue to request more products and upgrade options.

Builders are expecting to get help from suppliers. When asked which tools and support services they believed would have the greatest impact on boosting sales, 72 percent of big builders—and 80 percent of high-production builders—said the measure that would have the most impact is putting more support behind design centers and model home displays. But more than half (54 percent) said having suppliers train their sales forces would have an important impact on boosting sales. Providing better support in the form of full-line product information to sales staffs and product education and warranty information to give to customers would also impact sales efforts (see chart).

Despite how much market research seemingly is available about consumers and housing, builders place a great deal of value in having good market intelligence on what various consumers are buying or will likely buy in their next new home.