Tuesday, March 21, 2017

Four Biggest Profit Mistakes Modular Home Builders Make

For modular home builders, pricing is one of the biggest challenges you face.

Have you ever wondered by 80% of all modular home builders close their doors within 5 years of starting their business?

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Modular home builders live in a lower-margin, highly competitive environment. It makes a builder risk setting prices too high and maybe push potential new home buyers away or risk setting prices too low and you cut profits.

This "pricing paradox" drives most builders to default to ‘beating’ your competitor’s price. However, risk in most cases can be eliminated by getting better information. Generally, the more you know, the less risk you perceive. From that perspective, pricing is all about getting as much information as you can about your market, your customers and your own internal numbers that drive your profit.

There are no secrets in business, there is just information you don't know yet.

When it comes to pricing, here are four things to avoid. If you can avoid these, you'll not only be ahead of your competition, but also you'll be ahead of most other businesses.

There are 4 major components in every modular home that you have to watch carefully.

  1. Design, Sell, Factory, Delivery
  2. Codes, Prep, Foundation, Set
  3. Finish, Landscape, Utilities
  4. Gross and Net Profits

This article will focus on the 4th component, profit. Here are the four mistakes most modular home builders make that go out of business within 5 years:

Pricing too low and undercutting all the time:
For some builders, this isn't a mistake, it's an entire strategy, and it's not a very good one. Going in too low all the time might be great for your top-line revenue number, but it wreaks havoc on your bottom-line profit number--the one you will need to survive. You need to profit and price accordingly. You might not get business out of all of your price-conscious customers, but that's OK. Your competition will--and then they will have to figure out how to profit from the "price shoppers" when there is little or no profit to make.

Not understanding the difference between margin and markup:
Margin is always based on sales price. Markup is always based on cost. I recently talked with a builder who didn't understand the difference and thought a 20% markup on his costs was the same as a 20% margin. When I finished explaining that when his costs are $200,000 and he adds a 20% markup, his selling price is $240,000 but he prices his homes using a 20% margin that same house has a retail of $250,000. After I finished he realized the difference. Don't make the same mistake.
Forgetting to take all costs into account:
In order to price correctly--every cost needs to be identified. Even "little" things like job johnnies, clean up people and even pizza lunches for the set crews can typically add up to 2 percent on every house. Other items, like delivery or shipping costs, can also sneak up on you.

View them as diligently as you would your cost of goods sold as having an impact on your bottom-line.

Finding out what your competition charges and doing the same:

Instead of "following" your competition, do a bit more homework and start to discover and uncover the value you truly offer your customers. Then price for value. That way, you are in an excellent position to defend your price against the competition, with a lengthy list of your own "reasons why" your homes are worth their price.

3 comments:

Anthony Zarrilli said...

Great points made-I can comment on this in long winded detail but the short of it is this:

Every customer that comes into my office I tell them that if they are just going to look at the bottom number and nothing else we are not their builder. They need to look at all line items that bring in the final cost. We include EVERYTHING from demo through CO and beyond. If they don't make a change they will not see a single additional invoice and their contract number is their number. So many other builders put in unrealistic allowances (such as tile for labor and material including sub floor install of $2.00/sq. ft.-completely unrealistic). They during the job hit them every other day with upcharges-this is not way to go through a job. With our "all in number" it makes the job much less stressful, frustrating and in the end a MUCH happier customer. Surprises are not fun for the customer typically surprise is spelled MONEY. Thanks again for a great article.

Gwen Elliott said...

Great article coach. We don't mind letting customers walk when price is their only concern. If a guy down the street wants to undercut our prices, they aren't going to be in business very long. We set our prices the same way - Anthony does. Unless the customer adds something after the contract is signed, they never get another charge from us. If we miscalculated a price, that's a learning lesson for us and we change it for the next time. We've had a lot of learning lessons over the years.

Modslsman said...

I hear the word "Price" a lot in this article and from potential clients. I don't talk price, I talk value.