[Editor's Note: Just over one year ago, The Builder's Daily added business improvement strategy and learning installments from our longtime friend Ken Pinto, whose lifelong passion in business has focused on the build-lifecycle's supply and capability value chain. Ken's star, as so many of you know, has rocketed since the publication of his book "How Much Is The Milk? Uncovering Your Greatest Cost Savings in Residential Construction by Listening to Your Suppliers." We're grateful now, thanks to friends at On3, a mobile-based AI technology powered learning platform for the construction community, we can bring Ken to you in a new, video leadership learning format. It didn't take a global supply chain meltdown to make Ken's insights and action points a "must" master class. But now that it's happened, and now that supply chain operational excellence is a non-negotiable, what do you say we ask for more "Milk?"]

Homebuilder concessions, Lennar executive chairman Stuart Miller says, are "an art, not a science."

What they are as well – encroaching into more and more markets and submarkets throughout the U.S. -- are a reality of housing's 2022 correction.

A challenge of that reality for homebuilders and their partners is concessions – done right or wrong -- can fracture and split what had been selling as scalable products, prices, and programs into a dizzying host of more individualized customer-specific moving-targets, each hinging on constant calibration, coaxing, and focus.

The other thing Lennar's Miller and other strategic team members note in their focus on the "art" of navigating a business through a rough patch is that you can't ever expect to get concessions right if you can't also get operations, construction, and purchasing, and product evolution right as well.

It comes down to this. Swaying people to buy and staying in the black.

Al Trellis, author and founder/principal at consultancy Home Builders Network, notes that the "art" of concessions strategy and practice comes with an affirmative answer to a double-bind question.

Will it result in the most sales, and will it minimize the amount of additional concessions requested by potential buyers?

If the answer is "yes" to either one – but not both – of the questions, the answer is wrong.

The backdrop here is that ...

1). prices are coming off elevated highs that allow for some leeway to work its magic to motivate buyers,

2). many builders margins have been healthy enough to allow for some compression without cutting into bone,

3). competitors up and down the street – particularly, big nationals, whose gambit will be to play for a market share burst by pricing concessions to siphon buyers from rivals – will factor into what prospect perceive as value,  

4). recent commodities pricing declines will help "fund" some of the forward-order concessions, and

5). a net unit profit tolerance limit – fully loaded for sales, general, and administrative and debt costs – becomes the bright line in the sand not to venture near or across.

The trick, Trellis advises, is to strike a delicate balance -- one that stimulates sales and closings by conveying much-more-for-the-money perceived value to a buyer while, at the same time, strengthening a pricing "floor" that protects a builder's minimum acceptable net margin. This means an "announced" savings amount that's motivating enough to grab attention and interest, with a conceal-and-reveal array of value opportunities to bring each buyer over the line.

To illustrate, Trellis uses the following hypothetical example of the surface and sub-surface concessions – aimed to motivate a particular buyer without de-valuing the product line among other present and potential customers:

Originally Priced at $489,900

• Reduced to $464,900 - Save $25,000
• Special Financing arranged through Builder - 3/4% below Market - Save $19,279 in monthly payments*
• Annual Taxes in the premier Sherbet County School System - Prepaid by Seller for two years - Save $8,400
• Free oversized 14’ by 10’ cedar and pressure treated deck with stairs to grade and built-in seating - a $6,350 value
• TOTAL YOU SAVE - $59,029

*Note - Based on first seven years savings. Loan Amount of $371,920 (80% financing) and a market rate of 5.25%, special rate of 4.50%.

Here's how Trellis sums up the dual mission of this concessions strategy.

Here the total claimed (and hopefully perceived) concession is $59,029 instead of the $50,000 offered by a price reduction from $489,900 to $439,900. Additionally, the builder does not spend the full $59,029 due to the difference between the cost and the value of the special financing and the deck offers. We also enjoy the benefits of a “packaging of concessions” instead of just a single price reduction, and hopefully we have created a situation with a reduced probability of requiring further concessions due to the pattern of decreasing incentives, with the final one being worth $6,350 instead of a single $50,000 price reduction.

Now, here's a catch. To be able to execute on customer-specific concessions tactics and move inventory, data and alignment are lynch pins.

A carefully calibrated concessions strategy – over-delivering in a compelling and motivating way on perceived value, and yet protecting a homebuilder's margins – like the one Trellis has framed out only flies when the building-lifecycle functions as it ought to, which is hard.

That is, the pre-start, development-to-completion cycle needs to lock-in and operationalize the latest real-time commodities pricing trends. Too, improved supply chain visibility and just-in-time materials and building product distribution flows to job sites need to recapture time off the construction schedule and move that capability into customer care and nurturance initiatives.

That's all in the data, and not just any data, but fresh, responsive, clean data that populates and repopulates across the enterprise network on a constant basis – a single-source of truth.

These operational gains do not come simply by taking a cudgel to vendors – trade crews, installers, building materials suppliers, and manufacturers – to ratchet down their pricing so that builders can protect skinnier margins as they try to ignite acceptable absorption levels. Crushing partners now on their pricing is a short term fix at best. If they're businesses are tanking, you're not going to thrive.

The work – and success strategy – will be to turn the time gained from lower order levels and a newly "normalized" pace of demand into money and added focus on individual customers' array of catalysts and needs. Best practices – such as fusing unified data and technology platforms to expose cost opportunity areas and risks on both the expense and revenue sides of the ledger – that should be in place in good times now are crucial survival operational disciplines for the tougher stretch ahead.

As new starts activity slows, operational excellence opportunity grows because time is a resource that converts readily to value, efficiency, and optimal performance.

Many companies have just been too busy over the past few years to move forward with their strategic projects that could ultimately improve operations and create efficiencies in their day-to-day tasks," says Chris Graham, President of Constellation HomeBuilder Systems. "A slight slowdown in the market should provide organizations a chance to take full advantage of their existing technology solutions or invest in new and innovative ways to improve their businesses, realize cost savings, and improve profit margins."

A homebuilding organization's capability to weather truly turbulent months ahead will require an almost unprecedented alignment of every moving part on the operations, construction, and strategic supply chain front. That starts with clean, consistent, real-time data on every moving-part material, submaterial, process, practice, and outcome. That way, it's the customer that gets the focus.

Concessions, after all, are about striking a win-win lightning in a bottle, and doing it again and again. Builders that bring that win-win mentality over to the construction supplier side of the ledger have a better shot at reliably delivering that to homebuyers because they're the ones who'll keep making their numbers.

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