There is a veritable geyser of data tracking housing today. From existing-home sales, to house prices, to new-home permits, to starts—housing metrics abound.
Desperately Seeking Differentiation
So what is it that separates your company in the marketplace?
In a top 10 U.S. market in a city far, far way, a company quietly builds hundreds of production homes, breaking most of the rules that the industry has come to accept. It is incredibly successful, with the gross margins of nearly 40 percent (the highest I’ve ever seen) and a backlog that typically extends out two years. It possesses an astoundingly efficient production system, unbelievably short cycle times and extremely high customer satisfaction.
It is a very "stealthy" firm. Hardly anyone knows about it or talks about it. It doesn’t participate in the HBA or BIA; it never goes to meetings and has never been featured in a magazine. The owner likes it that way. The company never brags -- it just builds great homes, produces loyal, delighted customers and makes a ton of money.
I’d love to tell you the name, and some of you will figure it out, but out of respect for their low-key stance, I’m not giving it away. What is important is that you understand their philosophy and what it could mean to you.
I went to visit this builder as part of a team from another company that had made an investment in the firm and wanted to study its methods. What I saw astounded me. It was, well...it was weird. It was even-flow to end all even-flow: 42-day construction cycle, 44-day closing cycle. They start a house every day at 8:00 a.m. and close one every day at 4:00 p.m. Every day! Its project managers only know how to do two numbers -- one a day or two a day. That’s either 250 units or 500 units a year -- in a single project. If you want a particular lot, he’ll tell you on exactly what day you will have it delivered. And it will be the model he has designated, no exceptions. If you don’t want it, someone else does. Talk about absorption!
How does this builder do it? He builds incredibly uniform product, very few options and absolutely no custom options whatsoever. Won’t even discuss it. He builds long, fishboned, cul de sacs of 30, 40 or even 50 lots and puts the same model and floorplan on each one. Okay, there are three elevations, but these are only slight variations in roofline. Everything else is identical.
There is one grade of carpet and pad -- premium. Buyers get their choice of four colors. There is one tile -- white premium Italian ceramic. It has his name on the box. Buyers do have one option there -- leave it out and take the concrete floor. If a consumer wants another tile, they have it installed after the sale. (Few customers do this.) There is one cabinet -- a high-quality white Euro that he makes himself in his shops. Getting the picture? He builds the same house over and over and builds them perfectly. The workers get really good at them. Then he landscapes the bejesus out of them and his buyers are happy. The price/value equation is unbeatable.
Now, I know I’m losing most of you here. You are saying, and rightly so, "My God! Who would want that? Who would buy that? Fifty houses all alike? No options? No choices?" The answer? Only about one out of 200 people! So you are correct. I would never suggest you build what this guy does, but you can still learn a critical lesson from him. Read carefully. Read it again. Read it to your management team and discuss it. If you are like most managers and me it will take awhile to sink in.
I was enamored, as was the rest of the group, of the amazing production methods, but that was not the source of greatest inspiration. Listening to the owner describe his marketing strategy and how he evolved to it was even more provocative. Paraphrasing him, of course, this is what he said.
I woke up one day and realized that I could do really well and make a ton of dough if I got just two percent of the market. That’s only one buyer out of 50! And since new homes are less than 20 percent of the total home sale market here, I’m really getting less than one half of one percent! That’s less than one buyer out of 200! So what am I doing throwing all sorts of crap against the wall and seeing what will stick? I’m going to build something really, really well, that only one out of one hundred people are interested in -- and get half of them! The fact that 99 percent of people don’t like what I do won’t bother me for one minute.
And with that thought -- that paradigm shift -- the whole world changed for this builder, and it can for you, too. No longer do you feel compelled to build entry level housing, plus first move up, plus second move up, plus luxury, plus condos, plus townhomes, plus apartments, plus duplexes, plus patio homes, plus quads, plus the occasional strip mall! How well can you really do that -- and why would you want to? But you do it, because of one very simple reason. You have never decided, as a builder, who you really are.
The ultimate test here is the elusive concept of differentiation -- what sets you apart from the others. You’ll never achieve it, simply reproducing what every one else builds out there. Look at Oldsmobile, the oldest automotive nameplate in this country, a company that only a decade ago, produced and sold a million units a year in the United States. It builds very competent cars, but now sells less than 100,000. After many attempts at reinvention, GM has just announced its closing. Ultimately, there was nothing to differentiate them. Olds had a big boat luxury model (like Cadillac), a sporty luxury model (like Buick), an SUV (like Chevrolet), and a mini-van (like Pontiac). Each is very highly rated on production and quality but the company possesses nothing that is its own any more. Consumers went searching elsewhere.
As I said at the outset of this column, what enamors most people, and rightfully so, about this builder is the astounding even-flow production system he has built. But the subtle lesson that escapes most is that it was the marketing decision that enabled the production systems. Without the extreme focus on differentiating himself in the marketplace and concentrating on his product, he never could have developed the incredible systems of production that have become the visible backbone of his success.
At this company, salespeople never come to Monday morning meetings moaning about the ones that got away because they didn’t offer see-through fireplaces, whirlpools or purple paint. They know that most people won’t like what they see -- they expect it. But they sell all the ones that do, and they laugh all the way to the bank.
Lessons Learned by Scott Sedman tells the stories of the home building industry. As only an industry veteran like he can, Scott examines our habits and practices with an eye to improving the craft and business of home building. Scott is the president and founder of TrueNorth Development, Inc.
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