For those who experienced it, the Great Recession feels like it wasn’t that long ago. In fact, it lasted roughly from December 2007 through June 2009, and during that time unemployment reached 25%, home values declined by a national average of nearly 10%, and revenue for the top 200 home building companies dropped 63% by 2010.
The pressure of those years cements them in our minds. It was a time of necessary reinvention and resourcefulness. Not everyone survived. Yet, to others, the recession is just a faint memory; something they heard about on the news or in school.
While teaching a course to some marketing leaders recently, I mentioned the Great Recession and one attendee asked what it was. It rapidly became clear that this wasn’t sarcasm, and a quick survey of the class revealed they had worked an average of 4.5 years in home building (since about 2016), and so had not experienced any part of that recession personally.
It was then that I vowed to make sure the lessons of the Great Recession are passed on. This article is the first step.
Lesson 1: Advertising Can’t Solve It All
When times get tough, leadership looks to advertising to solve problems of low traffic and sales, or even consumer confidence and affordability, with the unfortunate belief that the biggest and widest net will eventually catch all of the fish required.
But homebuyers aren’t fish, and marketers often fail to explain which problems they can actually fix. In fact, advertising really only addresses three distinct needs—but only if your price/product/place mix hits a minimum standard of value for the consumer.
The first (and best) thing advertising does is attract attention so customers can instantly assess the value of the offering. If the perceived value is high enough, advertising can additionally inspire further action. Or, ads can simply educate. That’s it.
Still, when the Great Recession hit, many companies advertised themselves out of business believing they could “ad-buy” their way to profitability. When traffic dried up from the single, full-page ad in the Sunday paper, at $8k to $15k per week, they ran two full-page ads, certain that would drive traffic to the models. The lesson: If you increase spending and don’t see results in a few weeks, understand that marketing isn’t just advertising, and roll up your sleeves to help solve the actual problems.
Lesson 2: Rapid Competitive Analysis Is Key
When your value proposition isn’t strong enough to achieve the desired results, conducting a competitive analysis is critical—not only of your new-home competitors, but also of your local market as a whole. How many homes are selling at each price point? What features do these homes have in common? Can you offer or design a new home at a similar price that offers something unique that customers want?
When housing took off in mid-2020, home builders struggled with price discovery and perceived value of their homes. Many ultimately decided to use a bidding process so the market could inform true value. That’s a nice problem to have ... and an easy one to fix.
Offering large price incentives instead of reduced starting prices in your advertising is a dramatically less effective tactic.
But such “price discovery” on the way down is far harder. There’s always someone willing to pay you less—eventually there is a point where no one is willing to pay you more. You must analyze the data points from other builders, as well as resales, to determine value and where the market is headed faster than your competition to effectively outmaneuver them.
Lesson 3: Improve the Starting Price Point of Your Homes
Starting price point is one of the most powerful tools in the perceived-value war. It’s like a cheat code that can quickly affect results. I understand it’s not easy to reduce the starting prices of your homes, but it must be done.
The most painful way is simply to cut the profit on your existing offerings, but two better ways to adjust starting price are to reduce included features (allowing buyers to add back in what they truly want) and to invent new floor plans with smaller square footage and unique layouts.
The goal is to attract consumer interest by using a “low” base house price on the smallest home in your community lineup and then hope that many ultimately select a larger floor plan that results in better profit mar-gins. If they never click to your site or visit your community to begin with, nothing else can happen. The starting price point secures that initial interest.
Lesson 4: Repricing Beats Incentives
If anything I share here will be considered controversial, this is likely it: Offering large price incentives instead of reduced starting prices in your advertising is a dramatically less effective tactic to boost results.
Here’s why: During the recession, some builders offered free cars, pools, and “hundreds of thousands of dollars off” in an attempt to improve their value proposition. But to consumers (and other builders), these were signs of desperation, not value creation. Many who tried this method actually expedited their own demise.
In mid-2008, the home builder I worked for started down the incentive path, offering an average of $80,000 off retail pricing on an average sales price under $500,000. The sales team, unsure how to value the homes they were selling, would often—out of a sense of guilt—subconsciously negotiate with their own builder, even beyond what consumers would push for. As a leadership team, we searched for a better way.
After 60 days of intense competitive analysis of the entire market, all of our floor plans and options were repriced to what we called “market-based pricing.” This improved our starting price points without creating a bait-and-switch scenario on our pre-priced options (custom options still remained higher). It also instilled confidence in the sales team that our value was unbeatable.
The customer response was loud and clear: We grew every year by an average of 20% from 2008 to 2012, without offering incentives. Ultimately, we reached 26% market share of all new-construction permits in the counties where we did business, even though we were a “luxury” builder.
Lesson 5: Appointments Trump Traffic
“Get as many traffic units as you can to the sales teams in the model” was the rallying cry during the recession. Weekly traffic reports were abysmal, with many communities receiving an average of zero to two units of traffic per week. After our exercise of pricing to the market, the number of traffic units improved, but not as dramatically as one might expect.
What did improve markedly was the number of appointments held by the sales team. Appointments can be prescheduled or held on the spot with walk-in traffic. They are meaningful conversations around pricing and options that last at least 15 minutes—dramatically different from a model presentation with an unregistered prospect.
While traffic counts improved from zero to three per week or from two to eight per week, appointment counts rose from zero to three a week or more (often every traffic unit was an appointment scheduled by our online sales team). Most important, a pattern emerged: The number of traffic units didn’t really matter at all, as appointments were converting up to 50%. In fact, it wasn’t uncommon to see a traffic report with one traffic unit, one appointment, and one sale.
Sales managers stopped asking sales-people “How was your traffic?” and started to focus on how many appointments salespeople had and how they planned to continue the progress toward a sale.
It’s often said (and it’s true) that great markets make bad habits. But even good habits need to be reconsidered when markets get incredibly rough.