Going Forward, It's All About Market Share for Homebuilders

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While increasing revenues and profits are the gold standard in measuring business success, depressed home sales means that builders need to look at new metrics of performance. In addition to revenue, customer satisfaction and profitability, builders need to pay closer attention to market share.

August 01, 2008
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Cardis' Tips

Every business aspires to yearly revenue increases, but home builders who are depressed about yearly declines must recalibrate their goals to put greater emphasis on market share. The fact is, virtually all builders are experiencing a significant drop in home sales. That means survivors must outperform the competition even when their own sales are continuing to decline.

Jack Welch, the renowned former chairman and CEO of GE, provided bonuses not by how much a business unit profited, but rather by benchmarking each division with its corresponding market averages. If a division was highly profitable, but less so than their competitors in that market sector, he gave no bonuses to that division. Correspondingly, if a division lost money, but was doing better than the market, he awarded them a bonus. Crazy you say? Welch credits this incentive strategy as one of the ways he lead GE to consistently record profits.

Please don't misunderstand this point; we shouldn't stop trying to grow our businesses. Rather, it means we need to reset the definition of success to our employees in this age of miserably sky-high inventories and declining home values.

In light of the economy — which will surely send dozens more of builders into bankruptcy — how does one measure success? Many builders today do not know how to set up a dashboard for success because the past misled them to think high volume and high profits were normal. Half jokingly, you might say you are successful if you're still in business. More seriously, however, you need to look beyond sheer volume and turn your attention to other measures, such as market share, customer satisfaction and increased profitability.

Whereas there used to be more than enough business to go around, home builders must increasingly vie for a shrinking pool of home buyers. Though sales volume will always be a key factor, market share will become a more important measure of performance. A company that sold 1,000 homes representing a 5 percent market share should be proud to sell just 750 homes representing a 10 percent market share. That's a 100 percent increase in market share, despite a 25 percent decline in unit sales. Rally your team and celebrate this kind of performance. Without recognition, we risk significant staff burn out!

In some respects, every home building executive needs to restrategize his or her company as if it's a new business. Business plans need to be rewritten to reflect the new realities of the marketplace, and new measures for success need to be implemented. Sales volume will always be an important factor. However, a more sophisticated approach that values gains in market share along with profitability is needed to thrive in an industry where many are struggling to survive.


Author Information
Paul Cardis is CEO of Avid Ratings, a research and consulting firm specializing in customer satisfaction for the home-building industry. You can reach him at paul.cardis@avidratings.com.

 

Cardis' Tips

Carve a Bigger Slice

The size of home-building pie may not grow for some time. Meanwhile, focus on getting a larger piece of what's still there.

Revise rewards

Align incentives with your new focus on market share. Award bonuses even when sales are down if market share increases.

Focus on the customer

The best way to increase market share is through referral sales, which only happen when home buyers are delighted.

Remember Profits Still Matter

As you work to increase market share, make sure you're still keeping an eye on ways to increase profitability through watching those expenditures.

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