A: I'm so happy to see this question come in because I don’t know a single builder out there that doesn’t want to increase their margins. Wanting to do it, however, and actually doing it are very different things. I knew that Al Trellis would have the information builders need to make more money in 2016. Al is the co-founder of Home Builders Network, and has 25 years experience as a builder and consultant for the home building industry. This is what he had to say:
“The fundamental answer to the question above is simple: All of the myriad actions that we can take to increase profits fall into the following four broad categories:
1) Raise the Price
2) Lower the Costs of the Product
3) Reduce Overhead
4) Increase Sales
“Notice the order of the four categories. Most builders, when confronted with the question of how to increase profitability, go immediately to Category No. 4, increase sales (i.e., sell more). However, I believe that the order of the actions we take is extremely relevant, especially since sales volume and price are related.
“There are two primary reasons for the sequence of actions shown above. The first reason is my unwavering belief that business people often act based on their level of anxiety, particularly regarding pricing. Having a higher price than your competition is not automatically a bad thing, since most buyers also consider other components of value, some of which are not financial. Economists refer to the relationship between price and sales volume as elasticity, and understanding how much we can adjust the price with a minimal reduction in sales is at the heart of any strategy for optimizing profits. Most often, a modest increase in price will not slow sales at all.
“The second reason for this particular sequence of actions is that all of the other categories require significant commitments of time, energy, money, and/or pain to make them happen. They frequently require significant changes in vendors, products or people, and such changes are almost always uncomfortable and unpopular. Adjusting prices and pricing strategies is a much simpler process.”
Al shared with me that there are many successful strategies for each of the four categories that he described above: so many that he wrote a fifty-page handout on the subject. Al has offered to share it for free with our readers, and I encourage you to take advantage of this extremely valuable information. Email us for your copy.