There are basically two ways builders can boost their bottom lines: lower costs and increased revenue. In a previous blog, we focused on the cost-cutting aspect. In this post, we’ll explore ways for builders to increase profit.
Understand Markup vs. Margin
“It sounds elementary, but a lot of builders don’t know the difference between markup and margin when calculating their sales prices,” said Bob Whitten, CEO of SMA Consulting. “Markup is cost of sales multiplied by the desired margin percentage, while margin is gross profit divided by sales. As an example, a 25 percent markup yields a 20 percent gross profit. Many mid-sized builders don’t even price their own homes. They leave that to their purchasing, sales or accounting teams, and that means they often don’t price their base homes or their options correctly.”
Whitten feels that more builders should offer base homes as standard, then sell “nice to have” features and upgrades liberally as options.
“This is one of the keys to higher margins without impacting sales velocity,” he said. “No one ever buys just the base house. They pay for options.”
To illustrate his point, Whitten points to the fireplace in his Florida home.
“I’ve never used it once in 16 years,” he said. “If I had really wanted a fireplace, the builder could have offered it to me as an option – and would have probably made up to 40 percent margin on it. That’s why I constantly tell builders, ‘Options are your friend.’”
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Know What You Do Best and Capitalize on It
Whitten also extols the virtues of consistency and focus.
“Some builders have hit-or-miss revenue because they try to be all things to all people,” he said. “But the really successful builders don’t do that. Toll Brothers is never going to be the entry-level builder in any market they’re in. They focus on the move-up niche. We all know that the majority of restaurants fail in the first few years, but a McDonald’s almost never fails. Builders need to have that same unwavering focus.”
Today’s builders need to think like MBAs. The more they know about margins, markups and brand focus, the higher their profits will climb.
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