Business Metrics and the Imagination Age of Home Building

In the home building industry, we find ourselves at the intersection of the Information Age and the Imagination Age, a transition that brings a paradigm shift in business metrics and how we perceive and use data.

Gone are the days when merely gathering information was enough for a home builder to stay competitive. The key to success today lies in leveraging this data creatively to drive innovation and efficiency. “We are surrounded by data but starved for insights,” says author and marketing consultant Jay Baer, a sentiment that rings true now more than ever. 

Data in the Imagination Age

The Industrial Age was about efficiency. The Information Age emphasized the power of information transfer. Now, the Imagination Age demands we use data to foster creativity and innovation. Home building companies must adopt this mindset to create unprecedented value for their customers and stakeholders; it’s not just about having data, it’s about transforming that data into actionable insights.  

This evolution requires a culture that embraces creativity, technology, and the willingness to experiment and learn from both successes and failures. 

Which Metrics Really Matter for Your Business?

A significant challenge in the Imagination Age is distinguishing between valuable data and noise. With an overwhelming amount of data at our disposal, it becomes crucial to identify which metrics truly matter. Are they key performance indicators (KPIs) or drivers? Are they strategic or just vanity metrics? 

Lagging vs. Leading Indicators: Understanding the Difference Between KPIs and Drivers 

KPIs are essential metrics that help gauge aspects of business performance. They’re often lagging indicators, meaning they reflect outcomes that have already occurred, and they typically require analysis from multiple stakeholders to understand the full picture. 

Net sales, for example, measures the total revenue generated from sales activities, while gross margin helps assess financial health by showing the difference between sales revenue and the cost of goods sold. 

By contrast, drivers are leading indicators that predict future performance and can directly influence outcomes. They are often more actionable than KPIs and can provide early warning of potential issues. 

In this new age, it’s not just about having data, it’s about transforming that data into actionable insights.

Examples include the Budget Bust metric to indicate potential overspending and allow for preemptive corrective actions; Vendor Overload, which can help manage operational strain by highlighting when vendors are overburdened; and social media engagement to indicate marketing effectiveness and help predict future customer interest and sales. 

Are They Strategic Metrics or Vanity Metrics?

In the realm of home building, not all metrics are created equal. Understanding the difference between strategic and vanity metrics is crucial for any builder aiming to leverage data effectively. 

Strategic metrics are actionable, relevant, and directly linked to business goals. They offer profound insights that drive meaningful action and align directly with business objectives. They also provide a real-time, unbiased snapshot of performance and help forecast future business outcomes, enabling quick, informed decision-making.  

For instance, instead of focusing on the lowest cost (a vanity metric), strategic metrics for vendor and cost management consider the weighted average cost, reflecting the true impact on business efficiency. 

The same goes for cash flow, where the strategic metric would be the number of months of expenses covered by available cash, not just cash on hand at a given time. Thus, it provides a clearer picture of financial stability. 

For scheduling, you would track the average shift per closing to create far more actionable insights than simply counting the number of days on a base template. 

Vanity metrics, by contrast, are appealing but often lack depth and relevance. They can be misleading, inflating perceived success without reflecting true business health. Perhaps impressive on paper, they fail to provide actionable insights, potentially leading to misguided decisions.  

A good example is social media followers. While your numbers may appear impressive, they don’t necessarily correlate with actual customer engagement or sales. It’s the same with website traffic: High site visitor numbers don’t indicate real performance. You need context (that is, actual sales conversions data). 

Another example is customer satisfaction score, which can be misleading if it’s not tied to specific, actionable feedback that drives improvements. 

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How to Define Your Metrics 

To harness the power of data, answer these questions to help define your metrics: 

• What is the metric? Start fresh, be precise, and don’t make assumptions or bring past “baggage” to the conversation.
• Why are we measuring it? Ensure the action that should be taken works toward the company’s strategic goals.
• How is it calculated? Whether it’s a number, ratio, or index, all numbers are not created equal. Carefully consider where the data comes from and whether it can be automatically updated.
• Who owns it? The right metrics are owned by one person or a team. Keep drilling down until it’s clear who or what team that should be.
• When are alerts triggered? Know the acceptable tolerance or range for a given metric to trigger an alert, whether that number or ratio is above or below the tolerance.
• Where and how do we display it? Gone are the days of printing and taping numbers to a wall or bulletin board. Make your metrics accessible digitally and, ideally, in real time or as current as possible. 

Don’t skim over the above questions. Each metric must be actionable, relevant, timely, objective, and predictive. And consider all of the possible ways the metric could be manipulated. While we expect the best, we don’t want to encourage people sidestepping these metrics. 

Using Metrics: Putting It Into Practice 

Let’s see how gross margin—a critical metric in home building—stacks up in the Imagination Age.  

Gross margin directly affects your target net profit. But simply measuring this lagging indicator by itself isn’t enough. To truly influence gross margin, focus on its drivers: offering profitability, revenue modifiers, and cost modifiers. 

Offering profitability examines the profitability of various offerings, including base options and customizations. By aiming for a target gross margin plus a percentage (2%), builders can ensure each offering contributes positively to overall margin. 

Revenue modifiers include lot premiums, sales incentives, and concessions, which significantly affect gross margin. As such, it’s crucial to monitor and manage these factors to ensure they add positive value.

For instance, avoiding excessive sales incentives or strategically pricing lot premiums can help maintain a healthy margin.  

Cost modifiers involve variances, change orders, and vendor changes. Keeping these modifiers below a certain threshold (for example, less than 2%) is essential for maintaining control over costs.  

Managing change orders effectively and selecting reliable vendors can reduce unexpected expenses and protect gross margin.  

By focusing on these drivers, you can take proactive steps to positively influence gross margin. Instead of reacting to lagging indicators, implement strategies that address the root causes affecting profitability.  

Tip: Each driving metric should ideally be assigned to a dedicated person to monitor, set up as a leading indicator, and have thresholds to trigger alerts when something falls out of tolerance, ensuring a more dynamic, responsive management approach. 

Implementing Dashboards and Alerts for Your Business

The final step in the Imagination Age transformation process is to visualize your drivers using a dashboard and alert platform that can immediately notify you and your team of issues.  

Real-time visualizations and notifications enable swift action, ensuring issues are addressed promptly and effectively. If a picture is worth a thousand words, a dashboard is worth a million emails. 

Consider these dashboards and alerts: 

• Variance purchase orders: Track which cost categories drive variance and which vendors contribute disproportionately. Set up alerts for significant variances. 
• Gross margin shift: Understand shifts in gross margins and receive alerts when margins deviate from targets.
• Cash flow forecasting: Predict future financial positions based on current data, with alerts for potential shortfalls.
• Option profitability: Identify which options fall below target profitability and set alerts for any underperforming options.
• Start package completion: Ensure initial budget representations align with actual outcomes to safeguard profits, with alerts for discrepancies. 

By implementing these dashboards and alerts, builders can move beyond traditional metrics and embrace the transformative power of data in the Imagination Age.