Discount Houses

Welcome to the end of no-haggle pricing. The last couple of years builder model homes have been like Carmax or Saturn lots. Buyers show up. Salespeople quote a price. Everybody agrees. No haggle. No hassle. It's been great, hasn't it? Salespeople as order takers.

Those days seem to be ending. Salespeople are actually going to have to sell. The days of investors coming into buy new homes, just to flip them a few months later are over. The result of this change is a re-emergence of discounting.

For builders trying to differentiate themselves on quality — which is probably not a bad message for all builders — this discounting creates a very uneven playing field. To be honest, it feels a little kneejerk. For an industry that has been flying so high for so long, I worry that jumping so quickly into discounting will facilitate a perception of lagging sales. It's bad enough that we have to deal with daily news reports in the consumer business press about a potential housing bubble, but to fuel the speculation with rampant discounting programs hurts all builders.

Discounting at this time also feels a bit disingenuous. I know homebuyers are much savvier about costs and quality associated with home building than they were 10 years ago. Still, the ability of a home buyer to ascertain costs for any installed building product is a stretch. Offering discounts on products or items they don't really have true sense of the value of is just discounting for discounting sake.

In the sales arsenal, discounting is probably the most powerful method to create a sense of urgency. For an industry that has probably lost some of its sales discipline over the last few years, discounting has real appeal. It's simple and easy, communicates directly with the buyer and makes the builder and his sales staff feel as if they're really doing something.

Discounting undermines the entire value equation. You can get a real clear view of this in the home improvement market. Homeowners can always find someone to do the project for less money than a reputable contractor. Some guy with tools and a truck is always willing to work for wages. Consequently, professional remodelers must battle constantly with both maintaining and communicating the value equation.

One of the most exciting trends in the home building industry to arise in the last few years has been the strong focus on customer satisfaction. To delight demanding buyers, builders must deliver services in addition to the product. Discounting acts like a rot at the center of a service business. The value equation for service businesses is almost entirely based on the perception of their quality. FedEx was successful because the perception of its service, overnight delivery, allowed it to change the value equation for mail delivery. People would pay 10 times more for an overnight delivery than they would for regular mail, which took an average of two days. If FedEx discounted its service, it would have undermined the entire strength of the company.

For an industry that looks like it's moving into tougher times, discounting is the wrong answer. Holding margin and maintaining the value equation will help the whole industry.

Paul Deffenbaugh

630.288.8190, paul.deffenbaugh@reedbusiness.com