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Bob Whitten, one of the home building industry’s most respected financial and business consultants, joined Greg and Kevin to discuss the importance of aligning sales and marketing efforts. Bob covers essential topics, including why sales and marketing coordination can pay off in a significant way. Listeners can accumulate masses of info from this episode as Bob outlines pricing models, market research, competitor research, statistical evaluation, marketing budgets, sales metrics, and more.
Before Bob’s full-time move into consulting in 2003, he was Executive Vice President and Chief Operations Officer of Land Solutions, a Florida based land development firm, EVP for Cooper Homes, the home building division of Cooper Communities, and for ten years was a partner and Chief Operations & Financial Officer of Wayne Homes of Ohio prior to their sale to Centex. While at Wayne Homes, Bob helped triple Wayne’s annual volume to 650+ homes per year while raising profit levels to 35% gross and near 20% net. Building on scattered sites and exclusively on the land of their customers, Wayne was the first non-land holding builder to be bought by a public home building company.
In a previous professional life, Mr. Whitten also served as Director of Business Management for the National Association of Homebuilders. He is author of the best-selling NAHB book “Building Partnerships: How to Work with Trade Contractors.” He is also a frequent speaker to industry groups, having conducted over 750 workshops and seminars over the years. He has presented annually on business management for homebuilders at the NAHB International Builder’s Show (IBS) since 1989.
[00:00:00]Greg Bray: Hello everybody, and welcome to another exciting episode of the Home Builder Digital Marketing Podcast. I'm Greg Bray with Blue Tangerine,
Kevin Weitzel: and I'm Kevin Weitzel with Outhouse.
Greg Bray: And we are excited today to have with us Bob Whitten from SMA Consulting. Hi, Bob, how are you?
Bob Whitten: Doing great. Thanks for inviting me.
Greg Bray: Well, we're so excited to have you with us.
Bob. Why don't you just, for those who are not familiar with you, excuse me. Um, give them a quick introduction. Uh, who's, who's Bob and, and a little bit about SMA consulting.
Bob Whitten: Understand, [00:01:00] um, Bob has been in the home building business now for, this is the 40th year, and, uh, and I didn't even get that early, but start in the business, to be honest with you.
So, um, I worked for a developer in Washington DC. In the late seventies early eighties during the Reagan administration, most of the Reagan administration. I went to work at the national association of home builders in downtown DC and was the director of business management, which sounds real good, but it had nothing to do with the business of managing the association.
It had everything to do with being a management consultant really to all builders, and it put it back in perspective. Date-wise this is back when. Laptop and desktop PCs were first emerging on the scene. Literally, one of the first things that we were charged with was to set up a software review program to monitor and development of software for home builders that would work on those new devices.
And my first laptop had [00:02:00] no hard drive in it whatsoever. I had two floppies, one on each side of the laptop where I put the data in, the, excuse me, the programs that on one side and the data disc calmer on the other side, worked at some lightning speed, I'm sure. But I did that for about five years. And then I went to work for a builder that was on our business management committee, uh, that I had stewardship over at NHB where we really talked about all the business management functions of the home builder.
And how can we can do a better job as an association back in those days, producing magazines, producing, uh, business seminars and things like that around the country and also, um, software review program and other types of programs like that responsible for it? During my tenure there, I met a builder from Ohio, got to know him very well because he was the chairman of the committee that I had stewardship with, and ended up going to [00:03:00] work there as a CFO.
That was Wayne homes in Ohio. This was 1988 became the chief operations officer. Within a couple of years, we built the company up to build about 650 houses a year. By that, by the mid to late nineties. Last five years that we were a privately held company. We average 500 houses a year, and we built about 5,000 houses there during my tenure, uh, in all in Ohio, all on your lot.
So we were on your lots, semi-custom, high production builder. So we had to learn how to make money, building a house as opposed to on land. And it was quite an experience and a great learning opportunity. And since then, we sold our company in 1998 to Centex. And I had to go someplace because I had a non-compete that were Centex wasn't building.
So I built some houses in Alabama and Arkansas and a couple of other places, but mostly I went into the consulting [00:04:00] business with my good friend Steve Mossman, the SM of SMA consulting, where Steve was a CPA, and we are known as the financial management, consultancy to home builders as well as operational management.
Yeah. Today, Steve, unfortunately, passed away 10 years ago, last August. And, uh, we had to close the California office, but we're located in Orlando, Florida, and we work with clients all over the country. And we, our specialty is a privately held builders building, say up to 200 to 300 houses, but as low as 20 houses a year.
And that's, uh, you know, teaching them best practices in business management. So that's. That's the 50 cent tour of what we do.
Kevin Weitzel: So let me get this straight. You started in 77 so you've seen the dot com bust, you've seen the housing bubble burst. You've now seen the COVID-19 thing that we're dealing with right now, and you know, where were you with your forethought and not joining up in like 1971 so you could have done the gas embargo. [00:05:00]
Bob Whitten: I was dodging things in Southeast Asia there for a little while and then. Going back to college and getting an accounting degree, and for some really strange reason, I decided I, after three months on my first accounting job, sitting behind a desk, I didn't think I could handle that.
So I went to teach school for a couple of years and really enjoyed that, but I figured out I couldn't make a good living making about $8,000 a year while I coached three sports and taught full time right outside of New York City in North Jersey. And so I, I ended up doing a couple of other things and finally putting my accounting degree back to use with literally a property and development company, property management development company in the suburbs of Washington, DC.
Kevin Weitzel: Well, former Marine here, I definitely appreciate what you went through in the early seventies and late sixties. Uh, and current stupid guy. I appreciate your time and teaching.
Bob Whitten: Excellent. Thank you. [00:06:00]
Greg Bray: So, so, um, Bob. This is, of course, we call this the digital marketing podcast, and we just heard all about finance and operations.
And so I, my goal here today is to help our marketing folks understand a little bit more about why they need to care a little bit more about finance and operations. So in your experience, do you see a disconnect sometimes between those two groups and how they view the world.
Bob Whitten: Not in the best of companies.
Um, because you know, we look at it and say, the best companies, the best practice, if you will, in terms of how do you overall manage a company is we like to manage by numbers. And marketing people can relate to this when they get to it. I mean, what's your closing ratio. What advertising medium did you use to produce that closing ratio?
And if you use three different advertising mediums over the last 18 months, which ones produced the best closing ratio, defining closing ratio, which ones produced the best traffic, and then how many sales did you make out of that traffic, et cetera. And we can break that down even further and talk about [00:07:00] gross sales and net sales after the fallout, you know, on and on and on and what produced it and what didn't.
We can look at incentives. We're going to go, what incentives produce the best results in terms of sales? What incentives produce the best results in terms of profitability of the sales that they resulted in. So, uh, yeah, I came into the management of marketing and sales definitely from the back door, not the front door.
I was a financial guy so I could relate to the profitability. I learned construction and my dad worked is a senior construction officer for some major commercial construction companies in the forties 50 off since TBA. He literally left the cotton mills, South Carolina in the thirties and went to work with the Roosevelts.
Tennesse Valley Authority building dams in Tennessee and then end up building things like that, the tunnel underneath the Boston Bay that's now called the Ted Williams tunnel, the Con Edison power plant in Niagara Falls, New [00:08:00] York that's on Lake Ontario. Dulles airport and outside in Loudon County, Virginia, et cetera.
And hearing him tell all those stories for all those years. So I kind of grew up on that side of the business. My degree and background was in the financial side of the business. So I came into that by realizing my good friend in sales consultant, Bob Schultz always says, you know, nothing happens until we make a sale.
And so you have to have the sales there, and if you're going to have sales to do that right, and do that efficiently, then marketing is the real key. So, uh, I like to sometimes hide behind. But the truth is, I probably know more about that than I, I give myself credit for. And I certainly can relate to the people in those positions and know that they need training.
I couldn't teach Kevin Weitzel how to sell better cause he just, that just comes naturally to him. But I know we could sit down and certainly talk about some statistical evaluation of the sales methods that he and his staff maybe have used over the years and [00:09:00] what's worked and what hasn't worked.
And I'll tell you one thing that's happening right now that all of you, based on the. You know the businesses that your in and the title of this podcast being the digital marketing podcast right now, some of my clients were making some of the best sales numbers of that they've made in the last eight weeks.
And how are they doing it? Digital marketing is the only way to do it. Online sales counselors, digital marketing, virtual tours, uh, interactive floor plans. I'm not blowing smoke up anybody's, uh, you know what, here, just because that's some of the things that outhouse does, et cetera. And the websites are what Blue Tangerine does it just the truth is, the truth is that's what it is.
Uh, I'll admit that back. You know, in the nineties when we sold our company, we sold our company in 98 to Centex and literally never had a website. You know, but that was the state of the world back then. It was probably 25 30% of builders in 1998 actually had a website.
We didn't have one, but the way I look at it, I look back on what we did back then and said, well, if I had this technology that we had today, boy, how much [00:10:00] easier my life would have been.
Greg Bray: Well, you're absolutely right, Bob, that the importance of digital has just been grossly emphasized over the last little bit as people have been forced to stay home and still been able to communicate and make those sales happen.
So some of those builders have done a great job, of adapting or already having the foundation in place so that they were ready for something like this.
Bob Whitten: Yeah. And we've, we've seen that, um, we didn't know what to expect, you know, with the lockdowns and the different places, different places at different degrees of lockdown, et cetera.
And obviously those builders that have been in Detroit, those welders that have been in Pennsylvania, especially Eastern Pennsylvania, New York, upstate New York, closer to New York City and New Jersey where the lockdowns from more severe. But even they have made sales despite, you know, the virtual lockdown that they've had and other builders, like our builders in the upper Midwest and our builders in Texas, uh, literally had a builder in Texas.
[00:11:00] Tell me, well, March was a good month. I thought the first two weeks of April, I would have told you though, it's finally hit. We're not going to do anything. I only made X number of sales, but he said from April 15th until April 30th you add that all together. I actually had my highest all-time sales. Month and this was a guy that builds close to 300 houses a year and has been at it for a while and so pretty amazing.
Kevin Weitzel: So I have a question for you, Bob. You know, being that you are so heavily in, in averse and such an expert on the operational side of a building, you know, you obviously there's always going to be a combative aspect of marketing wanting homes built as fast as humanly possible. But what can marketing teams do and sales teams do to help positively impact the profitability of the building process?
Bob Whitten: The big thing about profitability, the home building is for everybody has to understand it takes X amount of time. X being determined by which market you're in, what product type you build, what geographic market you're in, et cetera. [00:12:00] Um, it takes, I like to say it takes a minimum of 60 days of pre-construction time for a pre-sold house or for a spec that's coming through the process before we're ready to start building the field.
Why 60 days? Because it's been proven. If we take that time and apply it correctly, we actually get a house built a lot faster. The backend. And so I used to have customers come to me and said, Hey, your competitor down the street told me that not only will they sell me a house for a thousand dollars cheaper than you will, but they'll start my house in two weeks.
When you're telling me it's going to be two months before you start your house, and I can honestly look them in the face and say, look at these statistics right here. And based on these statistics, I can almost assure you that we'll start your house in two months and we'll still finish before they will.
So it's the overall duration of the process or transaction that we have to be mindful of. And there's also a thing that we call the even flow or slot schedule or even flow construction. Every builder has a certain volume that they can do and they're [00:13:00] really smart if they stick in net volume range. And if they try to exceed that and it's always plus or minus 10% if you try to exceed that by much more than 10% what happens almost invariably is the wheels start coming off the cart.
And what does that happen? What causes, I mean, what kind of problems does that cause for sales and marketing going forward? Well, now your customer referral rate drops. Your customer satisfaction rates dropped. Your reputation takes a big hit, and now the marketing people have to spend more money, more time to drive less qualified traffic.
Meaning when they, when they get set, when somebody sends a referral to you, they've been endorsed by a third party that they have some degree of understanding and respect for and has some credibility in the eyes of the buyer. They come to you. That's an easy sell.
Kevin Weitzel: Absolutely.
Bob Whitten: That's an easy sell, and that's what we want.
That's what we want to when we do these operational things, they seem at first glance to sales like you're putting a governor on me. I can only sell this [00:14:00] many houses. Well, the truth is, that's all the houses you could sell anyhow because that's all they're going to build. You know, the guy can't build any more than that because he only has this many trades.
He only, I like to say it this way, you only have so many horses to pull the wagon. And if you, you know, if you don't have any, any more horses pull away and then you can't make a bigger wagon. So when everybody gets in there and understands that that's the system that you're on, it works so much better.
Everybody's happier. Everybody is, the customers are happier, and that just makes everybody else's job easier and it makes it easier for us if we have a goal and a quota, I hate that term, but if you had a quota to hit, you know, 15 houses a quarter, five a month on average, man, it's really nice to get to the 20th of every month to say, Hey, I hit my five for this month already.
I'm just going to build a backlog for next month until we get to the point where we say, okay, guess what? We're so far out. You don't even have to tell a customer, I can't sell you a house. All you have to do is be honest with them and say, I can sell you a house today. But the truth is I can't start your house until this [00:15:00] date in the future.
And why can't you do it? Well, because I got all these people ahead of you, and then they'll sometimes ask as I'm having to ask me this, well, why can't you start more? Well, because unfortunately I only have this many of this and this many of that, and this. I'm just, I'm being honest with you. I say a lot of my competitors have the same situations and limitations. They're just not as often as honest with you. In other words, there's always, let's just sell it, and sometimes they just don't even know. They don't realize it until they get into chaos and a crisis and they realize, Oh my goodness, I can't sell this number of houses.
I just can't get them done now and now I just, you know, I'm going crazy trying to make this all happen. I get those calls every week when the market's good. I get those calls every week and I sometimes say, you're not going to like my answer. Because the answer is, you know, you're going to have a very, very good, bad year.
Until we get this thing under control.
Kevin Weitzel: I hear exactly where you're coming from. And, and I, I've experienced this personally in my selling, and that's, I feel that if you take the high road and give the honest answer of turnaround time, you know, it's going to [00:16:00] take me three weeks to get this. You know, when Greg selling a website, it's going to take me three months to build a proper, you know, well thought out, a well-engineered website for your company.
And then Joe Schmuckatelli lies to them and says yah can get it done in a month. Well, guess what? You're already down the river with Joe Schmuckatelli and realized that he was lying to you and it's not going to be delivered and the punch list is going to be incredible.
Bob Whitten: It's the same. it doesn't matter what we're doing, anybody that has to manufacture anything unless we have a stock room in the back and they're already in stock.
Anybody that has some manufacturing, anything that's the two of you guys in terms of your, your respective product? Me and my home builders in terms of the the much longer transactional nature of our product. But nonetheless, you guys both have fairly long transactions. It's not like I can walk into Starbucks and say, Hey, give me a coffee and we're done in 15 minutes.
It's a, you know, Greg, it takes, it does take months to build a website and it does take weeks and months and sometimes to produce drawings and interact with floor plans and all the things that you guys do.
Kevin Weitzel: Absolutely.
Bob Whitten: The worst thing that [00:17:00] we can do to our longterm relationship to this client and other clients is to lie to them or if not, there is one thing that's worse than lying to them just outright. And that is just literally not knowing and proving yourself so ignorant that eventually, you get into this chaotic situation that I've oversold. It's like anybody, any of us ever feel good, if we stuck in an airport someplace and they say, Oh, by the way, this flight is overbooked and would you like to give up your seat?
And what they're really telling you is, boy, you better you better push it away into line so you get your luggage in the overhead. Otherwise, you can be sitting at the airport here in Orlando for two hours a week for your luggage when you get off the flight. You know, it's just, it's not a good thing. And, we all have certain limitations.
It doesn't matter however many developers Greg has, and he can go and get some more, but they've got to get trained and you know, that's why we can do that 10% more. Maybe in some industries, we can do 20% more than our original budget. What we thought we were [00:18:00] staffed up to do, but it's hard to do. I've seen guys say, if you just come and help me fix a couple of things on my company, I can go from this hundred that I'm going to build this year to 250 next year because I can make the sales.
What a beautiful situation to be in. But it's crazy to try to do that if you're not capable of building 250 houses if you have the capacity, wonderful. But if you're not, so I think that's a long, very long-winded way of saying, one of the keys to marketing is operationally what can marketing learn from operations is the first question.
If I'm a marketing exec and I go into an industry where they're building or manufacturing something that I want to know. How many can I sell for you? What is the sales budget? How many and why is that the budget. No, not that there's some arbitrary all we also had around it. So wouldn't it be nice for us to make, you know, $40 million this year?
So let's, let's build $40 million with the houses. Well, where did that come from? That just came out of the air, because last year we built [00:19:00] 28 and I think we can grow a little bit. Yeah.
Greg Bray: So Bob, when you see people putting numbers out there like that. Do you, in general, and granted there's, there's always the people that that do it perfectly, but for most folks, are they communicating that way?
Are they backing into those numbers the way you recommend? Or are they kind of pulling them from the air and throwing out sales targets and lead targets to the marketing team that really are not based in some type of reality?
I say the uneducated, now, what does that mean? That means. You know, it's, sometimes it's hard.
I get blinders on because I work with a lot of the same people over and over again. We have a group that we call our inner circle, and the inner circle pays a small fee that to be, you know, get invitations to all these webinars and everything. And then we kind of work with those people and those people become our clients.
And so they kind of get indoctrinated into what we do. So I kind of get blinders on and I go, I can't believe that somebody would ever do it differently than this. And then I get out in the real world someplace at IBS or somebody, they, they [00:20:00] hear me speak and they, they come up and pull me aside and say, let me tell you my situation and then what?
And I'm like, I can't believe it. So yes, it happens, but to the uneducated, and that just means. They haven't been taught how to do it correctly or they haven't experienced enough pain yet that they figured out on their own how they need to do it. And we weren't so smart to figure this all out, to be honest with you upfront.
We just went through a lot of pain.
Kevin Weitzel: Well, there is that, there is a school of hard knocks. There's also the imitation, you know, XYZ builders are doing this, so I feel I need to do it too. But in all reality, you have to look at your overall picture and find out what avenues do you need to try, even if it's AB testing, at least start somewhere to have that, that litmus test, if you will, to be able to find out where you're wanting to point that those marketing dollars.
Bob Whitten: Absolutely. So we always roll it up and say, first of all, there's how much could I build? And then we always have to look at it and say, now from a business model [00:21:00] standpoint, by that I mean a business model is working very efficiently when it's. When it's scalable, sustainable, and replicable. Scalable, meaning that it can go up and down by, you know, X millions of dollars and still work because we can apply percentages of rather than raw dollars to metrics and things of that nature.
And then it's sustainable that we can do it from a year in and year out. It doesn't change dramatically. It's not all based upon, Oh, I just bought this 50 really good lots and a really good price because somebody was going bankrupt and that my whole business model is based upon me making a whole bunch of money on these 50 lots.
Well, what happens when you just sold the 49 flat. What are you doing now? You know, where do you go from there? So it has to be sustainable. And the big one, this is how all the public companies became public companies. Is it replicable? Do you really think that Dr. Horton, who built someplace in the neighborhood of 50,000 houses last year really has a business model to build 50,000 houses?
The truth is no, they don't [00:22:00] because nobody could figure that out. How to keep everything balanced. What they have is a business model than an then in a hundred markets, they're going to build 500 houses. They know how to build 500 houses in one market. They know how many salespeople it takes. You know how many models they know how many lots.
They know how much capital they know, how many superintendents, they know everything that it's needed. They build someplace between 350 and 650 houses, but 500 being the sweet spot and everybody needs to find out what's your sweet spot, the sweet spots where it's efficient it profitable and your customers tell you how wonderful you are when it's all over. That's the sweet spot. When you can hit those three things, I tell people who are you ready to grow? And they say, yeah. And I say, okay, the first thing we do, so we get to the new revenue and we get stable. What does that mean? That means we get efficient.
That second step of stability is our customers are telling us we're doing well. And usually, the third step of stability is now we're hitting our [00:23:00] profit margins we should be making. And now once we do those things, we hit the revenue, we got efficient, we got profitable, now we're ready to grow. And when you do it step by step like that, it's hard to go from 100 houses to 200 houses.
It's more like a 10 or 20% growth pattern at best. Unless you're a brand new startup and you built 10 houses this year and you're kind of. No jumped at 25 the next year, that's different. But if you've been in business for 10 years, building 10 houses, going from 10 to 12 is a big jump.
Greg Bray: Awesome.
Bob Whitten: Get off the soapbox here. I'm sorry.
Greg Bray: Oh, no, Bob this is great. I just want to let you just keep going. We'll just kinda sit and absorb. Um, but I have, I have some questions about pricing because I think, I think lots of times when, when people are having a hard time selling, um, or, or generating leads, they start looking at the product and say, Oh, well gosh, if you know, if cause price is something that, you feel like you can, you can tweak to get somebody's attention, whether that's with promotions or, or you know, specialists of some type or whatever. So I'd like [00:24:00] to just kind of hear your thoughts on what's the right way to determine pricing and when do promotions make sense in your, in your opinion, some of those ideas.
Bob Whitten: Okay. Let's start with the first one. The first one is the pricing model, let's call it that. And I'm a firm believer in we do a two-step pricing model. The first is what we call cost basis pricing, and the second is market-based pricing. All right, but we're doing the same thing. So first we do the cost base.
We figured out what all our costs are going to be to build this new plan and let's say in round numbers, make math these a hundred thousand dollars and a lot of costs, $50,000. So I got $150,000 into this house and I want, then we say, okay, what's the margin that you want to make? Margin, not markup. We apply that margin to that cost and we figure out that.
Well, we're going to sell that house. We do. I used to be able to do all that stuff in the old days. I looked at the accounting school in the sixties and seventies when we had no calculators, but I can't do that anymore. So I got a hundred and I got [00:25:00] 150 divided by 30 because I want to make a, or excuse me, 150 and I divided by 70 because I want to make a 30% margin.
I got to sell that house for $215,000 in round number two 14 nine right. So that all sounds good. Now the question just becomes, will anybody buy it at that price? So now all we have to go to the market. So I say to all home builders, and this is for the marketing guys. Market research, you've got three types of market research that you need to be doing perpetually.
If you are the head of the marketing department, and if you're the owner of a home building company, you're a marketing guy. Or if you are a small volume builder and you don't really have a separate marketing guy, your outsource marketing people could help you do this, or you can do it yourself. It's not that hard.
Um. One is the typical economic research that's like permits, job formations, family formations, all that kind of research. We call that economic research. That's the research that actually your trade associations, [00:26:00] including the national association of homebuilders, where you can join their economics, um, study distribution lists for someplace in the neighborhood, a thousand dollars a year. I haven't done it for a few years. That's what it used to be. Uh, and get updates on all of those. And that's well and good, but it's kind of like accounting. It gives you a, a rearview mirror view of what's going on in the world. The second market research you have to do is, is, uh, competitor research and that's where you figure out what are you selling and what size, what school district, what amenities, and what is your product going to?
How is your product going to compare? And that that competitive research tells me that houses maybe in my school district with the same type of amenities as this new plan, let's say this $215,000 house in round numbers is. I don't know, 1400 [00:27:00] square feet, that's $153 and 50 cents a square foot, and then I find out that other equal houses, equal amenities.
This one doesn't have a fireplace. That one doesn't have a fireplace as a base. This one has a two-car garage. It's 20 by 20. Those have two-car garages that are approximately that same size, et cetera. Uh, they're selling $145, that's an $8 a square foot difference. $8 a square foot times 1400 square feet is a lot of money.
That's 10 12 $15,000 so you're going to be, are you going to be able to, now, to my chagrin, Nordstrom's, when we're not on lockdown, still is open and still sells a pair of shoes for about 80% more than you can buy them online and about 40% more than you can buy it from Zappos online. With great customer service there as well.
But Nordstrom still sells shoes all day long. Why? So? Nordstrom's has the ability to look at square inch pricing on their shoes and [00:28:00] say, forget about it. I have something, and maybe it's the guy in the tales playing the grand piano at the entranceway or something like that, or the reputation that, or the chocolate that they serve in the shoe department.
I don't know. But people will still come and buy from. So it's not always a price, but most of the time in our business it's, it is some degree of price. So if I'm off by eight-ten five dollars or more a square foot, I got major things I need to do. What can I do? I got to go back and figure it out. And there's a whole seminar unto itself about that.
What types of things we can do. But most of the time, I like to say if, if now, if I, I figured that was 153 and my competition is at 154 so I'm only. Or my competition's at one 52 so I'm $1 more, a square foot higher than them, so I'm $1,400 more. My ego is just big enough to say, if I can't, and my salespeople and my marketing people can't figure out a strategy for me to be worth a buck, a square foot, more than some of us need to find something new to do for a [00:29:00] living.
Kevin Weitzel: Get to packing.
Get to packing, a dollar a square if you can't sell that, you don't want to be working for me.
Bob Whitten: Right, and I can do that. I'm big enough. You go this today. If I can get in front of a customer, I can sit down with my slot schedule where I show him why it's going to take me two months to start their house, and then, you know, 90 days I can have your house done, or whatever it is.
I can sit down with them for that. And then when they get done, they're typical, we'll look us and nobody's ever explained that to me before. Say, no. I can educate the home builder enough to get that buck afoot. And so then I would just roll it out to the market and I'm good with that. So that's the combination of, that's a long-winded way of saying, you know, pricing is twofold.
One is I go to a cost and apply margin. Second is I have to take it to market and I can do a bunch of things to get it to market. I can change the plan, I can adjust the specifications of the plan. I can figure out, you know if I need to replace a trade contractor or two or three to try to get the plan better price, or I can reduce my margin sometimes, you know, talk about a 30% margin.
Well, we like a 25 to 26% margin. [00:30:00] So long story short, I hope that answers your question now. You'll ask me the second part of that question about incentives. And I, you know, I'm not a real crazy about incentives unless you know, we need them. I think when we have a good balance of specs, we know what we are in the market.
We're trying to build the right number of houses for a market share in the marketplace. We generally have less need for incentives, but sometimes our competition in the market conditions kind of force us into it. And when we do, uh, incentives, I love to do incentives based upon options.
Kevin Weitzel: I do too.
Bob Whitten: I don't like to reduce the price of my houses that hits appraised value right between the note, right between the eyes.
I don't like that because if I give a $10,000 discount off this house, I mean, I literally am walking away from $10,000. But if I could give a $10,000 shopping spree in my design center where you can buy $10,000 worth of options from me, I typically am only going to be spending about $6,000 on that because I'm looking [00:31:00] for a blended rate of about, even though my, my overall profitability profit margin is someplace between 23 and 30% margin I'm looking for on a house.
Dependent upon the market and geographic market and business model market and those types of things. But the options across the board, I'm looking for a blended rate of 40% on option purchases. Why? Because it's not, what's an option? It's, you don't have to have it. It's a, you want it not, you need it, and if you want it, then people are willing to pay more for it.
They put it in their house, and they're also the structural options, which are our most profitable options are the ones that are the hardest price. Structural options being something like a third car garage, an extra room, bumped out the back of the house, a finished room, frog, we used to call it a finished room over the garage, et cetera.
All of those things, structural options are just changing the fourth bedroom into a, um, a study. You know, maybe it's only a $1,200 [00:32:00] $1,500 option to do that and come to find out it actually costs you to negative $200 to do it, but you charge them 12 or $1,400 to do it because it was a benefit to them, but it really took away a closet and other things that you didn't have to do anymore.
Greg Bray: So, so what if I, if I understood you correctly, then, um, the, the key for incentives is to put them in your, your options and upgrades, um, so that you've maintained that, that base price integrity, both for just consistency in internally, but also for the appraisal impacts that it can have.
Bob Whitten: That is absolutely correct. Now that's a little bit harder on spec houses. You know, what do we most often trying to incentivize a spec house that doesn't sell. The biggest thing I can tell my marketing execs about a spec house that doesn't sell and my company owners is, you guys need to establish a policy that says, dependent upon your market that you serve your buying market.
Who your consumer is. You need to establish some rules about every spec house that can exceed the base price of this, of the [00:33:00] house that it's being built as a suspect out by a certain percentage. And every model home that I built in a community where I'm trying to sell those houses by 8% is slightly higher than that, but not all crazy.
I see a lot of guys trying to sell $200,000 houses just making up numbers now in a community, and they'll put a model in. It's, you say, what's the as-built cost of that model? And it'll be $295,000.
Kevin Weitzel: 350
Bob Whitten: Right? I mean, you just blew the market that comes into the falls in love with it, and then you tell them, well, guess what?
But you can't buy it. You know, because you came in thinking it was a $200,000 market. And so for entry-level, I say all my spec houses can have put 10% options and that's all. That's all you got. That's all you can spend figuring out what you want to put in there. And I always have a little list of things on every house.
For me, every house, every spec house that I built has these things that are optional, but they have to be in there under cabinet lighting in the kitchen. Big example. Floodlights at the front door and at each [00:34:00] corner and the front elevation of the house. Even those, those are options that are not included in my base price for my house, but for every spec I built, why half of the year you go to Ohio where I used to build half of the year, you could have a spec house sitting there, not lit up.
Every night you turn those lights on and now you know to leave some lights on the inside, people have nothing else. They can come in there and look through the front window if they want to. And look at my house. Well, while people are home, they will walk in the neighborhood. But anyhow, and so, and in a model home and my entry-level, I'll go as high as 15 so it's 10 to 15% options for entry-level for a move up.
It's generally 15 to 20 for the second time move up. It's generally 20 to 25 and for luxury think toll brothers, that's a luxury production builder, right? Uh, out of Pennsylvania, they could build a $300,000 townhouse. And you can option it out to do as a spec house or as a model at 399 because they can go up to the people who buy those houses can [00:35:00] afford to go up to 33% options, but not your entry-level people.
You know, my guys building houses for $189,000 in Laredo, Texas. Today, we build a model home, man, you've got 12 you've got $20,000 at most to put in a model home. You got $15,000 to put in the spec house because if you put more than that in it, the people will want it, but they won't be able to pay for it. And if you've done that, what will eventually happen? You'll give it away.
Kevin Weitzel: Exactly. You know, when somebody is prequalified for the first time by her home, they're not coming in with a ginormous budget. They get to choose whether they want maple cabinets or carpet pad, and that's all they, that's all they have in the bucket available of cash to spend.
Bob Whitten: You got it. We have to be aware of that. And that's, that's for the, so for incentives, you know, that's, that's a thing. But when it's spec houses, you know, we the same thing. We're going to give an incentive. It's sorta like we have to, what can we do on the outside of the house? You know, it's certainly like a move-up house.
We can do all, we can do a fence and we could give them a, uh, irrigation [00:36:00] system and we could put, you know, sod in the backyard if I don't typically, or whatever it might be. Extra concrete for the, you know, boat to sit on, uh, whatever. But specs are harder, and that's, that's probably the place I would probably be remiss if I actually sat on your podcast talking on behalf of SMA, Steve Mossman, and associates.
That's what the SMA stood for originally. And not say that one of the biggest mistakes we see a lot of builders is an overt Alliance upon a speculative building. It's easy to build spec houses or it seems to be easy and a really good market, especially it's, but the typical spec house that we monitor year in and year out against presale houses has a gross profit differential of 2.2%.
And that does not include the fact that more spec houses are sold with Co-broke realtor. So we're paying an extra 3% often for those, maybe a few times more than a pre-sold house, but just the gross profit differential is 2.2% [00:37:00] less for specs historically than for presales. Now I do have a builder or two who once in a while will, will get the same profitability on their specs and their presales. I have one guy in Newburgh, North Carolina at the listening to this. He knows who he is. I love him to death. He's like my fourth or fifth son. I have two natural and a whole bunch of home building sons out there. Uh, and he, every year his facts are good, but I, I'll go to my grave telling him, that's just because your presale system is screwed up.
Greg Bray: Well, there's certainly that you can, you can always have more than one dial to turn right. To figure out where the problem is. Well, Bob, um, is we're, we're getting a little close on time here. A question about marketing budgets in general, what are some recommendations you feel people should be kind of allocating for marketing budgets?
Bob Whitten: Thanks for asking. Hopefully, I can say this in like two minutes or less. An overall sales and marketing budget we want to spend for a production home builder, and we can define that at some point in time if anybody needs it, [00:38:00] uh, is about 6% of revenue. That's a good benchmark. Five to seven is kind of the range.
Now, what's included in there that includes my commissions and sales salaries will be about 3% of that in an ideal world, 1% for advertising, and we thought we were getting, making deep inroads when, when websites came along into that 1% for a few years, you know, because the, all the traditional old print, you know, we just had to pay for it every time we got to run an ad.
And every time we wanted a billboard and every time we printed an aside, we had to pay for that. But the website just, Oh wow, look at this. We paid for it once and it just kind of stays out there for a while. And then you guys in digital marketing got really smart about how to, how to get us to, do Pay-per-click and all that good stuff. All the stuff that we, and now we're spending that 1%, it's right back again and we're spending it just in different formats. But that's for advertising. Another percent for a model home. Okay. That's for the overall model home and the in the [00:39:00] community signage and all that kind of stuff that goes along with it.
Not, not the very brand new communities. That's a separate budget unto itself, markup on a start-up budget. But this was the ongoing budget. 1% there, and then that leaves us with about a percent for incentives. Like paying closing costs on behalf of a buyer. That's a big one at the entry-level, that's a real big one.
Um, giving away things like a fence or refrigerator or something else that comes along. And also that market research we talked about earlier, you can't do that. And I left off one part of market research, by the way, which is the one that in our industry gets forgotten about the most, but it's actually the most important.
And that's consumer research. And when it comes a time, every once in awhile, maybe once every four years in NHB, will do a little study on consumer research and they'll come up with some decent things for us. But overall, most of the time, the big builders are maybe a home builders association locally or statewide has to do their own market research.
I used to use a group out of [00:40:00] Carmel, California. Don't even know if they're still in existence called lifestyle research. Brooke Warrick was the guy's name, and, uh, they used to survey 4,000 new postal addresses. We did this every two years in the state of Ohio for us. Think about it. New postal address, that's a brand new home that was built or a new set of apartments.
So it was either our customer from last year or it's our customer for next year, you know, that we're serving. And we would ask them, we would put in this survey back in the olden days, you know, now they could all be done electronically, but back in the olden days when we send out snail mail. It included a self-addressed stamped envelope in them, and we actually put $5 in the survey.
That's not long. The survey was and say, look, we know this $5 doesn't, doesn't pay for your time for filling out the survey, but it's just an expression of our appreciation. Thank you so much. If you can fill it, we would get a 10% response rate back about, we did it every two years, 400 [00:41:00] surveys every few years.
We crunched the numbers and an amazing thing. The first time we did it and it, and it repeated itself each time we did it. Was that we found out who our customer was. That was one of the things they told us they would do for us. And they said, your customer is a heart lander. And we said, well, what's that mean?
And they told us, and I said, well, how do you know? And they said, well, we could do all sorts of different, you know, uh, algorithms and things and show you why your customers are Heartland Lander. But the real reason is we sent out 4,000 surveys and with each, with $5 items, that cost me 20 grand right there.
But we got 200 of them back with $5 in the self-addressed. I didn't want to keep your money cause I didn't have time to fill out your shirt. That's a hard Lander. And then they went on to tell us, you know what kind of things our customers liked in the house. If they only had $5,000 to spend, where would they like it?
One year we went through all of our homes and revamped them. I spent a ton of money. Trying to figure out how to get walking closets into every [00:42:00] single bedroom that we could get a walk-in closet in, despite the fact that we built houses in the entry-level first time, move up with 22 by 22 garages standard that's oversized and a full basement underneath every house, but they still wanted and were willing to pay for a walk-in closet.
That's what was interesting. We couldn't get them in all of our homes, but where we could, we revamped them to get walking closets. Then because the consumers told us that's what they want and not because we felt that's what we needed. Real key piece. I'm going to shut up in a second, but I'm going to tell you the one last thing that I always tell anybody about marketing.
It's part of marketing. I guess the biggest mistake I see homebuilders make, other than trying to build more houses than they can actually do or selling more houses than they can build. That's the number one mistake. The second biggest mistake over specking the houses, because they feel that's what should go in the house.
Not because I've ever listened to their customer at their customer's budget. Tell them what should be in the house.
Kevin Weitzel: That is very poignant [00:43:00] so. I'm going to toot your horn for a little bit because I run into people in my outreach to potential builder clients. Uh, that speaks so highly of you you know, the Toby Spades of Virginia Homes, the Vivek Puri of Classic Homes, Nick Thompson's of Thompson Homes, they have nothing but good things to say about you and how you've positively impacted how they operate their business on a day to day basis.
Um, so how would our builder audience and granted a lot of our audiences more based on the marketing side, but how can their building or their builder companies come to you, uh, with, and get the benefit of all the knowledge that you bring to the table? With SMA,
Bob Whitten: Sure always, the best way to get me is we have a website.
It's SMA opsb.com or SMA consulting.net so it's out there. It's not as good a website as Blue Tangerine could do for me. I know, but.
Greg Bray: We can talk after Bob
Bob Whitten: and, but the big, that's the way to get to me personally is just email and it's B Whitten, W, H, I, T T E [00:44:00] N@smaops.com. And I don't care. marketing guys, you've got a question, send me, send me.
I usually try to respond to every question in 24 hours that I get, and I spend a great deal of my day. I could probably, and the reason I always tell people to email rather than the telephone or any other medium is because I'm literally on email probably three to four hours a day and the other three to four hours of the working day, I'm oftentimes on the phone, especially now that I'm not traveling outwardly.
So email me and I'll be happy to talk to you about your business or to answer your question and if you've got an interest in seeing what we do. I work with several good young people here in Orlando. We do a various work in purchasing, estimating, uh, drafting for some builders. We also do consulting in financial management, construction management, HR.
We do personality profiling for a lot of builders to help them with, uh, and skills testing to help [00:45:00] them hire the right people for the right positions. We have a whole series of job descriptions and growth reviews, performance appraisals on a system to teach how to do that. But the big thing that we do is we, we have new clients come in.
And usually come in for two days, but then right now with everything going on, we just break it into about ten one hour sessions and we teach the overall best practices at about the 5,000 foot level of for home building in all of these category areas. You know, we, we touched on three or four of them today and we spent two or three minutes each talking about those.
And we generally have an hour. On each one of those topical areas and a whole bunch more. That's usually the best bang for your buck and only costs 2,900 bucks. And, uh, we just kinda, some people describe it as you just have to come with an open mind because those guys turn the fire hose on and they expect you to drink from it for like two days.
We do our best.
Well, Bob, thank you so much. I mean, it's [00:46:00] been a lot of, uh, useful information. I know that, uh, I've, I always learn every time we talk, uh, and I, and I hear you speak, and I think it's great for the marketing team to understand a little bit more about some of these numbers and the impacts and make sure that they're kind of seeing why things are being done the way they're being done.
So everybody's on the same page. So
If you want more information on the, you know, just the metrics of the marketing side of the business, I'll be happy to show you off what I have or show you some presentation slides or send them to you that we use in some of our programs. So we're happy to do that.
Greg Bray: That'd be great. Well, thanks again.
Bob Whitten: Thank you Greg, and thank you, Kevin, very much for inviting me.
Kevin Weitzel: Yes, sir.
Greg Bray: I'm Greg Bray with Blue Tangerine,
Kevin Weitzel: and I'm Kevin Weitzel with Outhouse