Monday, May 15, 2017

Commodity or Custom or Both? Modular Home Builders Need to Decide

An earlier article, Stop being Price Shopped, brought to everyone’s attention the problem of commoditization many factories and modular home builders throughout the US have in competing with site builders and other modular home builders.

Like death and taxes, commoditization of your homes is a given.

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Modular factory sales reps have probably never heard a manager blame "commoditization" for failing to deliver sales or profits? If you've heard it, you've probably wondered if it was just a convenient excuse or if the manager had a valid point.

If you work in the Manufactured Home Industry, the commercial or the Container housing side, you HAVE heard this many times.

The truth is, even when a factory builds a no value added home and quality standards are set by law or the industry, there is still plenty of opportunity for differentiation around availability, lead time, delivery, payment terms, and all the other services that accompany the core product. Factory Sales Managers must use their imagination. As the saying goes: "There are no mature products, only mature managers."

That said, many factors are squeezing margins, increasing customer price sensitivity, and making it harder to sustain product differentiation. The product life cycle suggests that, as the modular housing industry matures, it becomes more susceptible to the forces of commoditization. The difference today is that the speed from launch to maturity is faster than ever before.

Even modular home builders that sell to the custom home market can fall into the commodity cesspool. Your quote and plan is being shopped and priced with other builders, both site and modular. I’m sure it’s happened where a prospective new home buyer gives you a plan and/or a quote from another builder and asks if you can meet or beat the price. That simple thing is the beginning of your homes becoming just another commodity home.

Factory Sales Managers and Retail Modular Home Builders can do three things to delay the inevitable forces of commoditization.

Innovate. A new product that better meets consumer needs, even an upgrade of an existing product, can one-up competitors and force them to invest in matching or exceeding the new specifications. High Performance is only one area that you can tailor to your own specs and other builders will have to try and match it to make the sale.

Bundle. Selling a commoditized product with differentiated ancillary services can appeal to buyers willing to pay a premium for the convenience. Adding these services into the base price of every home you sell and giving up some profit means your competitor has to figure out how to add that as an option and still be competitive.

Segment. Mature markets are large markets that can be divided profitably into multiple segments. Builders can focus on providing expertise for less price-sensitive customer segments. Pick a segment and go all out to become the expert.

So, how do you survive if you find yourself in a commoditizing industry characterized by me-too builders, overcapacity, and frequent price cuts? How can you make money?

Builders: Decide which customers you do NOT want to serve by firing them. You may lose market share but improve profitability. Remember, that ‘fired’ customer becomes your competitors new nightmare.

Factories: Trim costs and acquire competitors (with profitable builders) to extract maximum scale economies in procurement, manufacturing, and distribution. Acquiring rivals is a fact of life for the Manufactured (HUD) side of housing.

Factories:  If you aren't the low cost producer, complicate your pricing structures so competitors can't easily make side-by-side comparisons, and only provide discounts as needed.

Facing commoditization and non-existent product innovation, some factories and builders retreat to serving a progressively smaller niche of price-insensitive, service-oriented builders.

However the modular home industry approaches commoditization, it needs to innovate at all costs to beat it back.

Because, as Peter Drucker said: "In a commodity market, you can only be as good as your dumbest competitor."

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