Transcript Intersection of Pricing and Marketing

The Intersection of Pricing and
Marketing
Reginald Hislop, III Ph.D.
President/CEO
Larksfield Place Retirement Communities, Inc.
The Current Real Estate Economy
 Real estate economies are local economies – some are faring well, others have
fully recovered, some continue to languish.
 Seniors Housing sales are significantly influenced by the state of the
local/regional real estate economy.
 What we know today “generally” speaking;
 Strong rental demand continues
 Prices for real estate have leveled and increased in most markets
 Foreclosures and short-sells close to normative levels.
 New housing starts still off giving price stability and demand strength to
existing housing, especially housing > 5 years old.
Real Estate Economy Dynamics
Understanding the issues that impact
the real estate economy.
Buyer/Investor Psychology and Consumer
Confidence
Regional and Local Economies
Government Policy
Credit/Banking Dynamics
National Economic Trends
Housing Supply
Buyer/Investor Psychology and
Consumer Confidence
 Consumption is a function of demand for a particular good
or service that is available in sufficient supply at a price that
the consumer is willing and able to pay
 Consumer confidence is all about the willingness and the
ability (real and perceived) of consumers to purchase goods
and services – how one feels about spending one’s resources
on (typically) non-essential (food, gas, etc.) items.
 Investor psychology is a combination of outlook, economics,
risk and the price that is quoted to reflect these items (loan
terms)
Regional and Local Economies
 While national economic news dominates the airwaves, real estate
is truly locally and regionally dominated
 What is true in some locations is not true universally
 In current post-recessionary period, some regions/locations
performed better while others struggle (Chicago suburbs, rust
belt primary and secondary areas like Milwaukee, Cleveland,
Toledo, Gary, IN.)
 Regions and locations that perform better evidence less
employment volatility, more government/institutional
employment, a broader supply of moderate priced housing, less
speculative development/new construction
Government Policy
 To sustain mortgage liquidity, the federal government and the
Federal Reserve have maintained Fannie Mae and Freddie Mac
intact – the primary buyers for mortgages
 The Federal Reserve has continued to buy Treasury securities as a
means of maintaining capital market stability and price stability –
key as mortgage rates are tied proportionately to Treasury yields
 Federal banking policy has shifted lending criteria such that
mortgages, while attractive via rate, are not as readily available
 Key issue for future policy: Job creation, tax rates, confidence in
continuing favorable lending/borrowing environment (Fed
Reserve)
Credit and Banking Dynamics
 Interest rates remain favorable
 Terms and conditions have tightened due to defaults and federal
policy changes – regulations now require more verifications and
credit requirements from borrowers
 Market for mortgage-backed securities very lackluster - requires
more banks to originate and “hold” their mortgages
 Fewer overall lenders – less competition, less product
 Tighter appraisal requirements and erosion of higher level market
comparables – price/value compression still existing in many
markets.
National Economic Trends
 Continued high unemployment and limited wage inflation
 Continued stock market favor (equities) with remaining fixed
income disfavor (bonds).
 Mixed economic news suggests no real forward momentum
 Uncertainty regarding federal health policy and economic
policy persists
 Large and growing amounts of cash “sitting” awaiting a change
in investment climate
 Global market insecurity and volatility – impacts U.S. in
terms of trade, currency, investment
Housing Supply
 Large and growing in terms of product available – keeps prices
low
 An increasing percentage of the supply is “troubled” – default or
foreclosed
 Supply is greater than actual demand – too much supply lengthens
the turnover cycle
 Supply in highest demand continues to be for moderate to low
income housing – four to eight times below the real, current
demand
 In some markets, supply continues to grow in proportion to
population as the population is decreasing (Southwest metro areas)
Demand for Senior Housing and
Elasticity
 Demand for housing in general, is fairly constant.
Influencers of demand include;
 Location
 Price
 Type (single, congregate, etc.)
 Supply is stable to growing. Today, supply of available units
for housing is greater than demand.
 Economic Axiom: Supply exceeds demand, prices fall in
order to increase consumption. With housing, cycles for
absorption (consumption) are longer – can’t efficiently
reduce inventory.
Principle of Elasticity
 Adequate to surplus supply of comparable products at various
price points = Elasticity
 Stable to limited supply of a product with alternative or
replacement products priced higher = Inelasticity
 With elasticity, when prices for a given product rise or remain
stable compared to prices for comparable products falling,
demand for one product shifts to the lower priced/lower cost
option.
 Demand can be impacted even when prices remain stable if the
financial condition of the consumer changes – consumer shifts to
lower cost alternatives
Elastic Demand
Elasticity and Senior Housing
 Many alternatives exist at different price points
 Remain at home
 Smaller home or condo
 Rental
 Add services to complement remaining at home
 Move-in with relatives
 Supply of senior “housing” units in most areas is adequate to
surplus with the exception of moderate to low income
housing.
 Supply of senior housing units tends to exist at price points
equal to or above the median market cost/price of
alternatives.
Current Senior Housing
Consumption Realities
 Price offered for a unit is positively or negatively impacted by
consumer financial situation – real and perceived.
 Economic outlook, particularly for real estate, does effect
consumer psychology (confidence)
 If the ability to re-sell existing homestead is limited or
constrained, especially at a price point psychologically palatable to
the senior, senior housing migration is negatively impacted –
won’t “give away” the property
 Value proposition must be viewed as break-even or gain – paying
more and getting the same or lesser value for the price is
unacceptable.
The Value Proposition
 All non-essential consumption is psychological and financial
 Value is a function of getting (perceived or real) equal or
higher utility (benefit) from the product purchased at price
that the consumer feels is equal to or less than the utility
received.
 Pricing then must “maximize” the value proposition for the
consumer. There must be some direct, tangible correlation
to the utility received and this correlation should be pricing
that is equal to or lower than the demonstrated utility
(benefit).
Senior Housing Value/Marketing
Proposition
 Real estate is the least tangible value today – the demand for
space is very elastic. Newer, nicer space does not equate to
greater utility (benefit) for the customer
 While “need” on the part of the senior for different
accommodations exists, the need can be met via many
alternatives at different prices
 Value is both current and future as utility (benefit) may
increase (should) over time. The sale may be current and the
benefit is extracted over-time.
Examples of Utility: Good and Bad
 Good
 Lower overall housing costs (utilities, taxes, maintenance)
 Price stability (costs rise slower)
 Convenience
 Accessories (activity, health clubs, pools, etc.) at no extra
charge or minimal extra charge
 Food service
 Health care services at a discount or pre-paid level
 Safety/security
 Accessibility as needs change
 Others?
Examples, cont’d.
 Bad
 Unit square footage, furnishings, etc.
 Services available on a limited calendar or time
 Poor service reputation
 Higher prices than comparables in the market
 Clearly deferred maintenance
 History of price increases greater than general inflation
 Poor customer service that is visible
 Others?
Strategic Market Pricing: Step One
 What is your current value proposition?
 Analyze price, services, reputation, price history, and all
elements of “good utility”. Be critical and specific
 What are the market alternatives?
 Start with competitors and work outward. What else is
available and at what price and with what features and utility?
Important: You must look at as many feasible alternatives as
possible including straight rental, remaining at home,
condominiums, etc.
 Compare: Where does your current value proposition fit
within the range of alternatives?
Strategic Market Pricing: Step Two
 Fundamental: Fixed Cost + Variable Cost + Margin = Price
 Key Assumptions: Debt covenants, occupancy rate, turnover (resident), capital
expenditures, guaranteed care, interest rates.
 Other: Investment returns, entrance fees, refunds, donations.
 Working Basis: Non-biased, cash focused revenue model that is driven by
revenue sources to create the cash flow to:
 Meet all debt covenants
 Cover all cash operating expenses
 Provide for a life-cycle based depreciation resource
 Meet all actuarial obligations of future care guarantees.
Strategic Market Pricing: Step Two,
contd.
 Build your pricing model!
 Basis is by square foot – revenue vs. non-revenue producing
space
 Revenue producing space is rental units x rationalized
occupancy (I like 85% as a basis for initial calculations)
 Non-revenue producing space is commons space and any space,
even if it produces some revenue like cafeteria, gift shops, etc.,
that aren’t part of the rental inventory (we’ll allocate
miscellaneous revenue later)
 Expenses are factored on a cash basis as are revenues – non-cash
items, with the exception of a life-cycle depreciation amount
are excluded
Pro Forma Pricing Model
A Demonstration by Spreadsheet
Strategic Pricing: Step Three
 Critically analyze the data!
Your calculated rental revenue per square foot, times you unit
square footage at the occupancy assumption is your base price.
How does it compare to your current pricing? To your market?
Adjustments Required?
 Inadequate revenue model (rate required is quit a bit above our current
rates)?
 Can’t create the funding required without entrance fees or other
revenues?
Market Adjustment necessary?
 Too high in some cases?
 Too low in some cases?
Strategic Pricing: Strategies
 Marketing: If after the analysis your options fall in the middle to
lower middle range of the universe of all other options, re-tool
your marketing and sales approach to communicate the value
proposition. Sell the price/utility advantages that you have!
 De-Aggregate Your Pricing: If you price is too high, is it
possible to reduce the price by removing some features or
amenities, providing them on an ala carte or preferred customer
basis?
 Enhance Value: Add benefits or features within the existing price
framework or on an incremental basis where more is perceived as
a bargain.
Pricing Strategies, cont’d.
 Re-Allocate Prices: Subsidize your margin levels by increasing
prices on “scarce” or “in-demand” units thereby lower prices or
improving value on less sought after units.
 Price Options: Consider developing pre-pay or finance options,
especially where entry fees are concerned.
 Flatten the Increases: Using simple funding equations, it is
possible to flatten increases or limit the impact to no more than
“X%” per year.
 Entry Fee Alignment: Change the allocation of refund
provisions, monthly fees and entry level rates to create different
“customer” focused entry fees.
Pricing Strategies, Cont’d.
 Bundle/Unbundle: By bundling or unbundling care services, guarantees of
care, other services (meals, etc.), you can create customized packages that
target market segments.
 Others: We are less enamored with these as they are too gimmicky and less
permanent but, they are worth discussing.
Free Rent
Free Cable
Free Trips
Free Stuff (televisions, appliances, etc.) Unit Upgrades
Free Moving Services Free Decorator Services
Custom Unit Finishes
 Why?: One time events such as above don’t change the value proposition and
often, are viewed as substantiation for higher prices.
Conclusion
 The demand for senior housing is very elastic
 The economy and especially the residential real estate
economy has a profound impact on the current and future
outlook for senior housing demand
 Consumption is a function of creating a solid value proposition
for your product – aligned with market economics, price vs.
demand against the available supply, and the range of options
available to the customer.
 Strategic Pricing is about creating the best value
proposition for your target market, positioned against the
range of alternative products – customers receive more utility
than they pay for!
Contact Information
This presentation and the spreadsheet model will be available
for free download on my weblog page at
http://rhislop3.com
Questions? Feel free to contact me at:
Reginald Hislop, III
[email protected]