The performance mindset targets three key areas: Cost vs. value, consumer demand, and measurable metrics to determine the effectiveness – or ineffectiveness – of floor plans. After completing the first two steps, you will have optimized your plans for performance and cut out the lowest performers. The final step requires a deep dive into several key metrics.
Getting the most out of your design investment means thinking differently about the role of architecture in your business. The design exercise must be treated as a strategic investment, equally integral to your company’s success as land acquisition, recruitment, and marketing, for example. To that end, floor plan design should be conducted with discipline and intentionality toward the goal of monetizing land at the highest possible margin.
This doesn’t sound like the “artsy-designer-type” perspective you might expect from your architect. That’s because effectively analyzing your design investment requires a unique mindset.
STEP 3: PERFORMING ASSET ANALYSIS
At BSB Design, we encourage builders and developers to think about floor plans as financial assets. The investment in architecture must yield a quantifiable return in order to justify the expense. To determine whether your assets (plans) are actually performing (earning you the most money possible for the lowest cost, both in real dollars and in human capital), conduct a focused performance analysis on each plan in your portfolio.
The Numbers Game
A performing asset analysis requires tools that allow you to consistently review five key metrics. Then you can make a plan for how to improve them (and measure if your plan works so you can adjust as needed):
- Absorption: How many do we sell? Track by plan, community, and region. How can we sell more?
- Cycle Time: How fast can we sell, build and close the plan? What can we do to reduce that time?
- Variances: Where does the plan leak cash because of inefficient design, inconsistent material selections, or complexity, and how can we eliminate those weak areas?
- Hard Cost Per Square Foot: What does the plan cost to build, in real dollars, all in? Where can we reduce expenses to decrease the hard costs?
- Profit Margin: How much actual profit does this plan earn every time we build it?
These key metrics should be central to every design decision a homebuilder makes, not just when creating new plans. Revisions, retooling and cutting low performers are all part of this process. But the gap between knowing what to measure and actually measuring it can be surprisingly large.
Start With the Winners – Then Win More
Most portfolios have a few top performers that end up accounting for the majority of a builder’s profitability. This reality is a reflection of the Pareto Principle, also known as the 80/20 rule. It’s common for 80% of the revenue to come from 20% of the portfolio. In fact, at BSB Design we believe that for many builders, 10% or less of their product library is responsible for 90% or more of their earnings.
A performing asset analysis should start with these proven winners because incremental improvements in already successful plans can result in huge gains. Conduct the analysis to leverage every possible opportunity at this sweet spot, and you’ll be off and running.
Limit the Library
In Step 2 of this series, we discussed cutting the lowest performing plans. This requires conducting a thorough analysis so you can be confident in decisions to eliminate product offerings. It starts with sales. If plans, even highly profitable plans, are only selling a few times a year, the cost of maintenance alone makes them a burden. The revenue potential of a less profitable plan that sells 100 times is the low-hanging fruit we want to focus on during a performing asset analysis. Ultimately, the goal is a lean, limited product library that only includes high performers.
Leverage the Experts
The deep data dive required by a performing asset analysis means multiple experts must provide their insight during the process. Everyone from the guy who pours the foundation to the salesperson in the model home and the contractor performing warranty maintenance should be included at some point. No detail is too small if it can make a positive impact on one of the five metrics. Dan Swift, President at BSB Design, explains it like this:
“When we analyze a floor plan using a performance mindset, we will find money that builders are leaving on the table. We’re not criticizing the builders for this – they are incredibly successful even without this process. But what if they could be even more successful?
If we can find a way to optimize a floor plan (reduce hard costs, decrease cycle time, etc.) to save $1,500, for example, that might not sound like much. But if that plan gets built 100 times a year, we’ve just put $150,000 back into our client’s pocket. Do that across the entire portfolio, and it really adds up.”
This article was based on a speech titled “Winning Strategies for Product Design” delivered by Steve Moore, Senior Partner, at the 2023 Shinn Builder Partnerships Executive Summit.
