Toll Brothers still sees its options program as a way to draw luxury buyers away from small custom builders while profiting from greater economies of scale. "We prebudget and predesign every option we offer, so if we're adding a second-floor playroom over a four-car garage, our architect can plug it into a computer and know how much wood has to be ordered and in what sizes," says Fred Cooper, vice president of finance for the Huntingdon Valley, Pa.-based builder. As the number of options Toll offers has increased, so has customer spending. Five years ago, options and premiums averaged $60,000 per home. Last year, the average Toll buyer added $90,000 in extras to her home, Cooper says. (The average Toll Brothers home sells for about $510,000.) The trend plumps up the bottom line for builders, whose average gross margin on options and upgrades is about 33 percent, compared with standard housing margins in the low 20-percent range, according to Strudler. Upscale Image The spotlight, long trained on baby boomers, will continue to follow them up market as their children leave home and head out into the world. Multiple fireplaces, his-and-hers bath suites, high-tech media rooms, and smart wiring systems are just a few of the upscale features that builders have begun offering in recent years. While consumer choices have followed the prevailing design trends over the years, flooring, kitchen cabinets, and countertops remain the categories in which customers spend the most time pondering their choices, according to Strudler. At K. Hovnanian, kitchens receive the most attention from consumers, who frequently are opting for gourmet appliances and granite countertops, says public relations director Doug Fenichel. But the 1990s also saw that affluent attitude drift down to the middle class, causing builders to shift their marketing once more. Just as luxury-car makers like Mercedes and BMW are spending billions on new, lower-priced models to lure less-well-to-do buyers with the cachet of quality, builders are spending huge amounts of time researching ways to bring value to every price point. "We like to surprise people by offering more options than they would expect," says Cheryl Schuette, senior VP of home building for Village Homes in Littleton, Colo. "It's a constantly moving target."
Colorado home builder teamed with Masco to create a design center that not only offers options but captures valuable marketing information. A display called "future possibilities" is devoted to testing buyers' responses to new products. A two-page survey plumbs their ideas about what they'd like to have that's not offered. Other questions relate to mock-ups, such as a current display of ceramic roof tiles, and visitors are asked what they'd be willing to pay based on a description of the product's features. To prevent sticker shock among middle-income buyers, the price is presented as the amount the purchase would add to a monthly mortgage payment. Village Homes works hard at offering entry-level products that look upscale. Research and development director Hope Marie Dunlavey travels the Parade of Homes circuit, scoping out features in custom homes that might be duplicated at a reasonable cost. Says Dunlavey: "We talk to our suppliers and say, 'Where can you start with this, finding parts and piecing them together in a different way?'" After spotting an intricately detailed staircase rail made of oak and powder-coated iron, for example, Dunlavey asked a supplier to re-create the look in various price points, using standard hemlock and black iron as the entry-level choice. "We offer the least expensive variation all the way up to the more luxurious design, giving low-end buyers a similar look without spending a fortune," she says. Despite this, Schuette says many of the company's clients are migrating upscale, toward premium goods. Whereas oak cabinets used to be the upgrade, there's a higher demand now for cherry and hickory. Other hot items are 12-by-12-inch granite tile countertops, professional-style appliances, warming drawers, and electronics. Village Homes' average buyer adds $2,000 in technology upgrades, a statistic that's climbing. What Price Choice? A decade of fine-tuning the selections process has led to smarter packaging of products, better systems to manage them, and more adept execution. While buyers have proven their willingness to pay more for what they perceive as good value, builders face an increasingly competitive environment, not only from other builders but also from home improvement centers. "We have to maintain the quality and prices our customers demand, and that's a tough balance," Fenichel says. "We have people whose sole job is to make sure we're getting the best deal on the broadest spectrum of products we need, to maintain the actual and perceived value of our homes." At Lennar, Strudler, too, believes that the ability to control costs -- and thus the number of choices the company offers customers -- is the challenge for the future. "We try to offer our customers a wide selection, but not every selection," he says. "You don't want to increase your production time by permitting the selection of items that are not readily available. You're maximizing choice, but within the limitations imposed by production."In 2000, the
Cheryl Weber is based in Severna Park, Md. Published in BIG BUILDER Magazine, August 2002