Rich Van Tassel, president of Royal Oaks Building Group, a medium-sized home building company in North Carolina's Research Triangle, was on the cusp; with 131 homes built in 2006, he knew his company, which targets first-time home buyers, would draw the attention of customer satisfaction ratings firms such as J.D. Power and Associates quickly. As soon as Royal Oaks built 150 homes or more in a calendar year, Van Tassel's buyers would start receiving feedback surveys to rate the quality of his product, as well as their experiences interacting with his company. "Once you get to that size, they're going to start hitting your homeowners with surveys and then put those ratings up on the Internet," Van Tassel says. "You've got to be ready for it."
"We figured out that, at the higher price point, they weren't happy with our basic landscaping package, so we made some changes there," Van Tassel says. Other changes came, too. With an initial customer satisfaction score of just 66 on Avid's 100-point scale, Van Tassel worked with his sales team and builders to improve on punch lists and warranty calls. By the third quarter of 2007, the firm's customer satisfaction rating had improved 23 percent, putting Royal Oaks' score just above Avid's national average. Now on track to close 150 homes in 2007, Van Tassel knows he has at least laid a solid foundation when J.D. Power comes knocking on his homeowner's mailboxes in 2008. "It's been a report card for us before we get the report card," Van Tassel says.
Yet, more important than that report card is the improvement in the builder's business. Despite the fact that his surrounding market saw home sales fall by about 10 percent through the third quarter, Van Tassel says his own sales have jumped 20 percent from 2006. At the same time, his marketing costs for each home sold have gone down nearly 40 percent, from $2,160 in 2006 to just $1,300 in 2007. While he concedes that the affordability of Royal Oaks' $240,000 average sales price has helped garner those results, Van Tassel attributes these improvements to the new emphasis his firm has put on customer service and making sure that it knows what it's doing right–and wrong–during the home buying experience. "We're doing better, because we got better at what we do; I think our customer service is a big part of that," Van Tassel says.
The story of Royal Oaks's rising customer service scores–and sales–paired with decreased marketing expenses during a sinking market belie an often overlooked area in home building: the financial impact of an effective customer service program on the bottom line. While most builders would say that they know, on some level, that they need to have a good customer satisfaction program to keep their buyers happy, they often struggle to articulate why that's important. It's even more challenging to hang hard, conclusive numbers on the return on money put toward customer satisfaction programs. And yet, determining your return on customer satisfaction is one of the most important steps to ensure that you're not just making your customers happy, but are making money by doing so. As this housing market's hair grows longer, understanding your return on satisfaction may mean the difference between future profitability or ending up a casualty of the latest housing downturn. The good news is that Royal Oaks' story is one that has played itself out at other builders in recent years. Combined, those experiences point to an irrefutable fact: Builders who zealously focus on customer satisfaction make more money–in good times and in bad. Understanding why, and how, might just help you do the same.
Risk and Reward
Most observers point to three main areas where improved satisfaction can have a direct impact on the bottom line: higher referral sales, lower warranty costs, and lower instances of homeowner litigation. As George Hess, president of Colorado Springs, Colo.-based Vantage Homes, says, "We focus on customer satisfaction because I've always felt that was the best way to stay out of court."
In this market, however, a fourth area may well be added to that mix: lower cancellations rates from skittish buyers watching the market sink before their eyes. "There is a lot of uncertainty in the market, and the more uncertainty we can take out of the home buying process for the consumer, the more we're rewarded for it," says Patrick Higgins, senior vice president of sales and marketing at Newport Beach, Calif.-based John Laing Homes, which consistently ranks as one of the nation's top home builders in terms of customer satisfaction. "You've got to provide them with the best home-buying experience possible."
While home builders like Higgins and Hess say they built their corporate culture around customer satisfaction because they feel it's the right thing to do, consultants will point out that having happy customers, per se, isn't the end goal of customer satisfaction programs. That's particularly true when it comes to determining a return on satisfaction. "The primary driver of any of these programs is to get referrals, or at least it should be," says Bob Mirman, CEO of Irvine, Calif.-based consultancy Eliant, which gauges customer satisfaction for more than 400 home builders nationally. "It's about delighting your customers with the goal of having them proactively go out and drive business back to you."
The reason that's so crucial in home building is because acquiring prospects is expensive, while closing rates on those you do bring in can be maddeningly slim. The cost of getting a prospect into your sales center averages about $300 nationally, while closure rates for those prospects hover at just 5 percent, according to Avid Ratings. For every 100 prospects you drive to your communities, you'll spend an average of $30,000, while actually closing on just five homes–a dismal algebra that translates into a cost of approximately $6,000 per each closed sale. Yet, when it comes to referrals, that math becomes amazingly upbeat. Not only do referrals generate fewer direct costs–it's hard to attach a number to good word of mouth–but the percentage of referral customers that actually close on the homes they shop is double to triple that of those who shop off of advertising or marketing efforts alone.
"The conversion rate of a referral prospect is 10?15 percent," says Paul Cardis, CEO of Avid Ratings. "It varies depending on your strategy and how efficient you are, but the difference is mind boggling." That higher conversion rate becomes even more important in the current environment, where cancellations are commonplace and a signed contract doesn't guarantee a sale.
"When somebody comes through that door and says they came because a friend or relative told them you were great, there's no better prospect on the salesroom floor anywhere in the country at that moment," says Will Holder, president of Houston-based Trendmaker Homes, which builds approximately 750 homes per year at an average sales price of $400,000. Holder says Trendmaker has seen less of a pullback in its own sales this year than the Houston market, a fact he attributes to increased referral rates. "You're automatically credible, and they're receptive to your sales presentation."