In today’s business environment, metrics have become a favorite analytical tool. However, looking at too many metrics can be confusing and distract home builders from focusing on one of the most important metrics at this moment: TRAFFIC. And not just traffic, but the ongoing trend on the traffic numbers from week to week in the local market and each community or product type.
It All Starts with Traffic
If there is no traffic, there will be no contracts. With no contracts, there will be no closings and consequently, zero revenue and business failure. Traffic is an indication of the health of the marketplace. Therefore, traffic trends in each local market are indicative of changes in market conditions and a precursor to sales, closings and revenue.
Objections
Tracking traffic has its challenges which discourages many builders from adopting this practice and utilizing its power to predict changes in the marketplace. The lack of a clear definition of what is a traffic unit—making it hard to measure—is a common objection. The first step is to clearly define a traffic unit and be consistent with the way traffic is counted. If there is a service that tracks traffic in the local market area, adopt the same guidelines the service uses to be able to compare trends in the general market area with company trends.
Generally, sales staff do not like to track traffic. They believe management is trying to measure their performance by calculating conversion rates. Conversion rates are calculated by dividing the number of contracts written into the traffic units during a specific time frame. There is a tendency for sales people to undercount traffic units to get a more favorable conversion rate, creating a questionable count versus a real count.
Sales is often considered a satellite operation with little interaction with the main office or management team, creating an environment not conducive to working as a team to evaluate market conditions and generate meaningful solutions and outcomes.
Objectives
There is more than one objective in measuring and evaluating trends in traffic changes:
- Measure the reach in the marketplace
- Identify where traffic is coming from
- Measure the efficiency and effectiveness of the marketing reach
- Measure the effectiveness of special marketing programs
- Measure not only the quantity, but also the quality, of the traffic; conversion rates are useful to make this evaluation
- Measure if marketing is reaching the right prospects for the product offerings and price
- Measure changes in traffic patterns that might be indicative of changes in the market early enough to adjust operations accordingly
- Set plans and sales goals based on historical conversion rates (For example, for a goal of three sales per month and a historical conversion rate is 5%, a minimum of 60 traffic units is required. Measure it and look at the trends to make necessary and timely adjustments.)
- Compare trends of weekly traffic with local market numbers in order to evaluate overall performance of sales and results of marketing campaigns and training programs
- Establish a team with sales, marketing and management, working together to maximize efficiencies and achieve sales goals
- Detect and monitor changes in the market early enough to adjust operations
- Excel in understanding market condition changes to be able to react prior to the general market and minimize the impact of positive or negative changes
What Does it Take?
Success in an uncertain market requires discipline, a well-defined plan and competent execution. It requires clean and consistent measurement of weekly traffic—following the adopted definition of a traffic unit—by community and for the entire company.
Support of the process from sales and marketing personnel is crucial, as is their participation in the evaluation of the results. Chart results weekly and create trend lines from week to week. Compare weekly company data with local market data.
Some medium to large markets have companies collecting traffic information for metro areas. A wise strategy is to subscribe to this service and compare your data with the local market on a weekly basis. Watch trends very closely, and be on the lookout for any divergence.
Create a management team made up of sales, marketing, production and top-level management to review and analyze trends. Break down silos and truly operate as a team. When symptoms begin to appear, it will take a team effort to overcome the challenges.
Next Steps
Guard gross profits. A common reaction is to reduce sales price, causing a drop in gross profits. Be aware that price discounts and giveaways are indeed price reductions. Make sure price reductions will trigger cost reductions by changing materials used, better negotiations with suppliers and trades, or trimming specifications and/or making some of them options.
Guard the relationship of operating expenses to new volume levels. Most operating expenses are fixed, meaning changes in volume will not automatically increase or decrease the expense. Management action is necessary to change fixed operating expenses. The amount of the expenses will not necessarily change, but the percentage to revenue can creep-up considerably and wreak havoc, consuming gross profit, leaving the company with a loss.
Beware and be prepared. Have your plan in place and be ready to act!
Shinn Group is here to help. In addition to our robust management training curriculum, we offer customized consulting and coaching packages designed to help home builders prepare for economic uncertainty and emerge on the other side stronger, more profitable and in a better position for growth. Contact us a 303-972-7666 or info@theshinngroup.com for details.
