HOW TO NAVIGATE THE 5 PHASES OF A MARKET CORRECTION
By Kevin Oakley
March 24, 2023
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Band-Aids are not the answer—enduring each part of a market correction is a challenging yet necessary process for home builders.
Markets in all sectors operate in cycles, and new construction and development is no exception. As the world gradually adapts to post-pandemic realities and strives to return to "normal" (does anyone know what that term signifies nowadays?), we are swiftly experiencing the cyclical effect's impact on outcomes. Once this process begins, it's impossible to prevent it from reaching its conclusion—the only uncertainty lies in its duration. How long will it take to reach the bottom of the current cycle and start rebuilding momentum in a positive direction?
A significant portion of the answer to this duration question lies within your control. In this article, I aim to outline the five phases of a market correction to enable you to navigate each stage effectively while your competitors become derailed and stagnate—ultimately increasing their likelihood of extinction.
Phase 1: Blame and Band-Aid
One of the most insidious aspects of a white-hot market is a disconnection of cause and effect with the tools at our disposal.
When homes are in short supply consumers will accept conditions they normally would not. It wasn’t the invention of a new sales script that fixed the issue of the kitchen being too small, it was the customer realizing they didn’t have any other option if they wanted to buy a home. The new logo on your website didn’t fix the poor costing of your materials leading to higher price points, it was the builder next door doing an even worse job at controlling their costs so you looked like a value in comparison.
My point is that when you enter the first phase of a correction, the world is already upside down to an extent, and leaders who aren’t fully aware of this reality can draw incorrect conclusions about what needs to be done in response to a decline in sales. That’s why I call phase one “Blame and Band-Aid.” Instead of investigating and uncovering the true underlying issues, executives look at what appears to be the most obvious shortfall and incorrectly blame it.
Here’s an example of what this looks like: Happy Acres has a sales goal of two sales per month. The sales team at Happy Acres holds 40 appointments within the month, but no homes are sold. The real issue is sales conversion, not a lack of appointments. However, in phase one the leadership team typically demands more appointments be created the following month in order to overcome poor sales performance.
The blame game has terrible consequences. Time, energy, and resources are wasted trying to solve the wrong problem. This exacerbates the issues instead of solving them, and it leaves less time, energy, and resources to address the true issue once you finally identify it.
Sometimes the problem is identified correctly, but no one wants to deal with it properly. Instead of doing the difficult work of incrementally fixing the issue, the builder will instead Band-Aid it with discounts and incentives. While this may temporarily improve results, left unchecked it can hollow out your sales and marketing efforts, leaving you unable to do anything but continue to lower your margins.
Phase one is ultimately best described as an attempt to solve core problems using any peripheral means necessary—without addressing them head-on. Encourage your teams to move through this phase as quickly as possible because very little good comes from staying here long.
Phase 2: Cut and Clear Out
As they move to the next phase, home builders begin to make strategic choices to adjust pricing to a level that allows unsold inventory to be cleared out while also cutting their overhead and expenses to maintain a minimal level of profitability. Phase two addresses the importance of cashflow in order to have the resources needed to work through future phases. The goal is to reduce costs without impacting the most important aspects of the organization. To trim fat without cutting into the muscle.
While incentives and promotions can work, nothing moves unsold inventory like pricing them to market. When you update pricing on digital ads and listings, the exposure of them increases exponentially because you unlock potential by reaching customers who previously couldn’t afford your homes even if they wanted them. Cutting your loses is painful, but it removes a ton of organizational drag. The amount of work hours saved by admitting to the excesses of the prior market gives your team the ability to focus on the future instead of squabbling about the past.
The pain of reduced margins (or even losses) on inventory sales means that other cost-cutting measures may be necessary to improve operating efficiency. Every role and department must be reexamined. Partners and suppliers need to be rebid. No stone is to be left unturned. All this must be done while not commoditizing your company. Protect what makes you unique and what your customers value most.
Phase 3: Reset and Rumble
Next up is resetting your product line to match the current market needs and demand from a fresh perspective. A judicious approach to competitive analysis is the bedrock of this phase.
Where is the market being underserved? Where is the competition most vulnerable? Are the reasons you didn’t offer a certain product before still valid or have circumstances changed? Use hard data and mental models to keep your feelings in check. Have the humility to start from first principles instead of carrying biases from the previous market into this new one.
The “reset” is all about observation and planning for a relaunch at the product level. The better your research and thesis about what the consumer needs and wants, the better off you’ll be. Going through this experience in 2009 was one of the most exhilarating times in my career because it requires tremendous amounts of teamwork across all departments to pull it off.
The “rumble” part of phase three is when you release the repositioned product to the market. You’re going to get some cuts and scrapes as you knock up against the competition. Taking the market feedback—the good, the bad, and the ugly—and then iterating on it faster than anyone else is the key to outselling them. Like a boat attempting to ride out a massive storm at sea, only those with a management team that works well together and toward the same goal will begin to gain market share.
Phase 4: Momentum or Mortality
Your adjustments in phase three will either gradually gain acceptance in the marketplace and momentum will carry you forward, or you will need to contemplate an exit plan for the business. For those that don’t make it, they will sell to other builders or close up shop entirely.
This is another painful, yet helpful part of the cycle as this helps those already gaining market share to acquire lots, vendors, and employees necessary to keep the business growing. This can all happen in a matter of months, or it can go on for years depending on the nature of the specific cycle that is occurring.
Phase 5: Growth and Good Times
All of this gets us back to where we want to be for as long as possible—sustained growth! The building companies that survive begin to truly thrive and expand. This creates new and improved opportunities for the entire industry and allows for investment in new innovations focused on more than just survival.
The best leaders understand that good times also serve as invaluable preparation for the beginning of the next cycle, and they fight complacency.
Navigating each phase of a market correction is a challenging yet necessary process for home builders. By understanding each phase, builders can stay ahead of their competitors and avoid stagnation or even extinction. As the cycle inevitably repeats, the knowledge and experience gained during these phases will better prepare home builders to face future market corrections, ensuring their long-term success and resilience in an ever-changing landscape.
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