Ch. 2 – The Impact of Second Order Effects

In Series – “Confessions of the Pricing Man: How Price Affects Everything”

For this blog series, I will be dissecting a book titled Confessions of the Pricing Man: How Price Affects Everything by Hermann Simon. Order the book and read along with me or just enjoy my summaries and how it applies to our amazing industry.

In our first blog, I challenged readers to dig into pricing: who completes the competitive analysis that determines pricing each year, how accurate is that pricing information and the negative impact of discounting. We also asked our readers to answer two survey questions:

  1. Who obtains competitive pricing at the site level?
  2. Have your communities discounted to close sales in 1Q19?

 

Our Focus 

Today we are going to dive into price, what components are used to set it, how to build value with consumers regarding market rate rent and most importantly how to communicate that value so you can collect it without discounting. I will introduce a new concept called second order effects that are a game changer so be sure to stay with me until the end of this blog.

 

Video blog to complement today’s content.

What Does Price Actually Mean? 

As shared in Chapter two of Confessions of the Pricing Man, price in its simplest form is the number of monetary units a consumer pays for a good or service. For example, a gallon of milk cost $5.00, a large coffee cost $3.00, a ticket to a movie can run you $10.

In purchasing these items, we know exactly what we are getting and the value of each to our lives. Let’s look at what price means as it relates to seniors housing. If only it were as easy as saying “assisted living cost $4,000 per month” or “independent living cost $3,000 per month!” Alas, there are many dimensions of price in senior living.

The Many Dimensions of Prices in Seniors Housing
  • Base Price
  • Discounts, incentives, special offers
  • Differentiated prices by apartment size, levels of care, apartment location, etc.
  • Differentiated prices based on shared apartments or waiver programs
  • Prices for complementary products or services (parking, storage, meal packages, etc.)
  • Bundles
  • Prices based on personal negotiations

Whereas ordering a cup of coffee or buying a gallon of milk is simple to understand, some products, like renting an apartment in a senior living community is not. I don’t expect this to change anytime soon, but for you and your individual community, it can. The result of these many dimensions of pricing is an extremely confused buyer and oftentimes, sales director who is not properly trained to understand where the pricing structure came from or why the rate is set where it is. The natural tendency is for the consumer to ask for a discount and the sales director to grant it!

As an industry we must strike a balance between what we are charging, the value perceived and how it’s communicated so we can move away from the price wars that are negatively impacting our business and ultimately taking away from the incredible work being done at the site level.

 

Price Equals Value

The most important aspect of pricing is value. If you’ve heard me speak anywhere over the last 20 years you know this is the foundation of everything I teach. Without value it’s impossible to sell let alone at market rate rent.

If a customer perceives higher value, he or she will be willing to pay more. However, the converse is equally true- If the customer perceives a lower value relative to the competition, their willingness to pay drops. Hermann Simon has three specific guidelines for businesses to follow as they make pricing decisions and they absolutely are relevant to our space:

  1. Create value: The quality of materials, performance, and design all drive the perceived value of customers. This is also where innovation comes into play. Personally, I feel we do a fantastic job of this in our industry and are seeing more innovation now than at any other time in history. The value is there!
  2. Communicate value: This is how you influence customers perception, how you describe the product, your unique selling proposition and of course your brand. There is tremendous opportunity here. As an industry we have been unable to effectively communicate the value of what we have to offer and that is clear in the pricing wars that are happening right now. So, while we have tremendous value, we are poor in communicating what that value is.
  3. Retain value: What occurs post purchase in the form of delivery will leave a lasting perception to buyers. Again, we do well here as a whole and in most cases are able to keep residents for the long-haul once we move them in.

While getting a handle on pricing may seem overwhelming, the reality is you’re closer than you think to the solutions you seek. The process of price setting begins at conception of a new development or upon acquisition. We now know the importance of getting this right and the impact of having a formal process outside of using sales directors to gather competitive intelligence. Going forward, we must be equally diligent about communicating the value and the power of the brand to consumers if we wish to be at peak performance.

 

Creating and Communicating Value – The Big Opportunity Gap

If you stayed with me this far, this is where the payoff comes in! As previously shared, communicating value  is by far the greatest area of opportunity for most operators and their communities. Once you know how to build value and clearly communicate it; you will see there is little need to incentivize or discount.

How many times have you heard a sales person say, “the building sells itself!” I can attest firsthand that buildings never, ever sell themselves. A community needs great people who can build value and communicate it in a way that justifies pricing in the mind of the buyer. In fact, buyers who see value in this way will rarely ask for a discount as they realize it’s insulting to do so.

No matter how amazing your community, if your sales and executive directors are unable to successfully communicate the value to consumers, it won’t fill at market rate rent. The buyer must fully understand and appreciate what you were offering, and what they are ultimately buying. The only fundamental driver of the willingness to pay is the perceived value in the eyes of the future resident and their buyer influencers.

 

Second Order Effects – My Most Powerful Takeaway!

What most stood out to me in the study of this book so far is the need to simplify the value by tying it to outcomes that are easy to understand and quantify: Second order effects and intangible benefits. Yes, take a moment and read that again- I had to read it three times! So, let’s dive into what this means and why it’s so important to your pricing.

While you may provide care, housekeeping, meals and transportation which is very easy to explain, the second order effect is what we need to begin to focus on- Quantifiable data and the impact of these services. To communicate this, we must first do a better job of creating quantifiable surveys of our residents and their families. The good news is there are tools that make this very easy and affordable.

Get the data you need with Bild & Co Research Surveys

Like you, I’m new to this second order effect language but I imagine the following are powerful second order effects of the services you provide that could be quantifiably confirmed (these are examples):

  • 96% of our resident survey confirmed our community keeps them safer than they were living at home alone
  • 83% of residents surveyed stated they had a more robust sense of community and friendship compared to living alone and in isolation
  • 93% of residents surveyed stated that their diets were more nutritious due to the quality of ingredients and consistency of meals as compared to living alone.
  • 78% of resident’s surveys have seen improved health as a result of their move to our community
  • 72% of residents surveyed stated that upon moving to our community, they saved $300 or more per month compared to their prior living situation

Imagine the impact of conducting a digital survey that’s proactively built around the constraints keeping seniors from moving sooner versus later- and being able to share the impact that moving to your community has had on residents in quantifiable terms.

As we open and continue this discussion, remember that emotion is still the key driver to closing sales, even when price is beyond a buyer’s comfort level. The goal of this pricing study is to further enhance your sales process in proactively addressing barriers, supporting a buyers decision to move with quantifiable data that reinforces the value your community(s) can provide and the importance of understanding pricing and communicating value so discounts become a thing of the past and we can get on to the business of caring for seniors.

 

Take Action Before Chapter Three

If you would like  objective insight into where your rates should be set, the Bild & Co team is happy to help. We can also assist in creating surveys that help quantify the value of your community. For information on our competitive analysis email revenue@tracibild.com. We can move fast and provide critical answers to your most pressing questions in your market service area. Stay tune for chapters three and four that are forthcoming! Questions or comments? Post them in our social media feeds or email me directly at TBild@BildandCo.com.

 

Written by Traci Bild

Author of Zero Lost Revenue Days & 7 Steps to Successful Selling

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