CH 5 – Why Discounting is Killing Margins and the Customer Experience in Senior Living
And Why Operators Need to Sell at Market Rate Rent then Push Occupancy to Boost Profit
My biggest takeaway from Chapter 5 in Confessions of the Pricing Man is understanding the ACTUAL profit an average company really earns is VERY LOW, but why?
Consumers, when asked, estimated an average retailers profit margins at 46% in the US when the reality is that retailers are happy when their margins are between 1 and 3%.
“Can you believe that in the 2012-2013 fiscal year, Walmart’s consolidated net income as a percentage of total revenue was just 3.8%?”
Apple on the other hand, which is an exception to this rule, had a net profit margin of 21.6% in 2014. As we know, one focuses on quantity and discounts while the other focuses on quality and premium pricing resulting in a drastic spread in net income and profitability.
The average profit margin for companies in the US is just 6.2%. Russia leads the way in profitability with an average profit margin of 12.5%, followed by Brazil at 10.2% and Norway at 8.4%, interesting right?
The chart below shows the distribution between income and capital with the total return for seniors housing stable the past two years.
END DISCOUNTING AND MOVE TO A FEE INTEGRITY CULTURE
Price is the single most important driver of profitability in business and is regularly discussed in the C Suite; yet, from our experience, it’s rarely discussed at the site level within senior living communities.
Here’s the reality – your staff can’t do better until they are taught a better way. If you want salespeople to stop offering discounts and you want executive directors to quit approving them, you must educate them on the WHY behind pricing and how those discounts negatively impact the future viability of the company. You can read more in one of the previous blogs: Chapter 1: Re-thinking Price in Senior Living.
Profit is ultimately the only valid metric for guiding your organization and the only metric that takes both the revenue side and the cost side of business into account.
There has been more cost cutting the last three years than I’ve ever seen due to intense competition and not near enough focus on revenue growth. At some point, you can no longer cut cost without detriment to residents and customer experience. Odds are you have cut cost as much as possible and there’s nothing left to cut which means you MUST now focus on revenue growth.
“Operating costs are increasing, and there really isn’t much operators can do to reduce costs at the moment. However, with construction starts down, we also think operators will be able to maintain margins by focusing on rent growth.”
Zach Bowyer, MAI | Senior Managing Director CBRE
While Bild & Co is known for implementing sales systems and holding people accountable through Revenue Growth Coaching, the goal of this blog is to permanently eliminate discounts in order to drive price – the single greatest impact on profitability.
DISCOUNTING PROGRAMS COULD CAUSE MORE HARM THAN GOOD
A Look at the General Motors Employee Discount Program
In the spring of 2005, GM was in a sales slump. To drive sales, they decided to offer their vehicles at a deep discount normally reserved for its employees starting June 1, 2005 and ran for four months. The results were unprecedented and yielded a sales volume increase so instantaneous and large, it took dealers by surprise. In June alone, GM sold 41.4% more cars than it did in June of 2004. In July, sales increased by another 19.8% creating concerns that GM might run out of cars to sell!
Where did these customers come from? The FUTURE.
Instead of creating additional demand, GM borrowed customers from its future sales and sold those people cars at deep discounts. They in fact dropped from a peak of 600K cars in July, to fewer than 300K cars in October.
But, how much did it ultimately cost?
GM’s average discount per vehicle came to $3,623 in 2005 (if you are not tracking this number, start immediately). The company posted a loss of $10.5 billion. The market cap shrank from $20.9 billion in August 2005 to $12.5 billion in December. One year later GM Chairman Bob Lutz said, in his view of the program:
“We are getting out of the junk business, like employee pricing sales that boost market share but destroy residual values. It’s better to sell fewer cars at higher margins than more cars at lower margins. Selling 5 million vehicles at zero profit isn’t as good a proposition as selling 4 million vehicles at a profit.”
As Hermann Simon goes on to say, GM led the world in car sales for 77 straight years, starting in 1931. It fell to second place in 2008. The company filed for Chapter 11 bankruptcy in June 2009.
As I read this, what stood out the most is that when we make a sale in assisted or independent living, that discount hits every month. Most often it’s not just a onetime $500 deal, it’s offered as $500 off the monthly rent month after month; it’s a discount that keeps on giving except to the operator’s bottom line.
But, how do you get asking price in assisted living, independent living and memory care; while improving occupancy and profit margins in your senior living communities without sacrificing customer experience?
Rather than volume, meaning more residents, your first objective must be training your organization the importance of selling at market rate rent. Having perhaps fewer residents but higher margins and in turn the funds to hire more qualified employees that deliver a raving fan customer experience.
Think of it as a slow, steady go rather than a quick easy win that ultimately kills the bottom line and serves as a temporary high that comes back to haunt you! Price, then volume, followed by cost cutting where possible. Here is one example of how to stop discounting today.
FEE INTEGRITY LANGUAGE FOR SELLING ASSISTED LIVING, INDEPENDENT LIVING AND MEMORY CARE REQUIRES TRAINING
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The fact is consumers are visiting four to six communities prior to making a move. Being that 98% of what they offer is the same, there is very little to differentiate.
- What is your differentiating factor? Know what 2% difference your communities offer over your competitors? Answer this question: What do you do that no one else can claim (this is much harder than it seems so take your time)?
- Stand firm on monthly rental rates and community fees. To succeed, value must be built first, or the consumer will simply walk away and go to the competitor who offers what they assume you do, but at a much lower rate.
For example, you may say something like this:
“Jack, I know you have visited three other communities in the Palm Harbor area and there are many options which can be confusing; especially when it comes to price. What differentiates us here at Seaside Villas is that we are the only community within a 20-mile radius that is family owned and operated. What that means is that Mr. Johnson, our founder, is on our property on a regular basis, engaging with residents and their families to ensure the resident experience is delivered as if it were his own mother (as, I can attest, she did reside here at one time).”
You may go on to say… “to deliver that experience, we have set our rental rates on our one-bedroom villas, specifically villa 206, which you love, at a monthly rate of $5,500, all inclusive of the care your mother needs. I’m happy to review in detail how we came to this rate as it’s important you understand. Others will offer discounts that we cannot because we are simply unwilling to compromise when it comes to your mother’s care.”
“As you know, those discounts ultimately come from the delivery experience. I can review our pricing details with you now or if you are comfortable, I can go ahead and collect a deposit to secure villa 206 for your mom. We can then discuss the next steps as it relates to the move in process and a specific resident, I have in mind who can help her through the process. Which do you prefer?”
EQUIP YOUR SALESPEOPLE WITH THE SKILLS NEEDED TO SELL AT MARKET RATE RENT
While this is a short example, you must equip your salespeople with the skill set needed to sell at market rate rent. The returns are tenfold, and you will see the impact in your profitability quickly. The best way to teach is to provide scripting and role-play scenarios until your salespeople are comfortable enough to successfully do this on their own.
Want to take it a step further? Consider creating a grid that compares your community and differentiating factors to its competitors along with pricing as a takeaway for prospective residents. Not only does education empower salespeople and executive directors to ask for market rate rent but to do it with confidence which is the key to success.
FOCUS EXECUTIVE DIRECTORS ON DRIVING PRICE FIRST, THEN VOLUME, THEN COST CUTTING
Revenue is the product of price and volume. Profit is the difference between revenue and cost.
How many of your executive directors and sales directors understand this? This means your business has only three profit drivers: Price, volume and cost. Most managers in seniors housing (and in general), invest their time to cost cutting to increase profitability. In his book Hermann Simon suggests that managers allocate 70% of their time to cost issues, 20% to volume and just 10% to price.
Interesting! Price comes in last, yet it has the single greatest impact on profitability, and it costs you nothing; making it a powerful marketing tool to have in your strategy toolbox.
STOP KILLING YOUR MARGINS AND COMMIT TO A FEE INTEGRITY CULTURE
As a company, you must make a conscious decision to stop offering discounts and to build a culture that emphasizes value. While discounts may inflate the numbers and relieve investor pressure, it’s only momentarily; that success is only an illusion.
Not only can you implement a zero-discounting policy quickly, it costs nothing to do so. Keep in mind, you must teach your sales and executive director how to have what we call “fee integrity.” Meaning asking for and holding firm to your pre-set rates, no exception. This doesn’t mean you can’t offer a tool box of incentives like free parking for 30 days, carpet replacement upon move in or upgraded cabinets; (a one-time spend that upgrades your property) while making the buyer feel they “got something:” a win-win for both buyer and seller without hurting margins.
Let your competitors’ dwell in the land of discounting while you rise above and offer a sales and customer experience unlike anything in your market all while driving profitability and the overall customer experience to all-time highs.
To learn more, BOOK AN APPOINTMENT with myself or Jennifer Saxman, expert Senior Housing Sales Consultants or you can DOWNLOAD Zero Lost Revenue Days to better understand Bild & Co’s PROVEN systems and how we drive occupancy, revenue and net operating income for our clients.
To Your Success,
Written by: Traci Bild, CEO of Bild & Co
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