Reginald M. Hislop, III Ph.D.Larksfield Place Retirement

Communities

Economic Value Propositions and Marketing Strategy

The Value PropositionAll non-essential consumption is psychological

and financialValue is a function of getting (perceived or real)

equal or higher utility (benefit) from the product purchased at a price that the consumer feels is equal to or less than the utility received.

Pricing then must “maximize” the value proposition for the consumer. There must be some direct, tangible correlation to the utility received and this correlation should be pricing that is equal to or lower than the demonstrated utility (benefit).

Senior Housing Value PropositionReal estate is the least tangible value today –

the demand for space is very elastic. Newer, nicer space does not equate to greater utility (benefit) for the customer

While “need” on the part of the senior for different accommodations exists, the need can be met via many alternatives at different prices

Value is both current and future as utility (benefit) may increase (should) over time. The sale may be current and the benefit is extracted over-time.

Economic ValueTangible and Intangibles are Key – Real

Quantified and Emotional/PsychologicalThe Relative Weight between Tangible and

Intangible is Product/Service Specific (e.g., homes, automobiles, insurance).

Consumer Psychology, Sociologic Factors, Financial/Economic Factors Influence Purchase Decisions

The Greater the Elasticity of Demand, the More Weight Consumers will Give to Non-Financial/Non-Economic Factors.

Price and Demand

Elastic Demand

Inelastic Demand

Principle of ElasticityAdequate to surplus supply of comparable products

at various price points = ElasticityStable to limited supply of a product with

alternative or replacement products priced higher = Inelasticity

With elasticity, when prices for a given product rise or remain stable compared to prices for comparable products falling, demand for one product shifts to the lower priced/lower cost option.

Demand can be impacted even when prices remain stable if the financial condition of the consumer changes – consumer shifts to lower cost alternatives

Buyer Psychology and Consumer ConfidenceConsumption is a function of demand for a

particular good or service that is available in sufficient supply at a price that the consumer is willing and able to pay

Consumer confidence is all about the willingness and the ability (real and perceived) of consumers to purchase goods and services – how one feels about spending one’s resources on (typically) non-essential (food, gas, etc.) items.

For Certain Services, Consumption is driven by need and demand becomes more inelastic as psychology of Consumption shifts to need satisfaction.

Regional and Local EconomiesWhile national economic news dominates the

airwaves, real estate is truly locally and regionally dominated

What is true in some locations is not true universally

In current recessionary period, some regions/locations performed better while others fared miserably (Southwest, Las Vegas, etc.)

Regions and locations that performed better evidence less employment volatility, more government/institutional employment, a broader supply of moderate priced housing, less speculative development/new construction

Government PolicyTo sustain mortgage liquidity, the federal government

and the Federal Reserve have maintained Fannie Mae and Freddie Mac intact – the primary buyers for mortgages

The Federal Reserve has continued to buy Treasury securities as a means of maintaining capital market stability and price stability – key as mortgage rates are tied proportionately to Treasury yields

Tried, and failed, to stimulate residential real estate demand by first time buyer tax credits – bumped the market temporarily

Key issue for future policy: Job creation, tax rates, confidence in continuing favorable lending/borrowing environment (Fed Reserve)

Credit and Banking DynamicsInterest rates are currently favorable Terms and conditions have tightened due to defaults

and federal policy changes – regulations now require more verifications and credit requirements from borrowers

Market for mortgage-backed securities very lackluster - requires more banks to originate and “hold” their mortgages or sell to the Government (Fannie and Freddie)

Fewer overall lenders – less competition, less productTighter appraisal requirements and erosion of higher

level market comparables – price/value compression

National Economic TrendsHigh unemployment and limited wage inflationContinued investment market volatility and

overall wealth reduction for Seniors – value losses will not be recapped in their lifetime.

New banking and financial sector regulationsUncertainty regarding tax rates and tax policyLarge and growing amounts of cash “sitting”

awaiting a change in investment climate Global market insecurity and volatility –

impacts U.S. in terms of trade, currency, investment

Demand for Senior Housing and ElasticityDemand for housing in general, is fairly

constant. Influencers of demand include;LocationPriceType (single, congregate, etc.)

Supply is stable to growing. Today, supply of available units for housing is greater than demand.

Economic Axiom: Supply exceeds demand, prices fall in order to increase consumption. With housing, cycles for absorption (consumption) are longer – can’t efficiently reduce inventory.

Elasticity and Senior HousingMany alternatives exist at different price points

Remain at homeSmaller home or condoRentalAdd services to complement remaining at homeMove-in with relatives

Supply of senior “housing” units in most areas is adequate to surplus with the exception of moderate to low income housing.

Supply of senior housing units tends to exist at price points equal to or above the median market cost/price of alternatives.

Developing an Economic Value Proposition: Step 1, Pricing

Your Facility

Single Family

Rental Competition

Monthly

EXTRAS:

Utilities

Food

Maintenance

Insurance

Taxes

Other

TOTAL:

Step 1, Pricing; cont’d.Your Facility

Single Family

Rental Competition

Entrance Fee per Month Impact

Cost to Move

OTHER:

Security Deposit

Decorating

Other

Incentives/Offset

Fee Inflation

TOTAL:

Pricing, Conclusion ?Totals from both pages creates the Price

component for Demand/Consumption. This value is critical going forward.

How does price compare to the market alternatives? Favorable? Unfavorable?

Can price be changed to mitigate the discrepancy?What other factors need consideration in each

alternative?Can these other factors be quantified? If so, how?Can price be positioned as a competitive

advantage, even if it is high?

Refine and Re-DefineYour Facility

Single Family

Rental Competition

TOTALS:

ADD(LESS):

Security

Social

Care/Health

Transport

Etc.

Value Proposition: Step TwoAnalyze the wealth profile of your target

market. What is the economic condition of your target market? What is it for your target consumer? What has changed in the past two or so years for this market and consumer?

Analyze the economy in your target market and vicinity. What is employment? What is happening to real estate values? What are rental occupancies like? What are taxes doing? What about utility costs? Dig sufficiently deep!

Qualify the economic conditions of your current customers. No need to be intrusive but how are they doing? How do they feel about your pricing/value proposition and their financial condition?

Strategic PricingCritically analyze the data!

Holding your pricing and value proposition as the constant, how does your product compare? Where is your target consumer, market and vicinity at economically? Do you offer a greater benefit in terms of the market?

Objectify your analysis. Weight the values based on the information received from your current consumer and the options available. For example, the greatest weight today should be given to a senior remaining at home and acquiring needed services “ala carte”. How does your product compare? How do your current customers compare to that scenario?

Value Proposition: Step ThreeUsing price as a baseline, begin to build

value by addressing the non-financial elements.

Examples of non-financial elements are;SecurityConvenienceActivitySocializationReligionCultureOther

Value Proposition: Step FourIntegration of Price and Non-Financial

Components.Weight to non-financial is given based on your

identified current customer values – quantify!Compare! Where is the current market and

what influence weighs heaviest. PriceNon-financial

Identify opportunities for improvement!PricingServices/Other

Value Proposition: Build It!Your

CommunityClosest

CompetitorFreestandi

ngHome

OtherRental

Price per month

Inclusions

Non-Financial Factors

*Location *Security

*Activity * Religion

Yikes! We Don’t Stack-Up WellMarketing: If after the analysis your options fall in

the middle to lower middle range of the universe of all other options, re-tool your marketing and sales approach to communicate the value proposition. Sell the price/utility advantages that you have!

De-Aggregate Your Pricing: If you price is too high, is it possible to reduce the price by removing some features or amenities, providing them on an ala carte or preferred customer basis?

Enhance Value: Add benefits or features within the existing price framework or on an incremental basis where more is perceived as a bargain.

Yikes!, cont’d.Re-Allocate Prices: Subsidize your margin levels

by increasing prices on “scarce” or “in-demand” units thereby lower prices or improving value on less sought after units.

Price Options: Consider developing pre-pay or finance options, especially where entry fees are concerned.

Flatten the Increases: Using simple funding equations, it is possible to flatten increases or limit the impact to no more than “X%” per year.

Entry Fee Alignment: Change the allocation of refund provisions, monthly fees and entry level rates to create different “customer” focused entry fees.

Yikes!, cont’d.Bundle/Unbundle: By bundling or unbundling care

services, guarantees of care, other services (meals, etc.), you can create customized packages that target market segments.

Others: I am less enamored with these as they are too gimmicky and less permanent but, they are worth discussing.

Free Rent Free Cable Free TripsFree Stuff (televisions, appliances, etc.) Unit

UpgradesFree Moving Services Free Decorator Services

Custom Unit FinishesWhy?: One time events such as above don’t change the

value proposition and often, are viewed as substantiation for higher prices.

Marketing: Using Your Value PropositionSell strengths, downplay weaknesses (or fix

them if you can).Four major components of Communication!

OralWrittenWebOther Media

Craft for each audience!Direct consumerInfluencerStaff

ConclusionThe demand for senior housing is very elasticThe economy and especially the residential real

estate economy has a profound impact on the current and future outlook for senior housing demand

Consumption is a function of creating a solid value proposition for your product – aligned with market economics, price vs. demand against the available supply, and the range of options available to the customer.

Strategic Pricing is about creating the best value proposition for your target market, positioned against the range of alternative products – customers receive more utility than they pay for!