White Builders builds 1,500 square-foot starter tract homes in the fast-growing

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White Builders builds 1,500 square-foot starter tract homes in the fast-growing suburbs of Atlanta. Land and labor are cheap, and competition among developers is fierce. The homes are “cookie-cutter,” with any upgrades added by the buyer after the sale. White Builders’ costs per developed sub-lot are as follows: Land………………………………………. $    54,000 Construction………………………………. $ 122,000 Landscaping……………………………… $       5,000 Variable marketing costs……………….. $       3,000 White Builders would like to earn a profit of 15% of the variable cost of each home sale. Similar homes offered by competing builders sell for $206,000 each. Requirements 1. Which approach to pricing should White Builders emphasize? Why? 2. Will White Builders be able to achieve its target profit levels? 3. Bathrooms and kitchens are typically the most important selling features of a home. White Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost $20,000 per home, but would enable White Builders to increase the selling prices by $35,000 per home. (Kitchen and
bathroom upgrades typically add about 150% of their cost to the value of any home.) If White Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner? White Builders builds 1,500 square-foot starter tract homes in the fast-growing suburbs of Atlanta. Land and labor are cheap, and competition among developers is fierce. The homes are “cookie-cutter,” with any upgrades added by the buyer after the sale. White Builders’ costs per developed sub-lot are as follows: Land………………………………………. $    54,000 Construction………………………………. $ 122,000 Landscaping……………………………… $       5,000 Variable marketing costs……………….. $       3,000 White Builders would like to earn a profit of 15% of the variable cost of each home sale. Similar homes offered by competing builders sell for $206,000 each. Requirements 1. Which approach to pricing should White Builders emphasize? Why? 2. Will White Builders be able to achieve its target profit levels? 3. Bathrooms and kitchens are typically the most important selling features of a home. White Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost $20,000 per home, but would enable White Builders to increase the selling prices by $35,000 per home. (Kitchen and
bathroom upgrades typically add about 150% of their cost to the value of any home.) If White Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner?

Explanation / Answer

Solution.

1.

White Builders are facing fierce competition with other developers. The approach which White Builders are willing to follow is Cost-based pricing where price is determined by adding a profit element on top of the cost of making the product. In this situation the pricing that comes out is $211600 [($54000+$122000+$5000+$3000)+15%].

But similar homes offered by competing builders sell for $206,000 each. In this case due to fierce competition White builders would loose their market share.

So the best strategy to be adopted by White Builders in this case would be Competitor-based pricing where competitor prices are the main influence on the price set.

2.

No, if Competitor-based pricing approach is followed then White Builders would not be able to achieve its target profit levels on single home. But the strategy would be effective to maintain the market share and survive in the competition.

3.

If White Builders makes the upgrades, the new cost-plus price per home would be $234600. [($54000+$122000+$5000+$3000+$20000)+15%].

Yes. The company should differentiate its product in this manner because the maximum price that can be increased due to upgrades is $35000 and the company is willing to earn 15% over cost. Thus is above price is finalised the company would achieve its target profits and would get an edge over the competition.

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