Economic Value Propositions and Marketing Strategy

1. Economic Value Propositions and Marketing Strategy Reginald M. Hislop, III Ph.D. Larksfield Place Retirement Communities

2. The Value Proposition • All non-essential consumption is psychological and financial • Value 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).

3. Senior Housing Value Proposition • Real 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.

4. Economic Value • Tangible and Intangibles are Key – Real Quantified and Emotional/Psychological • The 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.

5. Price and Demand

6. Elastic Demand

7. Inelastic Demand

8. Principle of Elasticity • Adequate to surplus supply of comparable products at various price points = Elasticity • Stable 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

9. Buyer Psychology and Consumer Confidence • Consumption 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.

10. Regional and Local Economies • While 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

11. Government Policy • To 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)

12. Credit and Banking Dynamics • Interest 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 product • Tighter appraisal requirements and erosion of higher level market comparables – price/value compression

13. National Economic Trends • High unemployment and limited wage inflation • Continued investment market volatility and overall wealth reduction for Seniors – value losses will not be recapped in their lifetime. • New banking and financial sector regulations • Uncertainty regarding tax rates and tax policy • Large 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

14. Demand for Senior Housing and Elasticity • Demand for housing in general, is fairly constant. Influencers of demand include; • Location • Price • Type (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.

15. Elasticity and Senior Housing • Many alternatives exist at different price points • Remain at home • Smaller home or condo • Rental • Add services to complement remaining at home • Move-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.

16. Developing an Economic Value Proposition: Step 1, Pricing

17. Step 1, Pricing; cont’d.

18. 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?

19. Refine and Re-Define

20. Value Proposition: Step Two • Analyze 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?

21. Strategic Pricing • Critically 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?

22. Value Proposition: Step Three • Using price as a baseline, begin to build value by addressing the non-financial elements. • Examples of non-financial elements are; • Security • Convenience • Activity • Socialization • Religion • Culture • Other

23. Value Proposition: Step Four • Integration 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. • Price • Non-financial • Identify opportunities for improvement! • Pricing • Services/Other

24. Value Proposition: Build It!

25. Yikes! We Don’t Stack-Up Well • Marketing: 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.

26. 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.

27. 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 Trips Free Stuff (televisions, appliances, etc.) Unit Upgrades Free Moving Services Free Decorator Services Custom Unit Finishes • Why?: One time events such as above don’t change the value proposition and often, are viewed as substantiation for higher prices.

28. Marketing: Using Your Value Proposition • Sell strengths, downplay weaknesses (or fix them if you can). • Four major components of Communication! • Oral • Written • Web • Other Media • Craft for each audience! • Direct consumer • Influencer • Staff

29. Conclusion • The demand for senior housing is very elastic • The 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!