Stenback 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 a standard model, with any upgrades added by the buyer after the sale. Stenback Builders' costs per developed sub-lot are as follows:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,000
Construction . . . . . . . . . . . . . . . . . . . . . $ 124,000
Landscaping . . . . . . . . . . . . . . . . . . . . . $ 6,000
Variable marketing costs . . . . . . . . . . . .$ 5,000
Stenback Builders would like to earn a profit of 14% of the variable cost of each home sale. Similar homes offered by competing builders sell for $208,000 each.
Requirements
1. Which approach to pricing should Stenback Builders emphasize? Why?
2. Will Stenback Builders be able to achieve its target profit levels?
3. Bathrooms and kitchens are typically the most important selling features of a home. Stenback Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost $22,000 per home but would enable Stenback Builders to increase the selling prices by $38,500 per home. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Stenback Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner?