Calculation of initial prices


Because most developers change the prices of apartments only a few times during the entire sales cycle of the house, the overall success of the project, the level of income, the pace of sales, the execution of plans, etc., depend on the setting of initial prices.

Initial prices are the prices at which the house goes on sale.
When setting the initial price level for apartments, the developer needs to solve two main issues:

  • What is the average initial price to set for the project?
  • How to set a fee for each apartment, considering the initial average price level.

Answering the first question, it should be noted that among developers, there are two most common approaches to setting starting prices:

  • Orientation to the market that is, analyzing potential competitors.
  • Focus on cost and the desired rate of return.

The market-oriented approach is the most common, as it is applied to objects of wide demand in the low and medium price ranges. To calculate the average initial price based on competitors’ prices, the developer needs to perform quite complex calculations and compare the characteristics of similar objects with his own. Developers can do this manually by collecting information about competitors’ features (values) and prices or using automated valuation systems (Automated Valuation Models).

For a qualitative assessment, you need to have a sufficient number of analogs – preferably dozens of projects at different stages but with similar location characteristics. Often, there is no such number of analogs, so the assessment is carried out based on 2-3 projects. At the same time, the possible error of calculations may exceed the result itself. It is about the disadvantages of this approach.

A clear advantage of such an approach is the effort to establish a competitive ratio of price and values, which corresponds to a rational approach to a potential client’s choice of an apartment. However, every sales manager can say that choosing an apartment has a more pronounced emotional component than a rational one.
The cost and desired rate of return approach are less commonly used. The main category of objects belongs to the high price range. As a rule, such projects are distinguished by a unique location, aesthetics, design, technologies, etc., so they often have no direct competitors. However, the demand for them is significantly limited. If they exist, the prices of analogs are secondary when setting the initial price for one’s project.

Every sales manager can say that choosing an apartment has a more pronounced emotional component than a rational one.

No matter how the average price is set, the developer at the time of placing the average price is between two risks:

  • Set a too-low starting average (undervalued project); as a result, the project’s potential is not fully used, and part of the income is not received. This risk works to the full extent if prices rarely change during sales and do not react to high demand. Therefore, a quick price change is the only option to correct the situation. But if you apply a high percentage increase to respond to a high understatement, you can overestimate balances and severely reduce sales.
  • Set an average initial price (overestimated project) too high, thereby reducing the number of potential customers who can buy an apartment to an insufficient level to fulfill the sales plan. In other words, the risk of getting a sales rhythm much lower than planned increases, and the terms of implementation are much longer. As a result, the expected level of income will not be achieved. Discounts and other pricing methods to stimulate demand will need to be used to correct the overvaluation error.

The initial average price of the project/building and the rate of price change during sales determine the total income of the project/building and form the sales plan.

And this is the right decision because the values ​​of each apartment inside the building are different, so their prices should be different. But having determined the initial average price, you are unlikely to be able to start sales, as you are unlikely to want to apply one fee to all apartments.

Therefore, let’s move on to question 2 – initial price differentiation.

The concept of average means that in the general list of apartments in the building, there will be prices below average and above average. So which apartments should be made cheaper than the average, which ones are more expensive, and how should they relate to each other?

The developer must take several steps to differentiate initial prices successfully:

  • Determine the factors of differentiation – characteristics of apartments that affect the price.
  • Determine the weight of each factor – how much it affects the price.
  • Make a markup – indicate the manifestations of each aspect of differentiation in each apartment.

The developer can perform such actions in ordinary Excel. They take a certain amount of time – from several hours to several days, depending on the performer’s skills and the building’s parameters. As a result of the calculations, each apartment will receive its own, more or less unique price by applying the coefficients of each factor of differentiation to the initial average.

In the execution process, the developer will face the question – of what weights and coefficients to use because the final result depends on this. As a rule, developers solve this issue from their own experience.

In the process of researching approaches to initial calculating prices, we identified two most popular differentiation factors:

  • Floor – price change for each floor or group of floors
  • View characteristics – groups of apartments with better view characteristics are valued more expensively, with relatively worse ones – cheaper.

However, using only these two factors does not consider the popularity of small apartments (the smaller the apartment, the more customers can buy it for living or investment purposes) and the value of unique elements in apartments, such as terraces or private yards. Therefore, for more profound differentiation, it is better to add a few more factors, in particular, the price’s dependence on the area of ​​the room, the presence of unique elements of the apartment, the convenience of planning, etc.

For more profound differentiation, it is better to add a few more factors, in particular, the price’s dependence on the area of ​​the room, the presence of unique elements of the apartment, the convenience of planning.

As a result of applying coefficients, there will be a gap in prices between the most expensive and cheapest apartments. What should it be? The more expensive the real estate segment, the more extensive spread that can be involved.

In the process of researching approaches to the calculation of initial prices, we singled out the following algorithm of actions of the developer:

  • Market analysis is carried out, either manually or using automated valuation models (Automated Valuation Models).
  • As a result of the analysis, an approximate and recommended price range for one’s project is selected.
  • With the help of a subject list of apartments, the developer calculates the prices for each apartment, applying factors of differentiation by floor and type (rarely – a more number of factors). The average of the recommended range, or its lower limit, is taken as a basis.
  • The obtained result is once again adjusted to the approximate recommended price range.

This whole process usually takes several days.

There are a few more definitions to keep in mind when setting initial prices:

  • Each house is unique. It has unique characteristics of a location, view from the windows, design of facades and common areas, and planning options.
  • Clients’ motives may differ at different times and in different places.

So, does such a systematic approach protect the developer from error? It reduces its probability or scale but does not exclude it. Why? Because the issues that developers must resolve in calculating initial prices are often based on the executor’s experience and data on similar objects. It is not a fact that they will be relevant to the situation or project.

Considering the above definitions, the probability of making a mistake when setting initial prices is higher than the probability of setting them perfectly.

To assess the correctness of the established initial prices, we will determine what price requirements apply throughout the project:

1. Maximization of the total level of income.

2. Ensuring sales rates are close to plan. That is, developers should sell the apartments neither slower nor faster than the sales plan (therefore, to begin with, you need to make sure that there was such a plan).

3. Avoiding assortment disproportion – rapid sell-out of certain types of apartments, floors, or apartments with the same characteristics, with relatively larger remainders of other apartments.

As you can see, none of the above requirements apply to the initial prices. Why? Because the prices of one moment (the start of sales) affect the overall result much less than price management during the rest of the project implementation period.

Although, there are specific guidelines for initial prices that, along with frequent re-evaluations, will help meet all three requirements for overall price management. They are as follows:

  • Do not set prices for apartments in the lower and middle price segments significantly higher (up to 15%) than existing similar projects while ensuring the planned profit level. In the case of underestimation, frequent reassessments will quickly correct the error. But in the case of a high overestimation, the adjustment process will be longer and may affect the positioning of the project, revision of its technical solutions, etc.
  • Ensure a high percentage of price uniqueness because, in general, each apartment is unique, so its price must be special.
  • Ideally, the median price should be higher than the weighted average building price.
  • Avoid price extremes.
  • Conduct frequent revaluations, optimally – after each sale.

How we set initial prices in MAXIFY:

  • The initial average price is determined by the developer and included in the income plan.
  • The system for starting differentiation uses the following characteristics:

Apartment area

The floor on which the apartment is located

Specific characteristics estimated by the developer

The comfort of the planning decision, as assessed by the developer

The presence of unique elements in the apartment, such as terraces or private yards

 Distribution of the apartment on several floors

  • The developer evaluates the view characteristics of apartment groups.
  • The developer considers the comfort of planning solutions for groups of apartments.
  • According to the positioning policy, the developer chooses which price range (class) the project belongs to.
  • Differentiation is made thanks to pre-developed settings depending on the class of the project. These settings result from 4 years of research into customer reactions to the developer’s pricing policy. At the same time, the built-in tool for statistical analysis of price distribution will help to control that the initial prices meet the essential requirements.

The marking and grouping process can take several hours, and the calculation process – takes up to 1 minute.

So, with MAXIFY, developers will simplify the differentiating initial prices. But the main thing developers will get from MAXIFY is the possibility of prompt customer reaction to initial prices and their changes under the influence of demand.