Are Your Product Margins Caught Between a Rock and a Hard Place?


"Rock, Hard Place" Road Sign with dramatic clouds and sky.Accomplishing a growth agenda often requires a significant paradigm shift.  You can no longer afford to simply “market what we make.”

Your perspective needs to shift from one that is internally focused to one that is customer driven.  The shift places an increasing emphasis on customer need assessment as the means to extend current your core competencies.  As a result, the imperative for growth becomes to “make (or source) what we can market”.

Develop the Equation and Discover the Opportunity

A Matter of Perspective

For a brand position to be compelling, it must contain more than a communications and/or merchandising program although it includes those components.  It must be, first and foremost, a business proposition.

The Key

The key to understanding the channel is to adopt their business perspective.  And for the channel, the business equation is fairly simple:

Selling Price = Costs + Profit

The goal is to keep selling price and profits up, and costs down.  But in an increasingly competitive market, there is constant downward pressure on selling price which, in the absence of a corresponding decline in costs, only serves to lower your profit.  To rely upon increased volume to offset declining margins is a much riskier bet.

The Business Equation

Assessing the Opportunities

Develop the Equation and Discover the OpportunityBased upon that simple business equation, there are a limited number of opportunities for building materials manufacturers to have a positive impact on their channel partner’s business.  “Profit,” for example, is determined by your customer and the level of profitability will vary from customer to customer if not even job by job.  “Selling Price” is controlled by the market.

The Point of Impact

From the customer’s perspective, the only variable element in the equation is “Cost.”

“Cost,” for your customer, is comprised of four elements:  marketing and administration, materials, labor and the cost of money (interest or carrying costs).  As the market place puts more and more pressure on your customer’s selling price and margin, more and more of your customer’s costs are pushed up the channel toward you as the manufacturer.

Therefore, the real opportunity for you lies in the channel partner’s cost structure.

The Elements of Customer Cost or Opportunities for Your Brand Position

Marketing and Administration

These, not insignificant expenses, can and are likely being addressed by you with extensive marketing tools such as merchandising, POS, identity programs, and other communication initiatives.  This is the easiest to way to cut your customer’s cost and, consequently, every other major manufacturer has developed their own dealer merchandising programs, builder programs and contractor identity programs.  By themselves, these types of initiatives are not compelling points of competitive differentiation for a building materials manufacturer.  They are table stakes and have become the cost of participating in the channel.

A Material Difference

Historically building materials manufacturers have focused on the materials component of the equation.

A materials focus offers a manufacturer three basic positions:

Products Promoted As:                              Opportunity for Manufacturers:

1. Lower cost                                                 Viable for only the lowest cost producer

2. Better performance at same cost             Advantages created through technological                                                                                                                                                                                                                                                    innovation erode over time

3. Better performance at higher cost             Profitable margins but limited volume

Labor Savings as Part of The Building Products Selling Equation

For both dealers and builders, labor is a significant cost.  In fact, as much as 30% of the cost of a new home is tied up in labor.  Some of the more aggressive manufacturers attempt to lower this cost burden by making labor more efficient through, for example, training programs.  But the effort at reducing the cost of labor has, to date, been tangential to the manufacturer’s offering which is primarily materials focused.  But with a new building products brand position . . .

 . . . labor savings doesn’t have to be tangential. 

One of the greatest challenges faced by dealers is labor productivity.  For the pro, it’s the shrinking pool of skilled subcontractors.  The goal for both is to manage material and labor costs effectively with as few headaches as possible.  Ideally, labor savings as well as product performance are key benefits.

Churn and Turn

For dealers and builders, in particular, it’s the cost of money which poses a particularly thorny problem.  With low inventory turn, both dealers and “spec” builders can watch their profit erode through monthly interest payments.  On average, 6% of the total cost of a new home is financing cost (a builder’s total profit margin on the home averages only 11-12%).  Regardless of how many projects the pro can churn, it’s the speed with which they turn that can spell the difference between a profitable year and a disaster.

For the channel, the relationship with the homeowner offers the “promise” of quicker inventory turns, particularly where that relationship is used by the channel partner as a point of competitive differentiation.  But to be truly valuable to the channel, your brand must be an assurance of quality for the prospective buyer.  The quality perception generated by your brand can then be transferred to the dealers who stock our systems and the pros who use them.

Addressing the Opportunities

Given that the opportunity for building product manufacturers lies in the cost structure of their customers, where’s the “meat” in a new program?  There are several approaches that you can develop around the four key elements of “Cost:”

1.  Marketing and Administration

2.  Materials

3.  Labor

4.  Turn

Marketing and Administration

Think about how compelling and customer-specific merchandising and communications programs can become through “mass customization.”

It means turn-key and off-the-shelf promotions to supplement national programs and to generate traffic and sales on a schedule determined by the channel partner.

Material

Since this is the historical basis of how a building materials manufacturer works to differentiate themselves, this type of innovation is more common to an organization’s branding efforts.

Labor

It means a “delivery system” that makes the pro more efficient through online design help, visualization and other tools that drive builder, contractor and dealer lead referrals.  And you can also provide online training videos and other tools to help the pro’s subcontractors become more knowledgeable and efficient.  Your product managers can also help this out by focusing on creating products that are easier and quicker to install.

Turn

For the pro, this kind of approach provides a brand in which the homeowner has confidence and which the pro can use as an effective point of differentiation.

In summary, the cost structure of your channel customers provides you ample opportunity for the development of a brand that extends beyond product alone.  Ultimately, this approach provides the bridge to the dealer, builder, contractor, remodeler and installer across which will flow an ever-increasing stream of products, services and solutions.  It’s a path that ensures long-term, profitable sales growth.

 

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