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.

 

Advertisements

What Does “Your Price Is Too High” Really Mean?

Dec-Jan 2010-2011 035It could mean, “I don’t like you, get out.”

It could mean, “I am testing you. I have nothing to lose.”

It could mean, “You haven’t shown your value to me.”

It could simply mean, “I’ll get a better price by saying this.”

It could mean, “I am only doing what you as a salesperson have trained me to do.”

Hints when selling around price

Don’t fear your price!  Be confident and not ashamed.

  • Know your value
  • Know your competition
  • Know your customers’ needs

Never start discussing a price quote with phrases such as:

  • You better sit down before I quote you my price.
  • This is the best I can do.

Don’t open your price up to negotiation with leading phrases:

  • You know I want to work with you.
  • I’ve been doing business with you a long time.
  • I sure don’t want to lose your business.
  • I could give you a lower price if…
  • Since you are one of our better customers, maybe I can let you have it for this price.

Never invite or challenge your customer to “shop” your price. 

This is what to avoid saying:

  • Our price is lower than anybody’s.
  • Comparatively speaking, I think we have the best price in the market.
  • Our new price is…

Avoid placing yourself in a defeated position on price.  Here are a few examples of what to avoid:

  • Just tell me where I need to be.
  • What do I have to do to get your business?
  • Am I in the ballpark?
  • Of course I could give you an even better price if…

When A Buyer Says…

“I don’t care about service, delivery or quality.  Price is all that is important.”  Response: “Okay then we’ll provide you poor service and quality products.”  This will put them in a position that forces them to admit their statement is false — they do care.  This will allow you to reinforce your value.

“My guys sell what the customers want.  They don’t see the difference.”   This is a great opportunity to meet and sell the salespeople.  Ask if you can talk to his people.  This is a great “pull through” opportunity.  Once you sell the sales reps — price becomes a lot less of an issue.

“We are reducing down to only two suppliers.  If you want to be one of them, you’ll need to get right!”  In this situation, never cut your price without the commitment of what will be gained.  At this stage a price quote without the commitment will only be used to leverage the other participants.  Response: List your competitive advantages; assure the buyer that you will be competitive and that if he’ll make the commitment now — on the spot — you’ll close the deal.  Put the heat back on them!

“I need an incentive to cut off a long-term vendor.  You must be lower if you want me to do so!”  Response: Only commit to being competitive.  If they didn’t have a need they would never consider a change.

What’s marketing looking for?

What does the marketing team look at when making a price decision?

  • Will the price requested set a new market low?
  • Will we be profitable with all the program added in?
  • Does it add or cut back ends?
  • Do we carry a price premium over our competition?
  • Can we reduce the “let’s make a deal” nature of our business?
  • Are we acting as industry leaders?

Make sure that the customer has truly earned and justified the price they need.  Make sure you are comparing apples to apples — there are many elements of price — get your facts straight. 

Once price is relinquished make sure you have gained something for the value you provided.  Finally, communicate thoroughly, professionally and always be reinforcing your value.

For other Channel Instincts posts on pricing, see Is pricing making you go bananas? or Are you pricing for volume or profit?

Are You Pricing for Volume or Profit?

imagesCAMM6VP4Your costs are rising and your margins are declining.  Worse, your retail partners are demanding greater margins and it’s a scorecard measure.  You need a price increase but you run the risk of triggering a line review or losing placement.

Let’s start with a basic premise: our job in Sales and Marketing is not to merely generate volume but rather to generate gross margin.  How then can we overcome pricing issues?

Profitability without growth will only serve to create an environment with no opportunity.  Growth without profitability only serves to create a poor performing large company.  Profitability without growth will only serve to create an environment with no opportunity.  Understanding the balance between volume and price is your job!

Survey after survey of retailers, dealers, distributors, contractors and homeowners shows that price is rarely the key driver in the decision process.  In fact, it is usually 4th or 5th.

When you buy a shirt or blouse, what factors do you consider?

  • Is price the key?
  • or style, color, fit, brand, or image?

How many of you buy clothes or anything else based on price as the #1 criteria?

Let’s take another example: a motorcycle helmet.  Is price the deciding factor? Who buys the cheapest motorcycle helmet?

Business is a Game of Margin – Not Volume!

Business is a gameToo many companies believe that volume and market share are the secrets to business success.  Yet regularly billion dollar corporations file for bankruptcy in the U.S.  When financial trouble comes, companies “cut price” in an effort to drive top line sales.

Remember, it is the buyer’s job to discount your value, while simultaneously securing it.

Your goal: Implement a pricing plan that provides leadership to the industry and communicates your desire to . . .

  1. Stabilize the market
  2. Capture your value
  3. Incentivize your customers to trade up
  4. Earn a reasonable return

To maximize your pricing and profitability you must:

  • Take a leadership role
  • Understand what price is
  • Sell your value
  • Recognize that being competitive is more than just price

It starts with pricing leadership.  You must take a leadership role…

  • Price leaders generally have brand preference.
  • Price leaders generally have the largest and strongest distribution system.
  • Price leaders generally have a technological advantage or leadership that customers generally want to be associated with.
  • Price leaders generally have scale.
  • Price leaders generally have created either real or perceived value for their goods and/or services.
  • Price leaders have a competitive cost position.

Finally and most importantly,

  • Price leaders have the courage to lead.

The ultimate goal in managing price competition is to create a stable competitive environment where you can earn the best possible sustainable return on investment.

The forgotten elements of price

trade-show-specialsMost everyone thinks of the invoice price and terms.  But these are the forgotten values of price:

  • Growth rebates
  • Promotional allowances
  • Show specials
  • “Buys”
  • Advertising allowances
  • Co-op plans
  • Pallet configurations
  • Terms
  • Price protection
  • Builder rebates
  • Contractor rebates
  • Parade of Home/Model Home allowances
  • Pick-up allowances
  • Guaranteed service cycles
  • Merchandising allowances
  • Service
  • Packaging
  • Customer accommodations
  • And more that are unique to your industry

Each of these elements makes up your pricing – and your value – to the buyer.  Don’t forget them when negotiating and remember they all are eating away at your account profitability.

Sell your real value

Your real value to your customer is the incremental advantage they get from doing business with you.  This list is generic, but you can use it to start building your own:

  • Deep customer relationships
  • Intimate customer knowledge
  • Shopper Knowledge
  • Broad product lines
  • Facilities nationwide to provide service and consistency
  • Technology and innovation
  • Outstanding quality
  • Packaging leadership
  • Brand awareness
  • Retail expertise
  • Merchandising and promotional ability
  • Lead generation
  • Customer service support
  • Web-based dealer portals
  • EDI
  • Industry integrity and financial clout
  • Multi-product accessibility
  • Accessibility to senior management
  • Online consumer education and support
  • And others unique to your company and position

You should already have an idea based on the market.  YOU own the process.  Homework is critical, so ask a lot of questions…starting with what do we get for making the price move?  That’s the biggest question of all!

Being competitive is more than just price

"What's the price?"Another key question is to ask what’s the competitive situation?  Don’t just shout “we’re not competitive! to the product manager or your sales manager.  Being competitive is more than just price.  Competitiveness is in the eyes of the beholder!

  • What’s the customer’s commitment to us — 25% or 100%
  • What’s the overall volume compared to other customers in the market?
  • What’s the competitive price on “like” product?
  • Who’s the competitive manufacturer?
  • Who is the distributor involved who quoted the price?
  • Is this the price on the invoice?
  • Is freight included?
  • What’s the price after all rebates, discounts, etc.?
  • Is this one time only?  For a job?  What’s the duration of the quote?
  • How does the competitor go to market?  Do they have brand identity, service programs, marketing support etc.  What does the customer like about the competition?
  • How will the competitor respond if we make a price move?
  • Will the competitor respond by taking our new price offer to accounts we do not have positioned at this price – in other words, lateralize the offer?
  • What other of our customers will be affected by this lower price?

What added value can you offer?

  • What else can we bring to the party other than price?
  • How can we help grow the customer’s sales?
  • How can we lower their cost?
  • Can we use any of our unique capabilities to keep from cutting the price?

Marketing is all about 4 P’s, one of which is Price

Make sure you spend as much time understanding pricing as any other one of the P’s.  Pricing deserves respect, attention and creativity.  You will be rewarded with greater profitability and be more competitive in the marketplace as a result.

For other Channel Instincts posts on pricing, see What Does “Your Price Is Too High” Really Mean? or Is Pricing Making You Go Bananas?  

For a Channel Instincts post on expanding the 4 P’s of marketing to 13 P’s, see The 4 P’s of Marketing Aren’t Enough Anymore!