Even though we need to be aware of our costs and gross margins, we can’t lose focus when we need to take a loss on paper to maximize profitability long term. The reality is that as the market rises, the value of our inventory on the ground rises vs. what’s on paper and conversely, when the market drops, the value of our material on the ground drops vs. what’s on paper. When we make decisions based on what’s on paper, blindly ignoring the market reality, that strategy seriously damages our long-term gross margin.
Our customers (and most of the time our sales reps) will push us to do the opposite of what’s most profitable for us. When the market is rising, they want to lock us into a sale, and when the market is dropping, they try to delay committing to a price. It’s our job to create strategies to counteract this and control the market timing of our sales.
Construction jobs, for the most part, have product deliveries dictated by timelines other than those following the price of material. It’s the time where commitments are made, and pricing locked in that are variable. It’s in this window of time where we can add a couple extra points of margin.
For example, an open quote for a customer that just pulled permits, at a time where you estimate the market going down, sets us up for a strategy to lock in the pricing sooner rather than later. When adopting this strategy, focus on the replacement cost, not average cost. When the market is dropping quickly, we are better off selling OSB at a rate under our average cost if replacement cost is 20% less. This is true especially for speculative sales to customers that are buying ahead for a discount. In the future, their willingness to pay will be lower than it is today when they recognize the market is trending downward. Pushing through existing inventory faster in this kind of market will help our average cost drop quickly and end up yielding more gross margin dollars over time.
Here are a few strategies to adopt depending on what side of the market we are on.
STRATEGIES TO CREATE DEMAND WHILE PRICES ARE DROPPING
- Discount jobs shipping after 14 days to lock price early and get a down payment. They will pay more now, even with a discount, than they will later.
- Offer full bunk specials to move high turning inventory to customers that are always willing to get a discount. “OSB Sale. $5 off per Full units only. Delivery $2 per mile or you pickup for free. This week only.”
- Understand when the project is going to need to be shipped from the time it’s quoted. If delivery will be right away, don’t give any discounts; but if it’s in the future, offer percentage points off to encourage immediate commitment. Even better—get a down payment to lock the discount.
- Be more aggressive now, even if it looks like a bad deal on paper. Move inventory.
STRATEGIES TO SLOW YOUR SALES PUSH WHILE PRICES ARE INCREASING
- Communicate early and often about the rising market to help customers raise prices in their contracts and with end customers. This “extra” we help them to negotiate is partially our profit.
- Only let customers lock pricing for more than seven days if they This will limit customers from pushing hard to hold prices.
- Offer an added value—a class to share strategies that help customers turn lumber prices into a variable cost rather than a fixed cost in their contracts. In the same class, train them to qualify their own buyers based on market fluctuations and borrowing limits.
In this highly volatile lumber market, strategically focus pricing on market timing over the more stable market strategy of selling based on the inventory average cost. Understanding retail market pricing and customers’ willingness to pay at given times is to our advantage when it comes to stabilizing or increasing profit margins.
Shane Soule consults with LBM and component companies to increase productivity and profits, and improve the experience for both customers and team members. Reach Shane at firstname.lastname@example.org