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Maintaining margins vs. market share

Real Issues. Real Answers. Margins vs. market share

To sell more (at lower margins) or sell less (at higher margins) is an age-old question facing LBM dealers. In today’s red-hot market marked by material shortages and spiking prices, there’s a new urgency behind the question of maintaining margins vs. maintaining market share. How is your company navigating this reality?

Thanks to our readers who shared their insights to this question from a fellow LBM dealer: “Our company has found that maintaining price competitiveness in a wildly fluctuating cost arena is extremely challenging. Shortages of key materials complicates the situation even further. We’d love to learn where other LBM Journal readers draw the line between maintaining market share and maintaining margins.”

Responses from lumberyards and specialty dealers

“With things being in a state of uncertainty, we are mindful of the extra marginal dollar that is available and the importance of that dollar for a future drop in pricing. Yards across the US will be faced with an inflated inventory at some point and face a loss. When the shortages started, the consumer was impatient, (trained by next day delivery) and not understanding. Retail stores are the front line and deal in person with the consumer. They are the ones having to explain this unexplainable situation. We worked hard to give first-hand information on the shortages and delays. Communication is key to success. Use social media, in-person conversations, and signage in your stores.”

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“It is very tough if you want to be profitable to maneuver through this volatile market. You have to do it on a customer-by-customer basis and market by market. Communication is the key, but you are going to lose some business to price and, if you keep you service levels up, gain some business with service. Standard top to bottom swings per year in the market, from high to lows, used to be plus or minus $150. Today you can have that move in one day so you and your competitor can bid a project the same day with the same margin dollars and have different bids because your cost assumptions were different.”

“Rapid cost changes demand rapid response, or your company is unlikely to weather the storm. You must maintain margins!”

“We price material quotes based on anticipated cost at time of future delivery. When prices fall, if ever they do, we will have to price our high-dollar inventory at the new lower pricing. Gain on the upside and lose on the downside.”

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“We are not discounting any prices, in fact with the pace of increases to us we are actually raising margins. If we are given a 5% increase, we make our retail increase 7% to stay ahead of it at the moment we are notified.”

“With shortages and less to sell, we must maintain our margins.”

“It starts and ends with your relationship with your customers, which should extend past customer service. Communication is always central to that. In this changing climate, weekly, if not daily, communication on availability, pricing, and lead times supports the partnership and gives your customer confidence that you are right alongside them.”

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“With these kinds of conditions, holding on to your market share is key. This is accomplished by being in stock and knowing where the market is at all times. This will maintain your current market, and new market share will come automatically when you competitor drops the ball, and certainly someone will drop the ball in these conditions. At the same time, you must as a business grab the higher margin dollars while you can. We are experiencing inflation whether we want to accept that or not, and with low interest rates and a hot housing market you can’t not raise your pricing. Plus, with the labor shortages due to covid and the transportation issues in trucking we are experiencing, one cannot keep the same price levels. If you do, you will be out of business because you can’t cut margins your way to a profitable business. The question I hear all the time is ‘Do you have it?’ Not ‘How much is it?’”

“Stick to the margins if at all possible.”

“We sell a variety of products that allow us to be competitive, but we’re not the cheapest on the bulk items, and we make a healthy margin on the high-end exclusive items. We definitely offer better service in our market and industry. At the end of the year, I review the profit made for each inventoried item and find that I made the same profit selling 200 tons of one item that I made selling 4,000 tons of another.”

“We maintain margins rather than market share.”

“Protect your core customers. If you need to cut margin to sell to someone and you leave yourself in a position without inventory, all you did was leave money on the table.”

“We feel that you must follow the market up and down to stay competitive. If you set your price based on the market as it goes up, you will increase the margin and react adversely when the market falls. This should average out during the quarter or by the end of the year. You will only prolong your loss if you try to hold your price and the market price falls. As to the supply problem, you must try to keep orders in the pipeline but not try to horde materials at the high prices. They will fall and you will have material at a high cost. Also try to find alternative products. These may be at a higher cost, but at least you have something to send your customers. If you have nothing, they may quit calling. You must have a good relationship with your suppliers. Ours will not sell stock to new customers in order to have material for us. Pay them on time!”

“The fact is you must stay competitive in the market these days. If you’re selling less at a higher margin, that’s fine, as long as you’re selling. Eventually the customers in the region will talk to each other as they are usually looking for the better deal. In my professional opinion, as long as you’re selling, even with smaller margins, you’re able to stay open and people are talking about your business and your prices. Recently we’ve had people in our small community comment, thanking us for competing with the big box stores. This saves them gas, money, and time. Yes, we want higher margins, but sometimes you have to sell items for less to make money. With the current lumber situation (dropping prices), we’ve set prices on a few boards at cost or less, in order to keep people coming into the store. To make money, customers have to buy. If your prices aren’t competitive, they won’t buy. It’s as simple as dropping margins on lumber and raising margins on screws, nails, truss plates, etc. Raise multiple items to make up for the lost margins in other areas.”

“We kept pace with the big boxes and other regional competitors until it was apparent that they were either not following the market (as reflected in their pricing) or they were too aggressive in hyper-inflating their pricing to take advantage of panic buying from the customer. We gained an advantage by continuing to purchase when we needed or when the materials in short supply became available. The worst position to find yourself in is to have nothing to sell! The big boxes in our area would have low pricing, but no inventory to back it up. Our regional national competitor went overboard and chased several of their customers into our arms. The lesson here is to be consistent; keep strong pricing practices in place. We would never want our customer to leave believing they were taken advantage of—too difficult to repair that kind of damage—even with lower pricing.”

“We are doing everything we can not to lose any market share. Sometimes it does mean giving up some margin percentage, but with elevated sales price we are still making more gross margin dollars to cover cost and profit needs. We are looking more at gross margin dollars earned per customer and the work involved in servicing that customer. The hope would be we absolutely keep our best customers from a profit and service point of view. If we have to lose one, let it not be one of the best.”

“Simply put, service over sacrifice.”

“This is very subjective and does not have a single answer. It all depends on what you are trying to do or be in a market, or with a customer. The price of materials usually gets passed on to the customer in most cases, so you shouldn’t have to bear the burden. Be smart and don’t make it a race to the bottom. Develop a strategy on how to deal with the market and ensure your teams are aligned around it. Pay attention to your customer because they usually know where the market is headed long before you do. Reward those that have been loyal and let them know of your commitment to supporting them.”

“We are a gypsum distributor in the Mid-Atlantic market. The two biggest national distributors have continued to battle for national builders’ work at extremely low or below cost margins, honored most of their older quotes (at losses), and have continued to quote and sell newer work on narrower margins. The other national supplier in our market pulled almost all of their older quotes and have raised their prices way up to try to capitalize on the material shortages going on. We have taken a position somewhere in the middle. We honored some quotes with key longterm customers which has had about a 3-4% impact on our gross margins. With steel prices up 100%, treated lumber prices up 200-300%, and gypsum and insulation up about 30%, we have been able to generate a lot more profit dollars to offset our decrease in profit margin. Our market has been extremely competitive over the past five years due to one of the big suppliers opening up new locations and going after market share. With all of the substantial increases over the past 10 months, we are anticipating that prices will stabilize, and we will not have to make the decision between market share or margins.”

“The challenge of maintaining market share and maintaining margins is a fine line at times. Depending on the customer and how quickly they pay is one factor. Are they a difficult customer to deal with? Then go with margin on them for pain and suffering. Set your margin and sales goals and keep them in front of you as you progress throughout the year. I’ve been a sales manager for a long time, and I believe sales and margin growth is not a sprint to the finish line. It’s a marathon, and we’re in it for the long haul.”

“Protect your margins. Materials are too hard to get to sell short today and be out of stock tomorrow.”

“We have tried to maintain our business plan as best we can. There have been occasional down moments, but we’ve tried to get back on the upswing side of it. We’ve made sure we took advantage of good buys.”

“I believe we have to try and continue to keep margins where they need to be. I also believe that on a per-project basis, it is important to take care of your loyal customers. At the end of the day margins need to stay up because the costs of doing business are not going down. Employees are only getting more expensive and harder to find.”

“A former boss told me, ‘We do not want all of the customers, just the good customers.’ The ones who pay on time and allow you to make a profit. Another former employer said, ‘The best thing you can do for your customers and employees is to make a profit.’ The most important number is not how much goes through the register but how much is left at the end of the month. What is your minimum acceptable margin? You will sell items below this number, but the average must be at or above it. Not just on the weekly or monthly average, but on each customer and preferably each sale. The customer who is just buying the loss leaders and low margin items is costing you and not making you any money. This is the customer you want to carefully work with to try to develop into a more profitable customer. Work more with the customer who is buying the majority of his projects from you. Negotiate on full packages only and match prices on a full package after making sure your list matches Brand X. Offer the best value and service. The boxes only offer price, but knowledge, service, and quality are more important to your customer. Being close (not necessarily below) the big box price helps. The boxes are not the lowest price on everything. Do not be scared to make a good margin on the extras to help you with the commodities.”

“We work to do all we can to maintain our margins through this current turbulent marketplace. We stay up to date on replacement costs of all inventory items, particularly commodity items, and price accordingly. We don’t commit firm pricing on projects unless we are covered from a cost standpoint. We are maintaining our market share largely because we are constantly communicating with our loyal customers.”

“Maintaining a reasonable margin should be the goal. All of us in this current situation have had to adjust margins because of product availability and price fluctuations. Dropping margins in order to gain market share is a short-term gain. There will always be someone else who will come in cheaper. If price is their biggest concern, then they’ll probably take the next low price that comes along. Take market share to the extreme: You have every contractor and consumer for 50 miles around coming only to your store. Problem is, you have dropped margins so low that you are not getting enough ROI and profits are slim. Unlikely, I realize, but what good did it do? Do your best to work with the customers you have and try your best to attract others. If the relationship is not mutually beneficial, and it can’t seem to be worked out without a price concession, thank them for the opportunity, and let them know you are there to help.”

“Everyone is in the same boat and the one thing that can set you apart is being confident and standing firm in how you and your company operate in a time like COVID. Changing and constantly adjusting to try and meet what you think is best can cause customers to lose confidence in their supplier.”

“Market share is not the issue. Even with higher costs, we are operating at capacity. The biggest challenge is maintaining cost so we can keep margin on point.”

“Maintaining market share starts with having the product on hand. We are fortunate that we increased our inventory early in 2020 and were able to dictate pricing for the first half of the year. Now it gets a little tougher knowing how much is too much to pay for lumber as your margins are being squeezed. In this crazy market we are in, we find that having the product on hand and the ability to fulfill orders completely even at higher prices than our competitors in some cases, trumps not having inventory levels where they need to be. Customers understand higher prices more in the fast-paced super-heated work environment we are currently in.”

“There is not a line that separates market share vs. margins. Every bid of any consequence is decided on a case-by-case basis. The decisions are based on the facts and conditions. When our salespeople engage in great discovery, our decisions and outcomes tend to be better. Unfortunately, when our discovery process is weak, our outcomes suffer. In this crazy market, using a ‘line’ or a ‘policy’ is tempting because of the consistency in might create. Sorry, that’s an illusion in these times.”

“We do a lot of installed sales, so I have told our designers and salespeople to keep raising margins until they start losing a certain number of sales. We raised margins five points. In this market if you can get the material don’t cheat yourself on margin.”

“With cost up and supply delays we use our standard builder mark up.”

“Since the product cost has increased so much, I have lowered my margins and am still clearing more than I used to when the cost was lower, but my margin was higher. I have found that I am maintaining sales at a greater rate this year than in previous years. More people are still working on projects and still want to finish them even though the cost to them is higher. I have also found that there is a lost less haggling over prices. Most people are content to get the products that they need.”

“You need complete transparency with your regular and dedicated customers.”

“Maintaining market share is more consistent with being able to supply materials when your customer needs them. Profitability may suffer at times, but your customers can count on your being there and having the materials they need.”

Responses from wholesale distributors and manufacturers

“Being competitive is important in a normal market, during normal times, in normal circumstances. This year has proven to be anything but normal. Ultimately, for me, it comes down to, ‘What do you want to be known for?’ And the even better question, ‘Where do you want your business to go from here?’ My answers are simple, but they aren’t for everyone. I want to be known for having a good product at a good price. I want my customers to feel like they got a good product, at a competitive price, and that I wasn’t trying to take advantage of the situation. I have complete respect for the need for price increases, because if we want to keep our businesses running, we may need to increase. That being said, I feel like there are a lot of things happening at the top of the supply chain that are being used to superficially inflate prices. That leads me into the second question: ‘Where do you want your business to go?’ How big do you want to get? I’m the type of person that envisions myself being comfortable in life. Living in a manner where I can have the things that I not only need, but the things I want as well, and do so without struggling to get by, without struggling to feed the family. So, you need to decide…are you trying to grow into a multi-location empire, or do you just enjoy being the place everyone in your community comes because they know you, your family, your staff? And more importantly, they know when they come in that they are going to get a good product for a good price. And when someone tries to tell you that they want a great product, or a great price, you can explain simply to them that good is better than great all the time. Just ask God. When He created everything, he said it is good, not great. Good is great, and good is good enough. My short answer is relationships over profits, but you have to be able to keep the doors open. You increase when you have to, but not more than you have to.”

“Supply the customers who we have already. However, try hold the price for one or two weeks based upon the commodities.”

“As a wholesale lumber distributor, we have been able to increase market share by taking inventory risk with escalating prices. Early in the pandemic in April 2020 lumber prices bottomed. Since then, mills have not been able to keep up with demand and lack of supply has caused prices to be two and three times higher on lumber, plywood, and OSB. We kept buying into the run-up and taking our PTS contract shipments. Wholesale margins have been higher than normal. Now after a year of shortages, lumber prices peaked in May and are falling like a rock. Margins are falling and may be negative for a month or two. We do not think this will last long as mortgage rates remain low and there is pent-up demand. Through the market rollercoaster our goal has been to maintain inventory for our retail dealer customers. We would advise this dealer to stay the course.”

“The decision has to be based on your particular circumstances. Does the longterm situation dictate smaller returns in order to satisfy your customers? If so, I would say work on smaller margins if need be to realize long term gains.”

“Why do they need to be mutually exclusive? I spent the majority of my career at the dealer level and understand that this is always a struggle. Some companies and some salespeople believe that they need to buy business with decreasing margins, I have always taken the approach that being competent, efficient and outperforming your competition has always been a more long-range way to establish your contractor base. You should be excited about the opportunities that our current condition provides and spend your time focusing on sourcing materials. Stay in constant communication with management and have a grasp on true sales opportunities that may present themselves. If you have the product, you will be able to get the margin you desire and at the same time add market share. Think outside the box and expand your material sources how and wherever possible.”

“In today’s business environment, demand has far outstripped supply and most of us find ourselves allocating lumber and panels to our customers. You do your best to take care of the ‘A’ customers, those accounts who are very loyal to you and depend on you to keep them in stock. You supply what you can to ‘B’ accounts, those customers that buy from you regularly but shop around and don’t give you all their business, and you cut off completely the ‘C’ and ‘D’ customers who buy from you only when you’re cheapest or are the only ones who have what they are looking for. In addition, during a rising market we base our sell prices off current replacement cost, not actual or average cost. To do anything else means you might not make enough profit on what you’re selling to buy the next truck of replacement material. Of course, the rules change in a falling market. The first rule of wholesale is, and remains, ‘Your first loss is your cheapest loss.’ In a falling market we sell on-market every day and let the gross margin fall wherever it does in order to turn our inventory and average our cost down. Market share without profit is of little to no value to us.”

“By now most builders are aware of the implications of supply / demand / price and know they’re going to pay more and be lucky to get some items. I opt for maintaining margins and being able to supply them when others can’t. Have inventory available at the risk of losing a few militantly price-conscious customers. For a builder, having product that can be nailed up at a higher cost is better than managing busy subs or losing the sub for potentially weeks.”

“Every point of the distribution chain is experiencing cost pressures and increases. As a business owner, only you can make the decision to pass on the increases. Just keep in mind, if your business is experiencing shortages, then so are your competitors. You should follow your business strategy accordingly. For example, if you offer strong value to your customers other than price, then you should be paid for it.”

“Move your pricing with the market. Those who choose market share will compromise their bottom lines when this washes out at some point. Service and consistent delivery of material is the key right now. Price of material is only what the market will bear but having the material to ship is paramount to fighting over keeping your customers on price. Lumberyards think they don’t have the edge right now, but they still do. Customers who withdraw quotes to start somewhere else lose every time.”

“In this current allocation environment, if you don’t maintain your margins, you will be certain to be among the first to run out of stock. Make hay while the sun is shining. There will be plenty of opportunities to give up margin when the market is crappy, and you need work. Now is not one of them.”

“With raw materials being extremely volatile, and demand outstripping supply, we have chosen to maintain as much of our margins as possible while working hard to make sure our lead times don’t get stretched out. To assure our lead times do not get out of hand we are concentrating our efforts on existing customers and passing on some opportunities that may be counterproductive for long term relationships.”

“We maintain the same margins since prior to the pandemic. While price gouging would have been easy to do, that is not how we have maintained 75 years of profitable business. Our model hasn’t changed, nor will we. Knowing what it costs to go to market is essential with the constant change in wages, healthcare, fuel, and another federal holiday. When will the madness end?”

“It’s all about margins driven by reasonable pricing and outstanding service supported by real people with the right attitude. Are you really big enough to maintain market share over the long term?”

“It’s much easier to keep your existing customers than find new ones. Do all you can to keep clientele, otherwise when better margins return, you’ll have nobody to sell to. Focus more on finding new ways to service these clients so pricing and shortages aren’t the leading topics of conversation.”

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