Offering purchase discounts to pro customers is an accepted, long-standing strategy that many lumberyards use to encourage loyalty from pro customers. But given the competitive and complex nature of today’s LBM business, how beneficial are they, really? More importantly, are they worth the hit to the bottom line? That’s the essence of this month’s Real Issues question, from a dealer who’s considering pulling the plug on their contractor discount program.
This month’s question came from a pro-dealer in the Midwest who wrote: “We’re rethinking our policy of offering contractor discounts. Our company has offered contractor discounts for many years. It has been a tool to build loyalty, and it has worked well. However, it has become problematic on some jobs, and it is also time-consuming to manage returns with discounts.
“Eliminating the discount would be the easier move and would force our contracting customers to put the margin on their labor, where it belongs. Before making a decision, I’d love to learn what others have done—especially those with experience changing or ending a contractor discount program.” Thank you to the more than 200 readers who took time to share their thoughts on this survey. Notably, many of the answers were very detailed, which shows how relevant this question is for members of our industry. As we do each month, we emailed this survey to subscribers who’ve opted in to receive our email communications. If you’d like to be added to that list, please let me know at Rick@LBMJournal.com.
Which of the following does your company offer to build loyalty with its pro-customers?
First, we wanted to gauge what readers do in order to build relationships with their clients.
As the chart shows, contractor discounts are very common among respondents, with more than four of five dealers (80.8%) checking that box. Discounts are second only to charge accounts, which nearly nine of ten (87.9%) of respondents’ companies offer. A distant third, free material delivery, is provided by 58.2%, and about one in five (20.9%) offer some kind of loyalty program. Of the 14.3% who checked “Other,” representative answers included:
“We offer 10% off on all cash/carry lumber.”
“Free CAD drawings and free estimating.”
“No restock charge for stocked material.”
“We just discontinued the contractor discount, lowered the prices on thousands of items to a ‘guaranteed low price’ structure and are working on implementing a loyalty program.”
“We’re rethinking our policy of offering contractor discounts. Our company has offered contractor discounts for many years. It has been a tool to build loyalty, and it has worked well. However, it has become problematic on some jobs, and it is also time-consuming to manage returns with discounts. Eliminating the discount would be the easier move and would force our contracting customers to put the margin on their labor, where it belongs. Before making a decision, I’d love to learn what others have done— especially those with experience changing or ending a contractor discount program.”
Below are fellow industry professionals respones to this question. “Still offering contractor discounts. I believe they give us the flexibility to get and keep contractors. We will be interested in the results of this survey.”
“Our contractor discount program is not without those same problems, but we regard those problems as a lesser of two evils. We can eliminate the program and potentially eliminate loyal customers, or deal with the pitfalls such a program inherently has. It’s just the cost of doing business.”
“Look at it from another perspective: you aren’t really giving contractors discounts, you are charging everyone else more so it looks like the pros are getting a discount.”
“It has been many years since we offered discounts. We have always worked to build a relationship based on our company being of value to the customer rather than having the lowest, most discounted price. You are right, discounts can be problematic, serving sometimes as points of contention that ‘clutter up’ the relationship.”
“We did away with our 2% cash discount 10 years ago when everyone else was adding a fuel surcharge. Met with little resistance. Over the course of time, this small change has added much to the bottom line.”
“Hard to stop once it’s in place. Would suggest a rebate/fee back to the lumberyard if certain conditions were not met but agreed to. For example, if the account is not current, an additional 1% would be added to the outstanding balance monthly, if in the rebate/loyalty program. That way the lumberyard is rewarded as well as the contractor who pays his bill on time.”
“We still use the contractor discounts across our store. We also will match a competitors’ price as well. If you are going to do away with the discount you will have to be competitive with your prices.”
“Our company is fairly large, top 20 in the nation, and we do offer contractor discounts and loyalty rebates. In our market, to get rid of discounts would mean effectively raising all prices across the board. Getting rid of rebates for our largest customers would likely be suicide. I do not know how much volume you are dealing with, but in our situation, we must look at the big picture and focus on overall gross profit dollars and thus a net/net return. After the discounts and the rebates, are we A) making enough of a return for the family and the board, and B) making enough money to continue to grow and provide for our employees. “If credits specifically plague your operation, I suggest delineating your process, making sure your customers understand what products are returnable and for how much, and that they understand restock fees and vendor return deadlines. If credits are eroding too much of your bottom line, try to restore some GP dollars with a firm understanding/partnership from your customer base on how it must work. Honesty can be painful and scary but will pay dividends in the long run.”
“We have a single-tier pricing schedule and have toyed around with tier pricing. Currently, our sales reps have the discretion to adjust the GM% based on many variables. Obviously, the lower the GM%, the less they make. It is a delicate balancing act that factors in many other outside variables (competition, volume, size of job, relationship level, etc.).”
“We changed our discount to 2% 20 years ago and offer a yearly discount of 0.5% to 2% based on volume.”
“The customer discount is a necessary tool to build a solid base and strengthen the bond of trust between the supplier and their customers. That being said, once the relationship has been built, the discount should cease via the supplier, and be put into the labor margin on the contractor side as stated. If the supplier is the only side working to retain a relationship with its customer base, then it is not a relationship, but a onesided business arrangement, and a bad one at that.”
“It depends what the questioner means by ‘discount.’ Approximately 50% of our sales result from a bid of a material list in advance of making the sale, and these products are lower than the list price. Virtually all the products on these bids are lumber, panel, engineered lumber, building materials and builders hardware. If this is ‘discounting,’ it is vital to our success. If, on the other hand, a sale results when a pro buys products from our store of products that were not on a bid, the pricing is at the discretion of the salesperson. Our practice in this form of ‘discounting’ needs constant vigilance. But since all our sales people are paid on gross margin dollars, they, at least, have skin in the game.”
“You simply can’t treat a $100,000 customer like a $100 customer.”
“If you are the leader in your market, you may have a chance to get away from discounts (or lower them), but just like we look at cash discounts as profit opportunities, so do builders. I would be very careful, and most likely not get away from a cash discount. However, I would strongly recommend lowering it if at all possible.”
“All of these discounts, loyalty programs, rebates, etc. are one pain in the a .”
“The discount does not build loyalty for all but a small percentage of customers, in our view.”
“In our area, several competitors offer a 5% discount. If you are going to convince contractors to do business with you, many will not change without a discount. If we open a new store is in an area where no one is doing discounts, we do not offer them either.”
“Our contractor pricing levels are based on purchasing volume, reviewed annually and adjusted accordingly. I don’t see us ever moving away from having lower pricing for contractors than for homeowners/consumers, so I’m not in a position to fully answer the question. Our point-of-sale system makes the pricing easy to track for returns, so again, no issues there.”
“It’s a double-edged sword. If you get rid of the contractor discount you are saying you don’t value volume business. Contractors are finicky creatures and appreciate getting ‘contractor’ pricing. The trick is to find a sweet spot where your margin is healthy enough to offer a contractor discount without making your pricing too high for anyone but the contractors. Repeat business is our lifeblood and ‘contractor’ discounts incentivize having them repeat their business with our company.”
“Our point-of-sale program makes it easy to handle returns and discounts. The way our discount program works helps too, as not just any contractor receives discounts. There is a level of spending and credit that has to be built to become eligible. I think we benefit more from the loyalty we gain with contractor discounts than we are inconvenienced by their returns. There is also incentive, of course, for new contractors to do business with us with our discount program.”
“Eliminate the discounts.”
“What we were finding was to maintain margins we had to inflate the shelf pricing to offset the contractor discounts. This was driving business away from the store for the customers that did not receive the discount or for the contractors that took our shelf price for face value, (not figuring their true net cost correctly). The other issue was flow. Our contractors were going into our contract sales department to negotiate a better price or for us to match our competitor’s price, thus taking much longer to complete their purchase and to get in and out of the store in a timely manner. “Approximately three months ago, we discontinued the contractor discount structure, implemented a ‘guaranteed low price’ structure, truly lowering thousands of prices across the entire yard and store to match or beat our competitors’ pricing. We definitely had to soothe the long-term discount customers, but they are still with us. The end result is traffic is increasing, the average sale amount is increasing, and we are up three points in margin!”
“I cannot imagine trying to eliminate the contractor ‘discount’ we offer. Fortunately our computer system keeps track of individual contractor pricing so returns are priced exactly as sold and not a problem. We also use the computer system to tailor pricing for each type of customer and so we do not offer a blanket discount.”