Tough Call: Attack of the low-cost competitor

A supplier from another market has moved into your territory and is using low pricing to capture business from your long-time customers. What would you do?

As the owner of a generations-old lumberyard that’s been serving your market for nearly a century, your company is on pretty solid ground. Over the decades, your lumberyard has earned a stellar reputation with builders of both single- and multi-family homes. You’re not known for having the lowest prices in your market. In fact, Benjamin Franklin’s famous quote, “The bitterness of poor quality remains long after the sweetness of low price is forgotten,” is printed at the bottom of all of your invoices. It’s not just about the products, though you do carry quality products from manufacturer partners who support you and your team when there are warranty or other issues. No, the reason builders buy from you is that they know exactly what they’re getting.

Lately, you’ve noticed that some of your loyal, longtime customers have changed their buying habits. They’re still buying the framing packages, insulation, sheathing, house- wrap and trusses, but their orders of windows, doors and cabinets have dropped off significantly. Since those are among your highest-margin items, this change is having  a measurable impact on your bottom line. Naturally, you wanted to learn why, so you had conversations with several of your biggest long-time customers.

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When  you  broached  the  subject  with  Nathan,  whose  company’s niche is apartment complexes, he explained, “We were approached by a supplier from another market who promised to save us 20% on all of our cabinets. With the number of units we build, and  how  much  we  spend on cabinets, that was too good  to  pass up. When they did a good job on an initial project, delivering on time, in full and for 20% less, we decided to stick with them for our cabinet business—but still buy everything else from you.” Unfortunately, the profit on the “everything else” doesn’t add up to much.

Another builder, a regional powerhouse known for build- ing developments of semi-custom homes, put it this way: “This other company said that they could sell us the exact same doors we’ve been buying from you, but at a sizable dis- count. We tried them out, and we’re saving nearly 15% on all of our doors. We still buy all the rest from you, because you’ve been such a good supplier for so long. But with the doors, the savings are just too big to pass up.”

You’ve battled low-cost competitors before. Typically it’s a matter of waiting until they drop the ball—either with poor service, late deliveries, rising prices, etc. But this time, the supplier seems to have done their homework, has a sizable warehouse close enough to service your market, and doesn’t appear to be going anywhere.

Unfortunately, your argument about “getting what you pay for” doesn’t seem to apply. Which puts you in a tough spot, because your company relies on healthy sales from those higher margin categories to balance out the rest of your offerings. What would you do?

1. Hold steady The prices you charge are fair, and the low- cost competitor’s strategy isn’t sustainable long-term. In no time, they’ll raise their prices and you’ll be able to earn that business back.

2. Slash prices Like it or not, you’ve been drawn into a price war. Your only choice is to cut your prices to match the low-cost competitor. Once they see you’re serious about keeping your customers, they’ll back off.

3. Drill down You know the cost on these products, and you know that the margins the competition is earning are razor thin. Talk to the manufacturer and see if they’re buying better.

4. Negotiate Tell your customers that you value their business but can’t match the competition’s prices and still deliver excellent service. Ask what you can do to recapture their business.

What would you do?

SOMETHING ELSE?
If you’d take a different plan of attack, email your suggested solution to Rick@LBMJournal.com. If we publish your reply, we’ll send you an LBM Journal mug.