A key vendor is marketing product—and prices—directly to a big builder customer, taking pricing control away from you and killing your margins. What would you do?
As an LBM dealer serving builders of all sizes for more than 30 years, if you haven’t seen it all, you’re dangerously close. You’ve seen leading-name LBM dealers with a strong market presence suddenly fall due to poor planning or decisions. You’ve seen builders seemingly come from nowhere—one day, they’re doing a couple of modest homes a year, then suddenly constructing dozens of high-end custom homes. And you’ve seen consolidation change the entire landscape—builders, dealers, wholesalers, and manufacturers. If you know one thing, it’s that change is inevitable, and if you can’t adapt, then you’re in the wrong business.
Most changes you can roll with, but one of your leading vendors just threw you a curve ball, and you’re not sure how to respond. Here’s the story.
Big Build Homes is a regional production builder that your company has been working with for nearly a decade. As you and your team learned quickly ten short years ago, large production builders and small custom builders operate very, very differently. With custom builders, margins are better, but there’s more service required for the lower volumes. With Big Build Homes, it’s all about efficiency. “On-time and in-full” isn’t a goal…it’s a requirement. Time is money, and your team has gotten quite good at understanding Big Build Homes’ needs—and delivering on them.
While the margins are thinner, the folks at Big Build have worked with your team to put systems in place to make life easier for you and them. It’s true that the margins aren’t where you’d like them to be, but they’re still worth your while. They were, anyway, until you got a call from Big Build’s A/P department. “Our latest invoice shows you’re still charging us the old price on products from Manufacturer X, but when the manufacturer met with our buyers, they promised prices 11% lower,” she said. “Should I short pay this invoice, or do you want to send a new one?”
This was news to you. Nobody from Manufacturer X said anything to you about charging lower prices—and they certainly didn’t tell you that they’re going to set prices with your customers. You hoped that a quick call would straighten it out. It didn’t. “Yes, in addition to marketing directly to production builders, we’re also setting prices—so everyone’s charged the same. I hope that isn’t a problem,” they told you. The fact is, it’s a huge problem. The products from Manufacturer X comprise more than 20% of your sales to Big Build Homes. Your margins are already thin…cutting your prices by 11% is going to put Big Build near break-even. At that point, you’re not sure their business is worth the effort. What would you do?
• Push Back. Tell Manufacturer X that they can’t set prices on the products that you sell, unless they’re willing to reduce the price they charge you by 11%.
• Accept it. The last thing you want to do is go to war with a major manufacturer—especially one that’s the source of much of your sales. Accept it and make up the margins elsewhere.
• Reason. Tell Big Build Homes that you can’t sell those products for any less, unless they’re willing to accept lower levels of service. You both need to make a living, after all.
• Transition. If Manufacturer X won’t budge and insists on enforcing the pricing they promise your customer, it might be time to meet with one of their competitors.
If you’d take a different plan of attack, email your suggested solution to James@LBMJournal.com. If we publish your reply, we’ll send you an LBM JOURNAL mug.