Please note: This older article by our former faculty member remains available on our site for archival purposes. Some information contained in it may be outdated.
Understanding dealer margins and market opportunities will help you negotiate the lowest material prices…
by Paul Fisette and David Damery – © 2003
Builders consider discounts to be the most highly valued service offered by building material suppliers. Talk to any builder and it’s price-price-price that drives the sale. Dealers hate this attitude. They think building a home is a complicated business and insist that contractor sales involve more than an exchange of commodity items. They consistently try to sell value. Dealers emphasize that quality and service save builders real money. But builders are a tough sell.
Readex, an independent research company located in Stillwater, Minnesota just completed a study that measures builder perceptions regarding the purchase of products and materials. The study was commissioned by Hanley-Wood on behalf of, ProSales magazine, JLC’s sister publication. Readex ranked builder’s views of value added services offered by dealers. They found that “discounts’ topped the list. The study shows that 76% of the 1,800 builders interviewed think “discounts” are highly valuable. “Blueprint takeoffs” ran a distant second with a 55% ranking. Dealer services like training and advertising earned very low marks. If you believe these survey results, builders aren’t much interested in those services. On the other hand, if it is all about price, then why don’t builders like to buy from the big boxes like Home Depot? Perhaps builders value services more than they realize or will admit.
In reality, all deals are negotiable, but to get the best price, you need to understand the playing field and players.
Market prices and conditions set the table for negotiations. Competition is stiff, but dealers must turn a profit or close shop. They have significant fixed costs. Dealers pay property taxes, rent, utilities, insurance, salaries, wages, and a long list of other expenses. Most building materials suppliers claim that overhead runs about 18% of sales. Competition forces lumberyards to settle for 5% – 10% profit margins. Dealers can sell every item for cost plus 25% or they can sell a mix of low margin and high margin products to achieve their goal. They do the latter. The tricky part for dealers is to get you to buy the entire mix of products from them and not let you cherry pick low margin items.
Dealers sell 3 things: price, quality and service. When builders demand rock-bottom prices, dealers must decide what levels of quality and service they can offer at that price. This gets thorny because builders are demanding. We want the best plywood, siding, and trim we can get our hands on. And we want timely deliveries, blueprint takeoffs, and engineering services too. We simply can’t have it all. There are tradeoffs we must accept.
Value selling is the latest buzz in contractor sales. Dealers improve margins by providing value-added services. The value-selling concept makes the sales rep a problem solver for the contractor. Essentially, the rep serves as part of the builder’s staff without showing up on the payroll. The rep’s goal is to maximize a contractor’s overall profit. Dealers don’t want you to shop price on every product they sell. Rather, they want you to evaluate the entire package they provide. The question you need to ask is: will I make more money on a project if I use supplier A or supplier B? If your business concentrates on small jobs like decks, siding, roofing and remodeling: then value-selling is probably not for you. If you build 10 houses per year, it might be worth considering.
A good sales rep can help you develop a project schedule. They can reserve a boom truck and deliver shingles to a roof on the day and time you need it. They provide job-site technical support and engineering clarification for structural components. Sales reps provide off-hour ordering and service. Reps also provide you with inside information about manufacturer’s rebates. They anticipate back-orders and even make emergency deliveries. There is a definite value provided by a good sales rep and smart builders make them part of their team. These services save money, but work to get the best price for the mix of quality and service you need.
Dealers give the best price to the best customers. One supplier I know says, “Tell Builders to walk through the door and say they are going to build 50 houses next year and that they are going to pay their bill promptly every single month. Tell the dealer they will have very few returns and no pickups from the job site. Say they will never make a mistake in ordering millwork. These contractors will get the best price.” Most dealers will tell you that pricing is based on some combination of 6 things:
- Historical Sales Volume (existing customers)
- Potential Sales Volume (new customers)
- Prompt Payment
- Services Required
- Customer Loyalty
- Personal Relationships
This view provides very important guidelines, but there are key elements required for a good working strategy.
Choose the right dealer. Be sure you work with a yard that is truly interested in serving you. Over the past decade, there has been a big push to segment the customer base into professional and DIY markets. Builders recognize this and to a large extent avoid the big boxes like Home Depot. However, individual pro dealers also specialize and only serve certain types of builders. Many dealers have stopped taking cash and walk-in trade; and focus on large production builders. These yards are easy to spot. They are big, make trusses, serve commercial accounts and offer very few products on shelves for retail trade. If you are a custom builder or remodeler this is not the place for you. Look for a yard that offers a good mix of products and supplies right on the trading floor. Your dealer should have a broad selection of caulks, sealants, fasteners, paint, hardware and accessories in stock. Custom builders and remodelers need dealers that have a door shop and custom milling facility. Look for yards that provide these services.
Only dealers who buy right can sell right. Dealers, like builders, get the best price if they are the best customers. Call the regional office of manufacturers like Boise Cascade, Weyerhaeuser, or Georgia Pacific and tell them that you would like to use their products on the next 10 houses you build. Ask them to recommend 3 retail dealers that carry their products in your area. There is a very good chance they will provide you names of their best customers; the ones that move the largest volume and pay on time! Also get a credit report. Call Dun and Bradstreet and verify the dealer’s credit rating is strong.
Find the right sales representative. You must find a sales person that is honestly interested in working with you. You need a “go-to guy.” Interview potential reps. Ask enough questions and you will learn quickly if the rep is knowledgeable, sincere, and interested. Don’t fluff your feathers to impress the rep. And don’t start by saying you want the best price possible. That will come later. Let the project and the relationship unfold. Be professional and let your attitude percolate into the discussion. Sell yourself and make the sales rep want to work with you. They will help you get the best deals possible as a strong relationship develops. Make them sell their company to you. Request a resume. What they can do for your bottom line? Specifically ask:
- Do they have tier pricing based on volume?
- How often do they deliver on time?
- What is their fill rate; In other words what is the backorder percentage?
- Can they commit on time for returns so products don’t get trashed on jobsite?
- What services will they provide and how will this help your margin?
- Can they provide a list of builder references?
- What discount will I receive and how is it structured?
Builders are well served by outside sales reps. Reps typically work on commission and only get paid when the builder pays the bill. So outside reps should be motivated to work hard in order to keep you happy. Many companies give their contractor reps free reign with discounts. The company sets a minimum margin and allows the rep to set a selling price. The dealer and rep make less profit with deep discounts. But often it’s the rep’s call to determine what a customer will contribute to the future growth of a company.
Every dealer wants new business. Some dealers offer discounts to attract new business. Others fear that loyal customers will get mad if they learn a new account is getting the same price break as them. This is a dilemma. But, new customer or not, promise reasonable volume and timely payments and you can expect a 10% discount on full orders.
Introductions are important. Greet a new dealer with credit application in hand. Have references ready. The best credit references you can use are competing lumber dealers. The new dealer will love it! All dealers want a good customer that pays on time. Think about what happens. The new dealer calls his competitor and asks for a credit reference. The old dealer says, “Joe Builder is a good customer who pays on time. I have nothing bad to say about him.” Your reputation as a good customer is enhanced and the new dealer wants to grab you from the competition. The old dealer will immediately put their best outside rep onto you so they don’t lose the account. You win! Both dealers offer a sweetened deal and you never even have to ask.
Persistence, honesty and fairness assure continued contractor discounts. Over time, builders and dealers develop comfortable relationships and can become complacent about pricing. Dealers and sales reps tend to focus on getting new business and often take existing customers for granted. Builders think their “guy” is taking care of them and relax the pressure on getting the lowest price. Keep dealers’ feet to the fire. Make them earn your business every day. Let your favorite dealer know that you are getting competitive bids. You can even tell the dealer who you are getting bids from if the bids are coming from true competitors.
There is an unwritten rule. Never show one dealer’s price to another dealer. Dealers hate this and in fact will stop doing business with builders who shop their prices. Dealers work hard to develop a cost estimate and it is not fair to give that work away to another dealer. Let each dealers work up their own price. It’s ok to tell a dealer, “Your price is not good enough. Do you want to sharpen your pencil?” But don’t provide numbers for them. Dealers share membership in many organizations and talk to each other at social and business functions. Word gets around. Earn a reputation for shopping prices and you won’t get discounts for long. And by the way, it’s a good idea to work price, but bottom-feeding price-shoppers are not considered loyal customers and lose “best customer” status. Eventually, they get smaller discounts.
Getting a 10% discount sounds good. But what does this really mean? Unfortunately, there are no dealer invoice price sheets available for building materials. A few products like cabinets and windows are moved through the distribution chain based on percentage of manufacturer’s suggested list price. But, realistically, builders must shop and compare prices to determine the best deal. Discounts are available. Here are some discount opportunities you can count on.
o Tiered Pricing Programs are offered by virtually every dealer. Some won’t admit it, but they do have them. Ranking is based on sales volume and potential. There is certainly no standard, but many dealers give 5%-10% discounts to the lowest “C-rank” contractor accounts if they do more than $25,000 worth of business per year. A typical “A-rank” customer does more than $100,000 in sales and earns 10%-15%. Prompt payment is required to qualify for tiered pricing.
o Credit and Payment Terms are fairly standard among dealers. Terms like 2/10days, net 30 means you’ll get a 2% discount when you pay your bill in less than 10 days. This is a powerful incentive that’s overlooked by most contractors. How many investors would snub a stock that’s guaranteed to earn 24% interest per year? Discount your bill every month and you will make serious money while earning the highest respect of your dealer. Dealers jump through hoops for builders who pay promptly. These builders get deliveries first; learn about deals and promotions first; and develop good relationships. It’s a no-brainer. On the other hand, pay late, after 30 days and you’re penalized. Finance charges compound too – in the wrong direction! Decide not to pay the penalty charges and dealers will either cut you loose or overcharge you on other orders.
o Prices for high margin items are negotiable. Low margin items are not. Specialty items like laminated beams, special locksets, cabinets and millwork are examples of products where dealers have room to negotiate. Gypsum wallboard, studs, and sheathing are low-margin products that dealers must carry to get contractors through their doors. Dealers are lucky to earn 3% on framing lumber. Don’t waste your time fighting for pennies. Focus on high-margin items and the cost of entire packages.
Cabinets: When shopping for cabinets it’s worth knowing that every manufacturer has a suggested retail price list. Everyone in the distribution chain works from this list. The range of prices builders pay at the end of the chain is quite variable, but here are some insights. In the eyes of distributors, there are basically 2 kinds of contractors. First, those that buy through purchase orders. These customers say, “sell me the boxes and I’m done.” They negotiate the deepest discounts based on high volume and low service. Builders, who buy dozens of kitchens per year, can buy direct from some wholesale distributors and manufacturers. They can expect to pay about 50% of list for stock cabinets. However, most contractors fall into a second category. They require design and layout assistance from retail dealers. It is not uncommon for retail dealers to purchase stock cabinets for 45% of the suggested list price. Builders buying single kitchens at retail can expect to buy cabinets for approximately 60% of list, providing dealers with a 25% margin. Builders who purchase multiple kitchens pay a few points less. The trick is to get your hands on the manufacturer’s list price. Then shop and compare.
Windows and doors are also sold from manufacturer’s suggested list price sheets. Ask your dealer for a price schedule and find out what percentage of the suggested retail price you will be asked to pay. Go to competing dealers and do the same thing. Be sure to compare apples to apples. Make sure you are looking at the same window units and getting the same price sheet from each dealer. Be careful reviewing quotes. Some dealers make up their own suggested retail price list to make discounts appear larger. The best deals come from stocking dealers who carry an inventory of boxed units. Displaying dealers offer the next best deals because they get windows at a better price than those who don’t display. Builders can purchase many brands of windows at 75% of list, but contractor prices are hard to predict. There is tremendous variability between brands. You need to shop.
o Rebate programs are available and can save builders hundreds of dollars per house. Manufacturers offer rebate deals to encourage builders to use new or lagging product lines. Trus Joist offers rebates to high-volume builders. The engineered wood business is competitive and I-joist companies are fighting for every scrap of business. Another example is Weyerhaeuser’s First Choice Builder’s Program where builders get a rebate if they use 1 of 7 products in sufficient quantity. Typically a manufacturer’s rep notifies retail dealers and explains how the deal works to them. Dealers own the relationship with builders, so they pass the information on to contractors. Rebates are usually based on a tiered price basis where the highest volume builders get the greatest rebates. Rebate checks are issued once per quarter and can amount to a few percent of sales for targeted product lines. It is worth checking out.
Everything is negotiable. But some things are more negotiable than others. It is important to focus your energy on products with negotiable margins. Forget commodity products. You are not buying a car and you can’t get dealer invoice prices for the thousands of building materials sold. This makes it difficult to gauge the depth of discounts. In the end it all comes down to having the right people sitting at the bargaining table: The right dealer and a valuable customer. Be professional, leverage competitive pressure, and develop a good system of checks and balances. Measure success by the cost of the entire package of materials and how services influence your bottom line for a project.