Okay, I’ll admit it. I’m now officially harping. Over the past several years I have frequently written about the comparatively weak revenue generating performance of wood products manufacturers when compared to all other manufacturing sectors. Wood products manufacturers generate, on average, revenue at half the rate per capita when compare to all other manufacturing sector companies. (see: http://www.woodiq.com/2017/04/21/latest-industry-data-shows-improvement)
The reasons for revenue productivity are too numerous to touch on all of them here, so I will pick one that is in my view, among the primary contributors to the poor productivity that hamstrings the industry.
Since the mid-nineties, U.S. wood products producers have been under increasing pressure to address foreign competitors, especially in the area of pricing. The race by consumers as well as our industry distribution partners to find cheaper sources of supply off shore put tremendous pressure on manufacturers to lower their prices.
Chasing the Bottom
It has often been said that’ if you chase the bottom, that’s where you will end up’. Sadly, many industry companies don’t understand their true costs and therefore can’t understand where their price points need to be in order to produce an acceptable return on their investment.
It is also true that in order to get work, many business owners simply cave to competitive price pressure simply out of fear losing a project or a customer. No rationalization of design or value-engineering to reduce cost proportionally, just a lower selling price. We simply cave in to the request to lower our price.
If you do a little analysis, you will see that protecting your selling price has a far more favorable impact on margins than prying a lower price out of your suppliers. There is always someone willing to sell something cheaper than you. Don’t try to compete on the basis of being the low cost producer – not in this country. You can’t win that race and why would you want to.
Get Closer to your Customers
If you don’t know your customers intimately, then there is a good chance one of your competitors does. Here I mean not just what your customers expect from you in the way of product or price, but what they need from you that aren’t related to product.
Your customer has non-product needs that solve other problems in their business, on the job site or makes their lives better if you are dealing directly with consumers. What our customers care most about is themselves; their projects, their companies, their homes or their lifestyles.
Our job is to make sure we recognize and address those things that make their experience with us better in some way. Look closely, ask questions and listen carefully for insights to their non-product needs and expectations. Every customer has them.
Good experiences that extend beyond product will differentiate your company from your competitors. This differentiation will allow you to shift the conversation from price to other aspects of the transaction that are equally or more important to them.
First Cost isn’t the Lowest Cost
A client I am working with recently shared with me that he was considering purchasing cabinetry from China because his quoted prices were substantially higher than that of their competitors and he had lost business because of that. On one recent project his price was $95K or 38% higher than his Chinese competitor.
But not so fast guys. That was only the first cost of the cabinetry. We did a little analysis and here’s what we discovered. Add to the Chinese cabinet cost the sea and inland freight, assembly on the job site, and installation and the picture was a vastly different one.
At the end of the day, the total installed cost of the Chinese product ended up being two percent higher than what he produced in-house. And these costs didn’t reflect any warehousing expense or the carrying cost of the inventory required to meet the delivery times.
While it was great to demonstrate to his client that on an installed basis they were competitive, in fact less expensive, there was one unexpected surprise, and it was even better. It turns out that this project yielded thirteen percent higher margin for the company. Why? Two reasons: first, because his margin was based on a higher selling price to begin with and second, because he captured margin on factory assembly of the cabinets.
The company is now helping his customers understand their total installed cost instead of looking narrowly at their first cost. This perspective adds value to the customer in terms other than simply product and goes a long way to making the discussion about price less relevant.
Apples and Oranges
Many business owners fail to make a precise comparison between the specifications of a competitor’s product when price points vary dramatically. If there is a substantial difference, that difference can only be explained in a few ways: 1) a pricing error, 2) a discount, or 3) a difference in specification.
Hardware and material specifications can often time explain substantial differences in rolled up project costs. Make sure you are providing pricing for the same specification. In cases where you cannot provide sell the value of higher quality as an upgrade.
The wood industry desperately needs healthy manufacturing companies. Sustainable companies need adequate margins to ensure their future. The formula for success no longer includes a calculation for lowest cost production. We simply have to be smarter about understanding our customers and how we leverage opportunities that exist.
Helping our customers understand what is truly the lowest cost is now part of our work. It will pay dividends in terms of both our top and bottom lines. To do so you must have a clear and strong value proposition that extends well beyond product and first cost.
If you need help protecting and growing your top and bottom lines, I can be reached at 608.279.8089 or firstname.lastname@example.org.