By Paul Fisette and David
Builders consider discounts to be the most highly valued
service offered by material suppliers. Talk to any builder and
it's price-price-price that drives the sale. Dealers hate that
attitude. They consider building a home a complicated business
and insist that contractor sales involve more than an exchange
of commodity items. Dealers consistently try to sell value,
emphasizing that quality and service save builders real money.
But builders are a tough sell.
A recently completed independent survey commissioned by
Hanley-Wood on behalf of ProSales magazine, JLC's
sister publication, ranked builders' views of value-added
services offered by dealers. They found that "discounts" topped
the list (see table, below).
A recent survey of builders found that
when it comes to choosing building material suppliers, they
place most value on discounts.
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
In reality, all deals are negotiable, but to get the best
price, you need to understand the playing field and
The Dealer's Perspective
Market prices and conditions set the table for negotiations.
Competition is stiff, and 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 material suppliers claim
that overhead runs about 18% of sales. Competition often forces
lumberyards to settle for 5% to 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. In
fact, 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 three things: price, quality, and service. When
builders demand rock-bottom prices, dealers must decide what
levels of quality and service they can offer at those prices.
This gets thorny because builders are demanding. We want the
best plywood, siding, and trim we can get our hands on. Plus,
we want timely deliveries, blueprint takeoffs, and engineering
services. But we can't have it all; there are tradeoffs we must
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. But if you build ten houses per year, it might be worth
Good sales reps can help you develop a project schedule. They
can reserve a boom truck and deliver shingles to a roof on the
day and at the time you need them. They provide job-site
technical support and engineering clarification for structural
components. Sales reps provide off-hour ordering and service,
as well as inside information about manufacturer rebates. They
anticipate back orders and even make emergency deliveries. Good
sales reps provide a definite service, and smart builders make
them part of the team. These services save money, but perhaps
more important, they help to provide the mix of quality and
service you need.
Dealers give the best price to the best customers. One
supplier says, "Tell builders to walk through the door and say
they are going to build 50 houses next year, that they're going
to pay their bill promptly every single month, that they'll
have few returns and no pickups from the job site, and that
they'll never make a mistake in ordering millwork. Those
contractors will get the best price." Most dealers agree that
pricing is based on some combination of these six
* historical sales volume (existing customers)
* potential sales volume (new customers)
* prompt payment
* services required
* customer loyalty
* personal relationships
Within these guidelines there are some key elements that make
for a good working strategy.
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 that and to a large extent avoid the big boxes like
Home Depot. However, individual pro dealers also specialize and
serve only certain types of builders. Many dealers have stopped
taking cash and walk-in trade and focus instead on large
production builders. Those yards are easy to spot: They're big,
they make trusses, they serve commercial accounts, and they
offer few products on shelves for the retail trade. If you're a
custom builder or remodeler, that's 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 also have a door shop and a custom milling
facility. Look for yards that provide those 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, and Georgia-Pacific and tell them that you would
like to use their products on the next ten houses you build.
Ask them to recommend three retail dealers that carry their
products in your area. There's a good chance they'll provide
you with the names of their best customers -- the ones who move
the largest volume and pay on time. Also, call Dun &
Bradstreet to verify that the dealer's credit rating is
Find the right sales
representative. You must find a salesperson who is
honestly interested in working with you -- a "go-to" type.
Interview potential reps. Ask enough questions and you'll learn
quickly whether 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
comes 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. Good sales reps will help you get the best deals
possible as a strong relationship develops. Make them sell
their company to you. Request a résumé.
What can they 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
* Can they commit on time for returns so products don't get
trashed at the job site?
* What services will they provide, and how will those services
help your margin?
* Can they provide a list of builder references?
* What discount will you receive and how will it be
Builders are well served by outside sales reps. Reps typically
work on commission and get paid only 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 rein with discounts. The company sets a minimum margin and
allows the reps to set a selling price. The dealer and reps
make less profit with deep discounts, but it's often 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 they are.
This is a dilemma for some lumberyards. But, new customer or
not, if you promise reasonable volume and timely payments, 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 who pays
on time. Think about what happens. The new dealer calls a
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 his best
outside rep onto you so he doesn't lose the account. You win,
because both dealers offer a sweetened deal, and you never even
had to ask.
Persistence, honesty, and
fairness ensure 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. Even tell the dealer who you're
getting bids from if they're coming from true
But there's one unwritten rule: Never show one dealer's price
to another dealer. Dealers hate that and will stop doing
business with builders who shop their prices. Dealers work hard
to develop a cost estimate, and it's not fair to give that work
away to another dealer. It's okay 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
Getting a 10% discount sounds good, but what does it 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:
* 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% to 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% to 15%. Prompt
payment is required to qualify for tiered pricing.
* Credit and payment terms are fairly standard among dealers.
Terms like 2/10 days, net 30, means you'll get a 2% discount
when you pay your bill in less than 10 days. That's 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 respect of your dealer.
Dealers jump through hoops for builders who pay promptly. Those
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 possibly overcharge you on other orders.
* 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 for
which 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 the entire
* When shopping for cabinets, it's worth knowing that every
manufacturer has a suggested retail price list. Everyone in the
distribution chain works from that 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 two kinds of contractors. First, there are those who
buy through purchase orders. Those 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.
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
* Windows and doors are also sold from manufacturers'
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 that you're comparing apples to apples,
that you're 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, so you'll need to shop.
* Rebate programs are available and can save builders hundreds
of dollars per house. Manufacturers offer rebates 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 Program, which offers builders a rebate if they
use any one of seven products in sufficient quantity.
Typically, a manufacturer's rep notifies retail dealers and
explains how the deal works. Dealers own the relationship with
builders, so they pass the information on to contractors.
Rebates are usually based on a tiered price schedule, so 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's worth checking
Everything is negotiable, but some things are more negotiable
than others. It's important to focus your energy on products
with negotiable margins. Forget commodity products. You're not
buying a car, and you can't get dealer invoice prices for the
thousands of building materials sold. In the end, it comes down
to having the right people sitting at the bargaining table: a
good dealer and a valuable customer. Be professional, leverage
competitive pressure, and don't let your dealer take you for
granted. Finally, measure success by the cost of the entire
package of materials and how the service influences your bottom
line.Paul Fisetteis director of Building Materials and
Wood Technology andDavid
Dameryis a professor of building
materials marketing and management at the University of
Massachusetts at Amherst.