Building product companies who understand who makes the most profit on the sale of their products make better decisions. A value chain analysis gives you a global view of your product as it moves through the channel.
Many companies are very shortsighted, as they can’t see farther than their first customer.
The benefits of understanding the building material value chain?
1. You understand the role your product plays in your customer’s business. Compared to his overall average profit margin, does your product give him a higher or lower profit? How has this changed over time?
2. You can see shifts in the market. For example, home improvement contractors have some of the highest profit margins in building materials. Is it any wonder that big boxes are trying to grow their installed sales? Online sales are another big shift that is underway.
3. You can make better new product decisions. When you’ve dissected the path your product takes through the channel financially, you’ll see different opportunities to meet an unmet need.
How to do a value chain analysis for your building product.
1. Map out how you and your competitors go to market. Don’t forget to include newer channels, such as online no matter how small they are. You want to be thinking about where the market will be rather than where it is today.
2. Find out the average profit margin for each step of the distribution channel. Some of these are easy to find, as in the case of any publicly traded company like Home Depot, who will report overall profit around 35%. For others like contractors, dealers, distributors and many builders, the best place to look is their associations and trade magazines.
3. The final step is to find out how much profit channel members make from your product. Unless you need really exacting quantitative data and have a really big research budget, I have found that the best way to get these answers is to ask for it. Talk to your customers and ask them how much profit they make from your products. The ones who are the best business people will know this and be glad to share it with you.
With builders it may not be possible to determine the profit margin they get from your product. The best you may be able to do is to see if they feel it makes them more profitable.
Once you know the value chain you need to make sure everyone on your team has this knowledge.
Have a meeting with your key people; discuss the findings and what they mean for you. What changes should you consider? Are there any new products or services that come to mind?
I am amazed at how many building material companies do not know the value chain of their product. The ones that do have a big advantage over those who don’t.
Around every three years it’s a good idea to find who’s making all the money on your products with a value chain analysis.
If this seems like a good idea and you want to outsource it to a firm other than ours, some good resources are Principia and The Farnsworth Group. Principia has a report of the building material value chain from 2012 that you can purchase.