Building material manufacturers will frequently ask me, “Why do customers always want a lower price for my products?” There are several reasons why and several things you can do about it.
Why you can’t raise building material prices.
1. You don’t differentiate. You and your competition focus on matching each other’s offerings, and while you may think you are unique the customer probably sees more similarities than differences. This gives the customer the leverage to reduce prices and your profit margins.
2. Wrong focus. You focus on economies of scale and improving the efficiency of the manufacturing plant. The goal of most manufacturers is to keep on selling the same old thing for as long as possible. They usually change only when they are forced to by a competitor. They rarely lead the change.
3. Afraid to make big product changes. Even when they feel confident in a new idea, manufacturers just can’t pull the trigger on the investment.
4. Afraid of the channel. The product categories that are doing the best are dramatically disrupting how their products go to market. Think about Amazon and Zappos. These companies are afraid to stand still while the building materials manufacture is afraid to move.
The building material channel is more innovative than most manufacturers. Look at how big boxes and major distributors are innovating. With each of their innovations, the manufacturer becomes less important and more easily pressured on pricing.
5. Innovation is not truly innovative. Innovation in most building material companies is based on the assumption that they must make the product, preferably in an existing plant. Truly nnovative companies look for unmet needs in the marketplace and worry about how it will be made later.
6. No pricing confidence. There is an assumption that customers won’t pay more for a product along with an assumption that a lower price will increase sales. Everyday many other industries prove these assumptions wrong.
7. A focus on volume over profit. Most building material manufacturers think the way to higher profits is through the operational efficiency of higher volumes. They define themselves as a commodity supplier instead of a solution provider.
The result of all this is that it is very difficult for manufacturers to defend or raise building material prices on the merits of the product or their service alone.
Pricing power is gained by being disruptive.
Here are three examples of effective disruption in building materials.
When one of Apple’s creative leaders decides to enter building materials, what do you expect? It’s an easy market to disrupt because no one else is even trying. It’s like a pro football team playing against a high school team.
There are many innovations with Nest, but the one I am most impressed with is how they just ignored the channel. The channel comes to them. Of course I also like how they raised the bar on how much consumers would happily pay for a thermostat.
MiTek, which sells to truss and wall panel manufacturers (and offers free CAD viewing software to builders) has recently introduced a marketing program called Buildability. They didn’t innovate with a new product. They looked at the pain points of their customers and developed a service solution that sets them apart.
Buildability is partially based on the extraordinary capabilities of a 3D CAD software program called the Sapphire™ Suite. The program reduces errors, costs and construction time and also solves complex framing problems, by allowing for everyone in the value chain to collaborate on the same CAD model, no matter what they are supplying to the construction process. With the Sapphire Suite, MiTek has disrupted the business and truly set themselves apart from their competitors.
Ever since the use of housewraps was required by codes, builders have been asking for a one step solution. Why do they have to install a sheathing, like OSB, and then basically do it again with a wrap? Couldn’t these two products be combined into one?
Several companies tried and abandoned their efforts. Huber stuck with it and developed their ZIP System so they basically have no competition.
As you can see there are many ways to be disruptive and improve your control of pricing.
Here are three ways to be disruptive.
1. You can listen to the market and either develop a new product or make major changes to an existing one.
2. You can study your customers business, find their pain points and develop a solution that helps them and complements your product.
3. You can change how you go to market.
You can also learn how to be disruptive and in control of your prices by learning from other industries. Mattel toys is disrupting the toy market. They developed a product that you can’t buy from anyone else. A product that people really want. They chose to sell it direct and through limited number of retailers. They don’t look afraid of big boxes or mass merchants. What could you learn from Mattel? You can read more about Mattel’s disruption in this New York Times article.
This level of innovation is hard for most companies. The senior people can’t see the forest for the trees. They either have to bring in outside help or be really daring and listen to the smart young employees who don’t why something can’t be done.
If you want to get away from constant pricing pressure, be a disrupter.