Price or Value? Competing in a Tough Building Market
Posted by Steve Kleber on May 14, 2007
There is one thing about the trough of business cycles â€“ it kick-starts the Mother of Invention. One fascinating observation within the housing slow-down relates to builder-supplier relationships and how business creativity stabilizes and even moves an industry forward. Builders such as Lennar are understandably looking to their suppliers to reduce their costs. As reported in Californiaâ€™s Orange County Register, they demanded that suppliers and contractors lower their prices from 5 to 20 percent or run the risk of being blacklisted from the bidding process for six months.
But price issues are superficial knee-jerk reactions that have long-term negative effects within the market, starting with the manufacturer and continuing down the supply chain to the builder. Instead of seeing their profit margins erode, suppliers and contractors have rightfully taken the challenge of focusing on value instead of price and it appears to be working.
This amounts to product differentiation and good old-fashioned selling. By offering alternatives that donâ€™t undermine the existing value of supplierâ€™s products and services, everyone wins. For example, when builders demanded rebates, LP Building Products directed them to its Tech Shield radiant barrier and the accompanying tax credits builders could earn by installing it. By having differentiation in the their product line, LP Building Products was able to provide an alternative with value that was transferable to the builderâ€™s customers
In the April edition of the Hanley Wood Builder magazine (â€œSomething Moreâ€ by John Caulfield), it was reported that â€œwhat started out last year as a conversation solely about price reductions between Pulte Homes and Therma-Tru, the Maumee, Ohio-based millwork manufacturer, evolved into an exclusive three-year deal where Therma-Tru is supplying fiberglass entry doors to all of Pulteâ€™s communities nationwide.â€ The brainstorming resulted in the development of â€œTru-Defenseâ€, a door system that can withstand 150 mile-per-hour winds, 8 inches of rainfall and impacts up to 35 miles per hour.
To explore the innovation/added-value connection further, our client KOMA Trimboard Products, went directly to the builder-remodeler market and asked them to take a flat piece of PVC trim and reinvent it. One builder in particular laminated pieces of trim and came up with new interior uses that enlightened the manufacturer to something very important in the marketplace. Companies like KOMA, LP Building Products and Therma-Tru are demonstrating that there is a better way to compete. Carl Hedlund, Therma-Truâ€™s president and CEO said â€œthis industry is looking for leadership and you can either cut your expenses to the bone, or you can make something happenâ€. We couldnâ€™t have said it better.