In the current housing market, charging customers more for product is...

Christina Lewellen
May 30, 2007
THE TALK...

 

The Talk... Page 2

 

Survey Results for 05/30/2007:

In the current housing market, charging customers more for product is...

...part of the game—price hikes are expected, regardless of the market.

 

 

39%

 

...a risk worth taking—rising costs must be offset.

 

 

33%

 

...too risky—they'll look for another supplier.

 

 

28%

 

 I can’t recall issuing a poll question with such a close outcome in its responses, or with such heated opinions flooding my e-mail inbox, for that matter. In the wake of Masonite losing a significant portion of its business with Home Depot following a price hike, I asked if raising rates in the current market is a wise idea. Essentially, my question split respondents three ways. Thirty-nine percent of people say price hikes are necessary, regardless of what the market is doing. Twenty-eight percent say increasing prices right now is a risky proposition, but 33 percent say it’s a risk worth taking to offset their escalating production and delivery costs.

Just as the votes were divided, so too were the email responses I received this week. One reader representing a lumberyard wrote:

“I am surprised that most respondents think price hikes are expected regardless of the market. At a time like this, you risk losing your customers by not knowing your competition and their price and service tactics. We as dealers and suppliers must keep in mind that we are not alone. Our customers have choices. We need a reasonable profit margin to stay in business but when times are tight, we should postpone getting rich until the market can stand that extra margin. Increasing prices should not be instituted just because we’d like more money but because our costs have gone up more than we can absorb. That goes for every element involved in the product along the line. We need to exert pressure upon our suppliers to hold the line just as Depot did to Masonite.”

Another reply stands by the necessity of price hikes, but questions Masonite’s reliance on a dominant customer. “Cost increases must be passed along in order to ensure survival,” the writer asserts. “The lesson here, as in any Business 101, is that you should never have one customer represent more than 5 percent of your business. A large, single-source revenue may look attractive at first, but in the end it’s like heroin; feels good in the beginning, and boosts your feelings, but it will kill you in the end.”

Yet another respondent sides with Masonite on its decision to increase prices, and questions Home Depot’s loyalty. “What gives Home Depot the right to dictate pricing to its vendors?” he questions. “Depot needs to be cut down to size. Depot’s value of their employees, their employee experience and their so-called family values no longer exist. Masonite would have been wise to go after Lowe’s and Menards.”

I’d like to include a few points from Randy Wadley, a consultant for the building products industry (http://www.randywadley.com) who contends that manufacturers have to carefully weigh the risk of losing a customer when considering increases.

“An unstable economy and a price-driven market requires new market strategies with continuous, specific ‘real-time’ adjustments being applied,” he writes. “Necessary price increases will have to be absorbed or passed on to the customer. The decision is one that must be heavily considered with large customers as Home Depot. Profit margins need to be held at certain levels to justify the business relationship on both sides. The break-even point is really the bottom line that manufacturing is required to focus prior to passing on price increases.

He continues: “However, prior to passing off any price increase the manufacturer should already know the answer to the question, ‘What will be the end result of this action we are taking with this client?’ If the outcome is unknown prior, then [ask], ‘Why is the action being taken?’ and ‘Will the worst-case scenario be acceptable?’”

Finally, one reader provides some suggestions for how to ease the pain of price increases, if manufacturers do decide to pass them on to customers. “It is about timing as much as anything and if there is an industry wide increase, [like] glass or aluminum that is widely reported on in this day and age, [or] transport costs because of fuel pricing, you have justification to go to the market,” the writer says. “The same way the across-the-board price increases are usually partially negotiated back with your ‘key’ customers so they continue to feel special, you argue the price increases you receive with your suppliers and negotiate rebates, delayed implementation of the increase, etc., to maintain margins. It is useful to attach a copy of the supplier’s notification of increase or a graph of the London Metal Exchange history showing increasing costs to support your position. In this case, if you have a range of price increases from say 4.5 percent to 8.0 percent, send copies of those at the top of the range. Then you pitch your increase at 6.5 percent to 7.0 percent, which is below the top of the market. It will assuage a lot of your customers straight away and you may still have a couple of points to play with your major accounts. You can also try forward contracts which can further delay your cost increase.”

Contact Christina Lewellen, senior editor, at clewellen@glass.org.