Good pro dealers are always planning for growth. It seems anytime you read an article today about the building supply industry you see new acquisitions and plans for expansion. While buying a competitor and opening a new location are both great avenues to grow the business, some of the most profitable revenue growth can be achieved by better utilizing existing facilities in the markets that your organization is already serving.
For example, The Farnsworth Group, a research and consulting firm that specializes in the home improvement and construction industry, is often approached by LBM clients seeking advice on growth planning. The first recommendation Farnsworth always makes is for a company to analyze its business processes to be sure current operations are reaching peak potential before they consider expanding and making plans to enter new markets. By following a two-step process, dealers can make substantial revenue gains using their existing assets. First, they must sell more to current customers and second they must win business from non-customers.
While savvy business owners and executives know these two cardinal rules of growth, they are easily put on the back burner when markets are red-hot. However, as most analysts report today, the business climate will get a little chillier going forward in 2006, so now is a good time for a refresher course in these tried-and-true approaches to business expansion.
Selling More to Current Customers All progressive dealers have a database that includes their best accounts, their good accounts, and those accounts that barely register on the radar. Most organize their account list in just this fashion: best to worst. What often surprises dealers is the number of their “good” and “best” accounts that use them as a secondary supplier. At Farnsworth, we have yet to find a dealer that does not have one of its “best” customers use them as a secondary supplier. It can be difficult to tell where you stand with your customers, but it is critical to know.
Consider that a builder or major remodeler gives approximately 70 percent of its business to its primary supplier, 20 percent to its secondary supplier, and 10 percent to tertiary suppliers. If you have three accounts that each average $150,000 in annual revenue and use you as their secondary supplier, shifting your position to their primary supplier can result in an additional $1.125 million in revenue. Consider prioritizing your account list by opportunity, not by revenue.
As an example, we were working with a dealer that was fairly certain it knew where it stood with each of its customers. One of its major accounts was a builder that was purchasing $450,000 in product and services. The dealer felt it had at least 80 percent of this customer's business. Our research revealed the dealer was in fact the secondary supplier and capturing only 20 percent of the client's business. The dealer was shocked to learn it was capturing such a small share. The main factor preventing the dealer from being a primary supplier was its service. The company was performing well on delivery, which is how it defined service, but it was underperforming compared to its competitors on fill rates, and its internal staff was difficult for customers to contact. To combat the problem, the dealer guaranteed this builder 100 percent fill rates and internal salespeople who would answer their phones from 5 a.m. to 6 p.m. Follow-up research confirmed that this approach was working. The dealer's revenue growth was coming from shifting its supplier status within its customer base. While these efforts were initially designed to win the business of one particular customer, they ultimately led to increased revenue with other key customers.
You can determine where you stand with your current customers by talking to them and implementing a good customer satisfaction program, which will tell you not only your position with your customer base but also what is required to gain primary-supplier status. In doing this, dealers typically find issues that are relatively easy to fix and will allow them to capture a larger share of available business. Each dealer is different and will find unique opportunities to sell more to their existing accounts.
Winning Business From Non-Customers Even the best pro dealers seldom have more than a 25 percent market share. This means LBM suppliers typically have the opportunity to substantially increase revenues in their existing market or markets. Adding market share points can have an enormous impact on revenue. For example, if you are a dealer with one unit generating $10 million, increasing your market share from 20 percent to 23 percent will provide an additional $1.5 million in revenue.