In my limited South Mississippi vocabulary, I define "Reckless Behavior" as actions which inflict damage not only to one's self but others associated with him or her. There's been a price war between the large national building supply companies to see who's going to have the opportunity to sell (oops--give away) products to the large national builders. This behavior can best be described as reckless. Unfortunately, many independent building material dealers are getting caught in the crossfire.

Last month, my company approached one of the national builders in regard to selling to them. They were very amenable to our pricing presentation, so they gave us their transparency format. I am going to tip-toe through this in order to not be in violation of some law, so forgive me for not being specific.

Transparency pricing is a calculation of the last three months Random Lengths composites with a certain percentage off with no freight adder, and then an extremely low, allowable mark-up. If you take into account the freight that is not allowed, the calculation would probably put you at single-digit profit margins, or below, to sell to this particular company. This calculation won't work if you seek to make a profit or at least break even.

During the National Lumber and Building Material Dealers Association Conference in Orlando this month, there was a discussion between Michael Mahre, senior vice president of corporate development at ProBuild, and Scott Hearty, vice president of national purchasing operations for Standard Pacific Homes. During the discussion, Mahre admitted the pricing strategy by Standard Pacific Homes was "very challenging." The goal of Standard Pacific Homes was to know exactly what everything in the shopping cart costs in an effort to manage costs further down the road.

Hearty said that Standard Pacific Homes had dropped costs by $13 per square foot, or 23%, since adopting their new pricing strategy. Instead of 300 different price increases per year, it only dealt with three pricing updates per year. Hearty acknowledged that some of the drops in pricing could be a result of dealers desperately trying to get business at any cost; however, he still contended that their pricing strategy had put them in charge of pricing for their homes.

These new models of transparency pricing were created by the national builders. Just like contracts, whoever writes it does so for their favor. What is really at work here is a bad economy, desperate dealers, and builders who are leveraging the two for their advantage. This is good for the builder if they have willing accomplices.

I don't fault the builders. In fact, I congratulate them for being shrewd business people who can leverage their purchasing power. This is capitalism at its best.

That being said, here's my rub: While these other dealers are being sheared, so are the rest of the dealers because they are allowing pricing norms with no regard to profit to be set in the market.

I have some truths about pricing and builders that I believe many who have a lot of experience would share.

Don's Truths on Pricing and Builders

  1. Some builders' only loyalty is to the lowest price. There has never been a low pricing model that has created loyalty to a supplier.
  2. Any supplier who thinks he can win a builder with a low price and then raise pricing to win him at acceptable margins is fooling himself.
  3. If a builder tells you that the only thing that matters is price and it doesn't matter where the product comes from, you have a builder who constructs a bad home. Service and quality are big things for homeowners, and buying from the cheapest in town is usually a compromise of both.
  4. For 31 years I have had other companies tell me they were going to run me out of business with their low price strategy. Each time, their low price strategy destroys them. If a company wipes a competitor out for a low price, the moment the market rises there will be another one.
  5. If you are going to have transparency pricing, then why would dealers leverage their purchasing departments and internal systems? The real purpose of any company is to do things better to make more money, not give it away.
  6. Salespeople with great sales at low margins aren't really sales professionals. You can hire anyone for $8 an hour to give products away. Great salespeople know how to earn both sales and margin with service and quality.
  7. Builders who focus all of their energy on just saving a nickel on a stud are missing the bigger cost issues in constructing a house, such as labor, shrinkage, and after market service. The nickels and dimes on material prices don't determine if a project is successful; rather, it's all of the other stuff like time, quality, service, and customer satisfaction.
  8. If you think you've figured out a new low pricing model that will now work, don't kid yourself. Just about everything has been tried, and it always goes back to selling it for more than what you bought it for.

Unlike some other writers, I actually operate on a daily basis an active lumber and building material company. It is very tough to have pricing standards in bad economic times. Just like you, at times we will cut deals to make things happen, but we will not sell to the point of paying a builder to take the merchandise.
During the discussion in Orlando, Mr. Hearty of Standard Pacific Homes said that there have been partners who told him that they paid him to take the product. I am not going to do that, because it will never be recovered. You are far better off keeping your merchandise at the store, not fighting the bank, and keeping your cash flow instead of paying someone to take your merchandise.

There's a saying, "When the economy turns bad it brings out the worst in people." This is very much true. Despite the economy, there's no need to act desperate. Strong leadership with principled pricing standards is needed now more than ever before.

I look forward to the day in which common sense pricing enters our industry again. Many in our industry have lost their way from salespeople to corporate titans. My only hope is that after millions of unwarranted losses in cash that some may soon get the message their pricing model doesn't work. I've said it before and say it again, "The professionals need to assume control again."

Don Magruder is CEO of Ro-Mac Lumber & Supply in Central Florida and former chairman of the Florida Building Material Association. This article originally appeared in FBMA's Oct. 28 newsletter.