Mark Scott has been on both sides of the fence. Through the 1980s, the owner of Mark IV Builders in Bethesda, Md., built custom spec homes; for most of the past 15 years, his focus has been high-end residential remodeling.
And though he brings in about the same revenue as he did building new homes (roughly $5 million this year), Scott's needs and buying habits as a remodeler are far different than they were as a home builder. “Any kind of builder is all about the price. That's the culture,” he says. “Not getting something when I need it is a much bigger deal to us [remodelers] than saving a few dollars.”
But it's a concept that too few LBM dealers and other product suppliers seem to grasp, especially as more of them shift their sales focus to large-volume production home builders. “We're a small fish in most suppliers' yards,” says Scott, who spends up to $500,000 a year on LBM supplies. “We've been pretty much told [by some dealers] that they're not interested.”
Collectively, custom builders and remodeling contractors account for hundreds of billions of dollars in construction activity every year. Together, they make up 45 percent of the customers among the top-grossing LBM dealers, according to the 2005 PROSALES 100, the largest share by far.
But as individual small business owners, they buy in quantities dwarfed by even medium-sized home builders, causing some dealers to neglect their business—at their potential peril. “Although an individual account may not represent a larger percentage of sales, when you add them all up, it can be quite substantial,” says Rick Ferguson, editorial director for The Colloquy Group, Frequency Marketing, a loyalty marketing firm based in Milford, Ohio, adding that small accounts also often consolidate purchases with dealers, buy higher-margin items, and are typically more flexible on price than large-volume customers. “You have to understand and appreciate their collective value on the bottom line.”
Complicating a dealer's sales efforts to this segment is that small-volume builders and remodeling contractors have their respective differences, requiring sales reps to become even more specialized—assuming there's interest in those segments of the industry as opposed to chasing bigger-volume builders.
To combat perceived or real neglect by an increasing proportion of LBM dealers, small-volume contractors are sometimes turning to the Internet, specialty outlets, and big box retailers to get what they want and need, at least in terms of products, if not services. They are also improving their internal processes to be more efficient in their purchases. “I'm trying to buy better,” says Scott, such as consolidating orders for multiple concurrent jobs and buying more online.
Meanwhile, dealers anxious to hold on to small-volume pros and their typically higher-margin habits are employing loyalty programs and value-added sales services targeted to that segment. “It's our niche in the market,” says Matthew Smith, a contractor salesperson with TW Perry, a four-location, $120 million dealer based in Gaithersburg, Md., and Mark IV Builders' primary LBM supplier. “Someone has to be there to meet the need.”
Subtle Distinctions If you added up their respective spending annually, a custom builder who finishes one or two homes a year and a residential remodeler like Scott may show about the same amount in an LBM dealer's books.
But when and what they buy is often vastly different. “Home builders know all of their specifications from the start, because they're starting from scratch,” says Ron Kastein, president and owner of Barker Building Supply, a three-location, $20 million operation based in Delavan, Wis., at which small-volume customers make up most of the dealer's sales, in part given the lack of national or regional home builders in the market. “Remodeling is more of an investigative effort. They usually need to replace or match something existing,” and often don't know what that is until they actually start on the project.