The hurdles facing the pro channels - one steppers and two steppers - are well documented. Market challenges have been further compounded by contractor and builder defections as they channel shop for the best price, and have slowly but steadily migrated to the big boxes. My building products clients use more colorful terms to characterize this trend, such as "the collapse of traditional channels" and "the promiscuity of DIY, contractors, and builders."
However, some contractors and builders have remained quite loyal to the pro channel. L.E.K. research shows that they value the services, pro desk, depth and breadth of inventory, and the speed of pick up or delivery among others. In fact, for those contractors who claim loyalty to the pro channel, the degree of loyalty is actually higher than customers who claim loyalty to the big box. So, how do you maintain (or enhance) the loyalty among this core group and win back the contractors who channel shop to compete on price?
Segmentation - and a Lesson From the Airline Industry
Most dealers and distributors that L.E.K. has evaluated do some form of segmentation today: different pricing as a function of order volume or annual purchase volume, different charges for delivery options, different billing terms, etc. And while these tools have been well established over the years, I believe there are opportunities for innovative methods of segmentation to tailor your services and products to the needs of your existing - and target customers. Importantly, you can do so in a manner that is not easily copied by the big box channel.
Take the airline industry as a great example. For years, the industry had conventional offerings for different types of customer preferences, such as refundable vs. non-refundable ticket and first class vs. coach. However, starting about five years ago, several carriers introduced additional sources of segmentation. One such example was the added charge for checked bags. In its simplest form, some passengers need to check luggage and others do not. For those who do have a need, the airline provides an added service (and incurred an extra cost). Clearly these are different customer segments, as identified by the fact that different needs and costs exist.
And in isolating these segments - and pricing for the custom service provided to each - the airline industry added $3.4 billion in direct profit. That is a big number to be sure. What makes it more important was that the industry earned a total profit (including these fees) of $2.6 billion in 2010. Think about that for a minute. Without revenues from checked bag fees and other services, the industry would have lost approximately $800 million (or the fees represented more than 100% of an entire industry's profit.)
There are several implications for dealers, showrooms and distributors. First, are all of your services being demanded equally by your customers? If not, are their opportunities to charge for some of these services (or potentially more aggressively price specific services to win back specific customer segments)? Second, ask if there are different costs required to serve specific customers or lines of business. While I'm certainly not supporting a cost-plus pricing model here, establishing distinct cost-based services usually point to some differences in segments. Can you use this to your advantage (receive a benefit in the form of higher pricing, better loyalty, share capture, etc.) by tailoring your value proposition as a function of these different costs?
The answers may be surprising. After all, it took the airline industry nearly 75 years to unlock economic value from targeting customers effectively. I believe that there are similar opportunities in building products distribution, and unlocking these sources of value in advance of a housing recovery will greatly improve your competitive position, your profitability and your market share.
Robert Rourke is vice president and head of L.E.K. Consulting's North American Building and Construction Practice. Questions or comments can be sent to: [email protected].
