May, 2007

The Bottom Line

How top performers take market share in a downturn.

By Greg Brooks

The news just keeps getting better and better—if you like downturns—but the focus is starting to shift. Six months ago, the question on everyone’s mind was “When will it end?” At this point, dealers seem to be settling into the realization that a lot of markets are in for a long, rough ride.

In January, the news was 2.1 million vacant homes for sale, in great part a measure of how speculators helped dig the hole. Now the issue is subprime lenders going belly-up, exposing just how much of the boom was related to loans that probably shouldn’t have been made in the first place. That in turn means more foreclosures and a longer wait until the market turns.

So how will you get through it? A dealer friend who’s been through three major downturns says you’ve got three choices:

Stay the Course

First, you can ride it out: Cut what you can and hope for the best. The problem is that it’s impossible to say how long you’ll have to wait. Each of the past three downturns lasted four to five years, and we’re only midway into Year Two of this one.

Cut Costs and Hope

Second, you can manage to the bottom line, as big chains frequently do. The trouble is that it doesn’t take long before you’re getting rid of key people. In the past week, two independents in major metro areas reported that, while their markets are down 40%, their chain competitors look to be off between 60% and 80%.

Sell Hard and Fast

The third option is to sell your way out: Take market share from your competition. Like most things in this business, it’s easier said than done. But it can be done. The two independents my dealer friend knows are off only 20%, and my friend is in a similar position. Like everyone, he’s been letting his weakest people go—but he’s replacing them with the top performers that the nearby chains have let go.

Everyone knows the adage, “You can have quality, service, or price: Pick two out of three.” Downturns expose weak players, but the strongest—both sales people and builders—know that all three are about the bottom line.

When builders ask for quality, what they’re really saying is, “Help me create satisfied clients who will enhance my reputation so I can either pick my clients or charge a premium and make more money.” When builders ask for service, they’re saying, “Help me build more efficiently so I can lower my construction costs and make more money.” When builders ask for price, they’re saying, “Just give me the money.”

If you wonder why builders are so focused on price, ask yourself which of the three appears to be the shortest distance between you and the money.

Price is the obvious answer, but not the best one. It’s well established that cycle time, callbacks, and construction waste have a much greater impact on builders’ profits than material prices. All good suppliers provide services that address those issues and put hard dollars in their customers’ pockets. The difference is that top performers know their value—and so do their builders.

It isn’t hard to calculate the value of your service. Most builders agree that their cycle-time cost is around $150 per day. NAHB says the typical builder gets 4.5 callbacks per home at $350 each, and the typical project generates 3,000 pounds of wasted wood. All you need to do is pay attention to the things you can do that save time, prevent mistakes, and reduce waste, and then tally them up.

Yeah, it’s an extra chore. But it’s one that puts dollars on your bottom line, too.