Real Issues. Real Answers. margins vs. market share
Today’s strong housing and remodeling markets are a golden opportunity for all companies in the residential construction business. When a company decides to grow its business, key strategic decisions must be made. For some companies, success is measured by gains in market share. Others focus on growing, or at least maintaining, margins. For others, it’s a balancing act. This month’s Real Issues survey takes a closer look at this strategic question.
This month’s question was suggested by a reader who opted for anonymity: “Why is it that market share seems to be a bigger motivator than profits during this industry up-cycle? Distributors, manufacturers and contractors all seem to be unwilling to bring prices up to levels that are fair for their businesses and that ensure the long-term survival of themselves within the industry.” The tug-of-war between margins and market share is as old as business itself, which makes it an ideal Real Issues survey topic.
As we do each month, we sent a brief email survey to those subscribers who’ve opted-in to receive our email communications. A big thank you to the nearly 200 readers who took a couple of minutes to share their insights. (According to Survey Monkey, which we use for all of our surveys, readers spend an average of just two minutes completing our Real Issues surveys.) If you’re not receiving our emails and would like to, just drop me a note at [email protected], and I’ll make sure we get you added.
Approximately how much does your company believe its revenues will increase/decrease in 2018 over 2017?
First, we wanted to get a feel for how respondents believe 2018 will play out for their companies.
As GRAPH 1 shows, respondents are overwhelmingly bullish on their companies’ prospects for 2018, with 88.4% anticipating a bigger topline than in 2017. Notably, the majority of those (48.1%) anticipate 2018 sales to top 2017 by at least 10%. Even better, 6.2% look forward to a 20% overall sales increase. Just 7.0% of respondents believe this year will be about the same as last, and a small minority—just 4.6%—anticipate a sales decrease. This optimistic outlook aligns with the forecasts from NAHB and other industry watchers.
When your company looks to strengthen its business, does it focus more on growing/maintaining margins or gaining market share?
Next, we wanted to get a feel for respondent companies’ priorities. Specifically, whether they focus more on margins, market share, or equally on both.
As GRAPH 2 shows, for most respondents, the question of margins vs. market share isn’t an either/or question. Indeed, more than two-thirds of respondents state that “Market share and margins are equally important.” Of the balance, 25.4% said “Growing or maintaining margins is more important than market share,” and just 7.1% said, “We’ll concede margins to gain market share.” Below are a sample of comments that readers added:
“Last year we specifically conceded margins to gain market share. This year we are increasing margins. We are enjoying significant gains in market share in certain segments directly related to efforts in 2017. Should be a great year.”
“It seems that we alternate yearly focus; concede margins to gain some market share, then focus on gaining margin.”
“There are plenty of great customers who understand value. That’s who we focus on. We let the competition grab those customers who only ‘understand’ price. Hence, we leave new construction and storm-chasers for the competition.”
“Credit worthiness is more important than either!”
“As a manufacturer, our approach can be summed up as ‘we don’t wake up this early not to make money, and neither should you.’ Currently we are entering the Northeast and have conceded our margins to guarantee a consistent GRAPH 1 profitable margin to our distribution partners. We are still profitable and able to grow but at a slightly lower margin as compared to our established markets. We do this not by lowering our pricing but by offering more to the people that choose to come on board in this new market; by heavily discounting our first set of displays, offering no charge signage, posters, and other literature we guarantee the new guys have the tools needed to be successful without asking for an upfront commitment. Long-term, this is handled as a marketing credit based on sales, but to gain market share we concede a portion of our margin today to grow our dealer base.”
As competition continues to intensify in response to the growing remodeling and new construction market, how can a company grow its market share and still maintain acceptable margins?
“Be smarter and quicker. Pick the projects that best utilize your resources.”
“We have focused on increasing market share within the homeowner/ DIY market, keeping the lower velocity items at higher margins, and competing with lower margins on the faster turning items. By offering a wider variety of products, the complete line of products to finish the job right, and having customer service as a focal point, our one-time customers become repeat customers. We do limited advertising to grow market share and every bit of advertising has research completed beforehand to make sure every dollar is maximized, as well as post advertising breakdowns to see who the advertising affected positively. Within the contractor field we focus on meeting the building needs with lumber and common building materials but avoid the specialty needs such as doors and windows that control valuable space with limited margins. If specialty items are needed, we order and have ready within 2-3 days.”
“Through high quality new hires.”
“Sell deeper to your current customer base who are already used to that margin in return for the value. Find similar customers. Avoid the ‘home runs’—big projects or players usually lead to depressed margins for everyone, and we all use the excuse, ‘but it keeps the trucks rolling.’ It’s too easy to justify the volume at an unacceptable margin because we think it’s going to reduce our overhead. It doesn’t!”
“By providing the very best service, providing value, really walking the walk when it comes to customer service. Operationally, we must truly be customer-focused in order to earn the higher margins.”
“Offer unique products and services that your competitor’s don’t, that way you avoid price wars and can earn a fair margin.”
“Work harder on the ‘Value Equation:’ Quality x Service x Price Importance x Improved Sales Process x Customer Perception.”
“One of the biggest things I stress to our distribution partners is the importance of differentiation. Whether it’s warranty, service, or product, you want to get away from the commodity race to the bottom. Too many manufacturers hand out distribution like candy with widely varying pricing structures. This creates a situation where you have multiple distributors in one area all competing. This is great if you’re either the giant dealer with the best pricing deal or the tiny specialty distributor working out of a van who can use the product as a way to sell an installation. The vast majority in the middle are left facing a tough choice. You either sell at a price you can’t sustain and worry about having to service the sale, or you lose the project to the one-off guy working out of a van. Our pricing model sets a lower bound limit on pricing—meaning the giant guys have the same pricing structure as the midsized companies. By not saturating your market with multiple dealers, we also try to create a situation where you compete on your ability to service and reputation in the local market. This allows high quality companies that take care of their clients to be on the same footing as their competitors. Instead of fueling a race to the bottom, we try to create a situation where at a minimum everyone makes a standard margin but can upsell their particular advantages directly to the end user. That way, you grow your market share on service and ability to provide what your client is asking for. Yeah, in some cases you may lose a volume order solely on price but too often the company that wins the race to the bottom won’t be able to sustain its ability to service the client and eventually loses more than just a one-off order. We look for people that are in it for the long haul and try to create a sales program that matches that approach.”
“A company can’t grow its market share while maintaining acceptable margins without access to large amounts of capital. This hurts independent LBM dealers, unless they are willing to risk more and more.”
“Very hard to do both.”
“First: Better purchasing strategies. Second: Strong quality control at every stage of manufacturing (ie: quote, design, cut, build, delivery). Third: Pre-qualify new sales opportunities.”
“By being the best at what they do consistently and treating customers, employees, vendors and all others with respect.”
“It’s not easy, but it can be done. First, it’s critical to have great people surrounding you. Second, make sure the job is done right and the customer is happy. Third, work hard to generate positive word-ofmouth. Fourth, if you’ve done 1-3, you’re on your way to higher margins.”
“I’ve been trying to figure this out.”
“By offering exceptional service and value-added features that competitors don’t normally offer.”
“Building strong relationships with your key customers. Gaining their trust and confidence in you and your business.”