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Winning Contractor Business: A Guide for Distributors

By David S. Bauders, CEO SPARXiQ

Winning Contractor Business: A Guide for Distributors

Mark Twain’s famous saying, “It ain’t what you don’t know that gets you in trouble; it’s what you know for sure that just ain’t so,” perfectly captures the challenge faced by distributors serving the construction industry. Understanding the true drivers behind contractor buying behavior is pivotal for delivering exceptional service and capturing primary-supplier status, which in turn is the key to market leadership and profitability. Despite the common belief among distributors that price is the primary factor influencing contractor preferences, my experience suggests a different reality.

Beyond Price: Understanding Contractor Needs

Having supported hundreds of distributors over the last 30 years, I’ve observed that the majority of sellers have an inverted understanding of their customers. They perceive their products as commodities and believe that price is the sole differentiator driving preference and market share. While this belief seems logical, its implications would suggest a race to the bottom leading to domination by the largest-scale, lowest-cost distributor.

If this price-driven proposition were true, why are there so many small and mid-size distributors serving these markets? Why do so many of them have higher margins than their larger, lower-cost competitors? Why does pricing for construction customers vary widely even in so-called commodity product categories? Why is there often no correlation between customer size and price in markets where scale drives cost?

As with many stereotypes, there is a kernel of truth to the contractor Price-Seeker view of the world. Every salesperson can recall instances where their customers insisted on lower prices: “You need to sharpen your pencil; Your competition’s offering a much lower price; You’ll have to do better than that…” Contractors, particularly their purchasing professionals, have learned that uttering these phrases often results in reduced prices and margins. Yet, marketplace data show no negative correlation between relative price levels and share of wallet. In fact, in many cases, there is a positive correlation between relative prices and market share. That is, distributors with higher wallet share also have higher prices and margins.

Real Drivers of Contractor Preferences

Contractor preferences are shaped by a combination of factors, with price being just one of them. Based on my interactions with commercial contractors, the following factors, in order of importance, drive supplier preference:

In-Stock Availability
Geographic Proximity of Products
Supplier Performance and Service
Price

Contrary to salespeople’s beliefs, price isn’t the top priority. Contractors are primarily in the labor business. Their biggest challenges involve acquiring and managing skilled labor and aligning the material flow to maximize labor productivity while minimizing material waste. Hence, the preference for the first three decision criteria over the fourth.

Overcoming Material Planning and Competitive Bidding Challenges

Contractors have expressed to me how difficult it is to plan material flow to support labor productivity. Depending on the vertical market, up to 70 percent of material spend is required for delivery in less than 48 hours. As one buyer explained, “We can’t plan our way out of a wet paper bag… It’s really hard to shop for a lower price when you can’t plan…”

What about the dreaded competitive quote process where a bill of materials is put out to bid? Buyers generally seek to avoid this activity for several reasons. First, soliciting competitive bids is cumbersome, time-consuming, and often inconclusive in terms of a savings payoff. When a bill of materials (BOM) is emailed to three or more distributors, each responds differently, with different products, available quantities, partial or missing line-items, and often with product substitutions that may or may not be allowed. Chasing down distributor responses takes time.

Managing these responses and organizing them for comparison is daunting and requires wading through emails and attachments to yield up the dreaded Stare-n-Compare marathon. At the end of all this, there’s a high chance that the buyer will have to choose more than one supplier to meet timing requirements. As a result, buyers perform competitive quote processes on a relatively small volume of high-value quotes, typically accounting for 10 percent of buys by quantity and 30-40 percent by value.

Strategic Supplier Relationships and Market Dynamics

Further inhibiting the Price-Seeker approach is the strategic imperative of securing contingent supplier service when the primary preferred supplier can’t meet all the buyer’s needs. Over time, buyers learn that they need to spread their wallet share carefully to ensure fallback supply options to keep their crews productive. The result of this dance is three types of supplier relationships: primary, secondary, and fill-in or tertiary. The typical contractor buys from seven to ten suppliers, with the top three being a mix of primary and secondary.

The real battle in the market revolves around these supplier positions, driven broadly by availability and service. In addition, a great supplier secures manufacturer cost-supports to help win big projects and buyouts. The staging of material flow — delivering the right products in the right quantities at the moment of need — is where the distributor’s real value is won or lost. Up to 30 percent of contractors’ material spend is wasted due to overbuying, jobsite damage/shrinkage, or errant product specifications. Distributors that can minimize or mitigate material waste offer a compelling value advantage that dwarfs price in impact.

Strategic Value Over Price

The path to becoming a preferred supplier for contractors involves a nuanced understanding of their needs and preferences, as outlined in this article. When distributors price recklessly in pursuit of market share, they disregard their customers’ true interests in pursuit of low-value, price-cutting gambit. Even worse, they divert away from their buyers’ compelling productivity and lean needs that drive contractor profitability. Finally, they deprive their organizations of the cashflow to invest in capabilities that contractors desperately need to survive and thrive in the thin margin contracting industry.

Distributors that recognize the importance of factors beyond price can develop strategies that align with the true drivers of contractor loyalty, thereby securing a competitive edge in the market. This approach not only fosters stronger partnerships but also supports sustainable growth and profitability for both distributors and their contractor customers.