The problem with economic downturns in the concrete industry is that the competitor down the street often doesn’t value his product or company at a fair price.
Instead of looking at his business as a whole investment, this panicked producer reacts to falling sales volumes with a strategy that attempts to capture sales dollars with greater market share. Unless he’s enacted some significant cost savings initiative, his reaction focuses solely on reducing selling prices.
“Producers sometimes quote a yard of concrete at a price that is lower than the cost to produce that yard.”
Believe me, reducing selling prices is a dangerous trap in which to fall. The erosion of selling price is one of the biggest culprits of falling financial performance.
Pricing concrete below total production costs has been the traditional industry response to decreasing sales volumes. Even in good times, I regularly see producers who quote a job with a per-yard price that’s lower than what it cost to produce that yard.
I realize that we exist in a world where the producer who submits the lowest per-yard price usually wins the job. At first, there’s some optimism that things will work.
But at some point during the project, the panicked producer becomes aware that he’ll be lucky to break even. Naturally, the larger the project, the greater likelihood that the panicked producer will lose a significant amount of money.
I’ve seen examples of this actually crippling successful businesses, causing them to close.
So, how can you prevent saleprice erosion?
Avoid becoming a panicked producer by adopting two approaches that are not mutually exclusive.
First, a producer should determine his own ideal bid price for a yard of concrete. The benefits are obvious. The producer knows that he will make money on every delivery. Pricing every job based on known internal costs and targeted profit margins are the key to profitability.
This helps to avoid a pricing strategy in which several projects are quoted at the same price that could be at or below the known production cost. It also sends a signal to the market on how to value your product.
Second, develop a marketing approach that convinces the buyer that your quality, service, and reputation are worthy of the higher, fairer price. No logical customer expects you to lose money on a job. This approach will remind the customer that a deal that is too good to believe is often not true.
Finding Your Ideal Price
Producers can easily establish their ideal price with a little thought.
First, determine the cost of each mix design.
Second, establish a realistic delivery cost.
Third, look at your annual budget to estimate what yearly fixed costs would be. This includes selling, general, and administrative (SG&A) costs, and direct fixed costs such as depreciation. Estimate a realistic sales volume. And then divide the total fixed costs by this sales volume to establish a fixed cost per-yard.
Fourth, determine the required profit margin. There are many ways to calculate a profit margin, including return on sales, mark-up over total costs, and return on assets. For simplicity’s sake, use a mark-up over costs.
A great reference for this exercise is the National Ready Mixed Concrete Association’s Annual Industry Data Survey. The survey results provide data on the profit margin for all sizes of operations, as well as costs associated with geographic regions.
Pierre Villere is President and Managing Partner of Allen-Villere Partners. Contact Pierre Villere at email@example.com or telephone 985-727-4310.
© 2007 Hanley Wood, LLC. All Rights Reserved. Republication or dissemination of “The Science of Pricing Concrete” (The Concrete Producer, December 2007) is expressly prohibited without the written permission of Hanley Wood, LLC. Unauthorized use is prohibited. Allen-Villere is publishing “The Science of Pricing Concrete” under license from Hanley Wood, LLC.