How to Increase Selling Prices in a Depressed Market

There’s much discussion, at the moment, across many different market sectors, about the current downward pressure on selling prices. However, many of the comments suggest a lack of understanding about the drivers behind this trend and frustration at the inability to reverse it.

So what’s going on?

Well let’s stand back for a minute and consider a few fundamentals.

We live in a free market economy, in which businesses are entitled to price their goods and services as they choose; and they bear the consequences or reap the rewards of their decisions. Whatever pricing decision you make, I, as your competitor, am entitled to exploit that decision to my advantage, if I can; and vice versa. The alternative is a command economy, which I suspect that none of us would want.

In a competitive market the price of a particular product or service varies within a range that has an upper and lower limit. To illustrate this, consider a completely hypothetical case. A particular sized bar of milk chocolate may have an average selling price of £2.50; but some brands, in some circumstances, may sell for perhaps £3.50, whilst others may sell for £1.50. No one would buy the chocolate bar if it was priced at £50; so there is an upper cut off, beyond which there is no market. Similarly, if £0.50 was all that anyone would pay, it would be below the economic cost of production so, once again, there would be no market because confectionery manufacturers wouldn’t make it. There is only a market when there is sufficient demand for a product or service, at a price that is above the economic cost of producing and supplying it.

The state of the market, at any particular time, will have an effect on the price range of the product or service involved. Back to our bar of chocolate; if demand increases but supply can’t keep up, we may well see the price range shift. The upper end of the range may increase to say £4.00 and the lower end may increase to perhaps £2.00. Alternatively, we could see the price range widen; with the lower end remaining at £1.50, while the upper end increases to, for instance, £4.00. There is also a third possibility; the upper and lower limits of the price band could remain the same, but the distribution of prices, within it, could skew towards the higher end. But, in all of these circumstances, there would be an upward momentum of one sort or another.

However, if demand continued to increase but production and output caught up and overtook it, we would have an excess of supply, creating a downward price momentum. And all the examples I gave, in the last paragraph, would then work in exactly the opposite direction.

In a declining market, the momentum on price would be downwards, if demand was falling faster than output. But, if capacity was being taken out of the market, at a faster rate than demand was falling, demand, relative to supply, would increase and the momentum on price would be upwards.

There are five things to take out of these last few paragraphs.

  1. Prices are distributed within a range, with upper and lower limits.
  2. The range itself is affected by the relationship between supply and demand, within the market. If supply exceeds demand, the price momentum is upwards; if demand exceeds supply, it is downwards.
  3. Upward price momentum can be driven by: –
    • The whole price range shifting upwards
    • The price range expanding
    • The distribution of prices skewing towards the upper end
    • A combination a, b & c
  4. Downward price momentum can be driven by: –
    • The whole price range moving downwards
    • The price range compressing
    • The distribution of prices skewing towards the lower end
    • A combination of a, b & c
  5. Supply can exceed demand on a rising market, if capacity is coming on stream faster than the market is growing. Demand can exceed supply on a falling market, if capacity is being taken out faster than the market is declining.

Now the moment of truth; as an individual business, you can’t affect any of this, unless you’re in a near monopoly situation, which isn’t normally the case. Applying this to today’s difficult trading conditions, anyone who thinks he or she can stop prices falling through taking tactical actions, better selling etc. is tilting at windmills. They can no more stop prices falling than they can make water flow uphill.

But that isn’t where the matter ends; it’s really where it begins, because you may be able to increase your selling prices by moving your price position closer to the upper end of the price range.

Your position, within the price range, is dependent on your competitive position, within the market. When you have significant competitive advantage over your competitors, you will be able to command a price premium over them. However, when your competitors have a significant competitive advantage over you, they will command a premium over your prices.

So what gives us competitive advantage?

Normally, it’s a combination of many factors rather than just one or two. The quality of your product, compared with that of your competitors; your standard of service, compared with theirs; your reliability; and the price you charge compared with theirs. These are perhaps some of the more obvious examples of factors that can provide competitive advantage; and let’s stick with them for the moment.

Reliability to a customer that is working to “Just in Time” procurement is likely to be a very high priority; and may mean that price is less important. But a business that maintains much higher raw material stocks may place a greater emphasis on price and be less concerned about reliability.

Component quality and tight tolerances are likely to be important to a manufacturer of specialised precision equipment; and, once again, may mean price is less important. Whereas a manufacturer of lower tech household or garden products may place more emphasis on price, providing the components he buys meet a certain basic requirement.

Service may be very important to a business looking for technical support from a supplier and he may be prepared to pay a premium to secure that service, whereas a customer who required no technical support may be looking for the lowest price.

If we continue to stick with just quality, service and reliability for the moment, markets place a weighting on these factors. Different markets will have different weightings; and weightings may differ between segments of the same market. Weightings may also change over time and there may even be a seasonality factor to consider.

From a supplier’s perspective, this means that you really do need to understand what your market wants and then make sure you provide it. If you have a production capability that can produce high quality precision components but your market doesn’t require that level of precision, you’ve got a mismatch, just the same as you would have, if your market requires technical support and you don’t provide it. In the first instance you won’t get a premium for something the market doesn’t want and in the second, if you don’t provide a service, the market does need, all you’ve got left is price.

Price, delivery, service and quality are just a few of the factors that combine to provide competitive advantage. The full list is almost endless and will be different from one market or market segment to another. So let me suggest some of the more common factors that might be instrumental in creating competitive advantage.

  • Staff training – how competent, confident and effective are staff in their interface with customers? Are there formal appraisal systems and structured training programmes aimed at achieving continual improvement? Are their processes and communication channels in place that enable staff to effectively resolve customer issues and highlight problems and potential problems with management?
  • Systems & process – how efficient are the back office systems in the way they interface with customers? Do customers receive the information they need, when they need it, in their preferred format; and is it accurate? Are SOP systems effectively automated?
  • Distribution – to what extent do you control it and ensure that customer expectations are met? Is delivery performance measured against a range of relevant KPIs? At a time when distribution is increasingly outsourced, is there a mechanism for holding the carrier to account?
  • Selling – do you have an effective sales capability? Is it well trained, properly motivated and appropriately incentivised? Does it have transparent targets, against which it is measured and rewarded? Are the targets designed to be achievable, whilst stretching individual performance? Is the sales force properly supported by the rest of the business?
  • Product development – are your products right for the market? Are new products needed? Are they being developed? Should some products be dropped? Are you behind or ahead of the game? Are you at the cutting edge or a follower?
  • Market intelligence – do you really know what’s going on in your market? Do you know the trends? Are you responding to them? Do you know what your competitors are doing? Are you aware of political or legislative factors that may affect the market; and are you preparing for them? Are you looking for gaps in the market and planning to exploit them?
  • Brand – Do you have a strong brand? Are you supporting it in the market? Are you building and reinforcing the brand values? Are they the most appropriate brand values? Do you need to reposition the brand?
  • Advertising & PR – Do you have an appropriate programme? Is it clearly defined with specific objectives? Is performance being measured? Are the objectives being met?
  • Business strategy – do you have a business strategy and a business plan? Do your shareholders, directors, managers and employees all understand it and support it? Are they all focussed on achieving it? Is progress being measured? Is it working? Does it need amending or rethinking?
  • Leadership – Is there board level recognition between, on the one hand, management and administration and on the other leadership? Is true leadership in daily evidence? Is leadership producing a well-motivated and fully committed workforce? Is the workforce confident in and supportive of the management of the business? Is there decisive leadership? Does the market have confidence in your leadership?

These are all factors that can and do provide competitive advantage. Their relative importance will be different, depending on the precise circumstances; but any business that wants to achieve and maintain a premium price, towards the upper end of the market price range, will need to do three things.

Firstly, it will need to be very clear about its target market. It will need to differentiate between its core market and any peripheral markets/segments that are less important to it.

Secondly, it will need to have sufficiently good market intelligence so that it can identify all of those factors, which the core target market really requires of it. Furthermore, it will need to understand the emphasis that the core target market places on each of those factors.

Thirdly it will need to deliver on each count in order to optimise its competitive position.

This challenge could range from “not too difficult” to “completely impossible”, depending on where you are now.

For those businesses, already at the top end of the price range within their particular markets, the challenge is to stay there and to remain ahead of the game. However, the further down the price range you are, the more difficult the challenge.

One of the difficulties that many businesses face today is that, up until 2008, we had 15 years of economic growth, to the extent that some people really did believe that we had broken the cycle of boom and bust. Many others, managing businesses today, have never previously done so in tough times. Real sustainable competitive advantage isn’t something that can generally be achieved overnight. Foundations have to be laid and then built on, over time. Some businesses didn’t do that in the good times and, as a result, are now exposed. Others did and remain profitable, successful and sustainable, as they take market share away from their weaker competitors, often at higher prices.

For some businesses, it’s too late; and sadly we’ve seen the casualty rate increase. But for many others it’s not too late; and, whilst there is no quick fix, they can ease their prices up, over time, by progressively creating sustainable competitive advantage. But to do this they must adopt a strategy of transformation and change; they must act with clear determination to change; and they must start now.

The Survival of the UK Window Industry Needs Seismic Change

Seismic changes that reshape an industry happen very rarely; and they are, almost always, driven by innovation of one sort or another. Within the last forty years, the UK window industry has seen only two such changes; the first in the early 1970s and the second in the early 1980s.

Let’s wind the clock back to 1969; it was the year I joined the sales department at Alcan. My job selling custom aluminium extrusions to commercial window and curtain walling manufacturers, of which there were relatively few. It’s hard to believe but, at that time, there were no window systems suppliers; windows for new build were single glazed, timber or steel; and PVCU was still something for the future. Aluminium window manufacturers designed their own window profiles and paid aluminium extruders to cut suites of dies that were exclusive to the fabricator concerned. Suites of window profiles were often contract specific and only used once.

At about this time, a fledgling double glazing market, focussing on secondary glazing, was being established. Names such as Everest and Alpine made their debuts and met with some early success, which created a demand from other potential new market entrants. But there was a significant barrier to market entry for many small businesses and entrepreneurs. They didn’t have the design skills to create their own suites of profiles and, although the cost of aluminium die production was relatively low, the working capital required to fund the extruders’ minimum production quantities was significant.

From the extruders’ perspective there was also a problem. The demand from small companies was resulting in a proliferation of profiles and short production runs, which had serious implications for productivity.

The combination of entry barriers and productivity issues was a serious impediment to the growth of the market. However, James Booth Aluminium of Kitts Green in Birmingham was the first to solve the problem. They designed standard suites of dies for secondary windows, replacement windows, residential doors and patio doors; and extruded all four ranges in bulk. The extrusions were held in stock and sold in bar lengths to small fabricators. And so began the supply of window systems in the UK.

This was, almost certainly the first and most important seismic change the industry has experienced in the last forty years. It may seem very familiar today but, at the time, it was a highly innovative new market channel. The major brands, such as Everest and Alpine undoubtedly created product and market awareness but the principle of systems supply underpinned 30 years of market growth by supporting the proliferation of small fabricators and installers.

Very soon, James Booth Aluminium was acquired by Alcan; Midland Extrusions, owned by GKN, set up Scope; and Crittall Hope, then a large commercial window manufacturer established CEGO. These three businesses, more than any others, were responsible for the low cost market entry of the majority of smaller players, which collectively came to dominate the market.

As time went by, the products became better and more sophisticated and solid aluminium frames gave way to thermally broken and thermally clad products, which improved thermal efficiency. The market continued to grow, making room for more and more new entrants; and everyone was happy. Then, as the 70s gave way to the 80s, there came the second seismic change. PVCU arrived. Whereas the first seismic change was based on an innovative new market channel, the second was based on product innovation.

In the late 1970s, Hepworth launched a PVCU window system, under the name of Astraseal. This was actually a German window system produced by Brugmann; and several other German window systems soon started to appear. In the early 1980s HIS launched an all British system, followed by Bowater (Halo) and Spectus. PVCU was now the clear direction of travel; but Alcan, Scope and CEGO all failed to grasp the enormity of the change. At first, they tried to fight it; eventually they realised they couldn’t and launched their own PVCU products; but it was too little, too late. They’d misread the market and paid the price. So the major players that opened up the market in the 1970s were confined to history.

Since that time, we’ve seen the window market grow, almost non-stop, for a period of twenty five years or more. Products have become gradually more sophisticated, as has manufacturing and process; PVCU became the dominant frame material in the domestic and new build sectors; and conservatories became part of the product range. But the structure of the industry and the market channels haven’t really changed very much. A few large brands still account for perhaps 20% of the market; and 80% is in the hands of small and medium sized players, underpinned by the systems suppliers. A few very large fabricators have evolved but this has been largely in response to market growth rather than at the expense of smaller competitors.

The window market, including all of its various sectors, probably peaked somewhere between 2003 and 2008 depending on, which research you read. The domestic replacement sector is saturated and is increasingly dependent on second and even third generation replacements. It’s this sector that fuelled the growth of the entire market; and it’s this sector that is leading the decline.

Decline is inevitable and unstoppable because the boom period of ripping out tens of millions of old, poor quality timber and steel windows and installing maintenance free replacements is over. Second, third, fourth and even fifth generation replacement may occur, as products become increasingly more advanced. But the rate of that replacement is unlikely to be as great as the rate of the first generation replacement, because the benefits of moving, from a rotting single glazed timber window to a double glazed PVCU replacement, are substantially greater than changing from a mark 1 PVCU window to a mark 2 or even mark 3.

During this period of decline, there will be consolidation between some of the major players – Epwin/Latium and Veka/WHS Halo are recent examples. Some of the bigger brands will diversify – e.g. Everest has moved into kitchens. Some major brands will fail – e.g. the original Zenith/Staybrite; although I must hasten to add that the phoenix is a successful, albeit smaller, business. These are not the only examples to date and there are likely to be more in the future. Amongst the smaller players, there will be an increasing failure rate as the weaker ones are squeezed out; its already happening.

When markets decline, the initial rate of shrinkage, tends to exceed the rate at which capacity is taken out; and this puts pressure on prices, margins and profits. However, as the rate of decline reduces and eventually bottoms out, the reduction in capacity catches up and eventually equilibrium is reached; the pressure on price then reduces and businesses can, once again, start to build their margins and strengthen their balance sheets. But, before that happens, the market and the players in it are likely to have changed significantly.

So how will the market have changed? Who will be the survivors? And what shape will they be in?

The truthful answer is that no one really knows. However, we can learn the lessons that history teaches us; we can drive our costs down, our operational efficiency, quality and customer service up; and we can strive to keep our products and services at the cutting edge. Those businesses that succeed in all of this and develop the greatest competitive advantage will survive. Those that fail to do so will not. The critical unknowns are (a) when and at what level will the market bottom out and (b) how great will the fallout be? So the only way of being sure that your business will survive is to ensure that you establish and maintain significant competitive advantage over all of your competitors; and that’s not easy.

A market that has grown almost non-stop for thirty years or more and then goes into decline before eventually stabilising at a level that is considerably below its peak is going to change. That is inevitable. The question is, “will the current players simply be reactive to market pressures and batten down the hatches or will some of them see this as an opportunity and lead a third seismic change as the early systems suppliers did in the 1970s”?

Of the first two seismic changes, the first was a new route to market and the second a major product innovation. Looking at today’s market, there doesn’t seem to be a build-up of pressure anywhere within the supply chain nor do there appear to be any major cost advantages available through new channels. So it’s difficult to see that alternative routes to market offer the opportunity for seismic change.

Looking at product innovation, there has always been a stream of improvements to profile design, hardware specifications, thermal efficiency etc. But these tend to be small steps that provide progressive improvements but not the sort of seismic change that came about with PVCU.

Is there perhaps a new material to supersede PVCU and create a whole new market opportunity? Over the years, I’ve seen many different people and businesses getting excited about all sorts of different composite materials and alternatives to PVCU; but ultimately, such benefits, as there may have been, have been marginal and driven by businesses wanting to find some degree of differentiation. But, if I think back to the late 1970s, when PVCU first appeared, despite the reactions of CEGO, Scope and Alcan, it was blindingly obvious that this was where the market was going; the benefits were so great and the drawbacks so few. Can anyone really put hand on heart and say that about any potential alternative today, other than in niche market circumstances?

This probably means that we have to look at marketing for the seismic change that the industry needs. So where do we look?

Step back; think of the window industry in the context of other building products, home improvement and consumer markets. Think kitchens, bathrooms, heating, furniture, beds & mattresses etc; and think about what, in marketing terms, makes the window industry different. The answer can be summed up in one word: BRAND.

The window industry relies heavily on sales to the consumer; but it has very few major national brands; Everest, Anglian and Safestyle are probably the only three. There are a relatively small number of strong regional brands; and that’s about it. Of course, there are very many small and medium sized businesses with really good reputations in their locality, trading successfully through word of mouth and recommendation. But that is very different from having a strong brand that is associated with specific brand values and achieves a high degree of unprompted recall.

This situation is actually quite unusual. If you have a new central heating system, you could go to British Gas or the local plumber but the boiler itself is likely to be a branded product – Worcester-Bosch, Baxi etc. and the radiators may be Stelrad or Myson. The same is true if you have a new bathroom or kitchen; Twyford, Ideal Standard, Magnet, Poggenpohl etc. But the overwhelming majority of windows are sold on an own brand basis by small businesses that, on their own, don’t have the resources to create and support strong brands. The consequence of this is that the product has become fully commoditised and a large part of the market is, therefore, price driven. Look at the average price per installed frame for the market, as a whole, and compare that with the average installed price of an Everest frame. In reality, the product is “me too” and the fitting, in most cases, is as good by a small company as it is by Everest. Perhaps the Everest guarantee is stronger but that doesn’t justify the huge premium that Everest secures. That premium is due to the brand.

In January 1983, I launched a new PVCU window system into the UK market. It was the “Halo” system; the company was Bowater Halo (now WHS Halo); I was the CEO; and the strap line was “Perfected for Britain by Bowater”. It was one of the first all British window systems. “Halo” was designed as a consumer brand; and our original strategy was to maintain and support the “Halo” brand throughout the supply chain, from extruder to consumer, adding value at each level. Whilst the sales of the Halo product took off and the business was quickly established as a leading PVCU window systems supplier, the branding strategy didn’t work. It was radically different from past practice, the market was growing very quickly, there was very little price pressure and margins were high throughout the supply chain. So the verdict was, “we don’t need it”; the timing was wrong. However, I would argue strongly that today, “we do need it”. Significant added value is unlikely to come through different channels or major product innovation; and that leaves brand as the only other means of achieving it.

The businesses that can pick up this challenge are the systems companies and perhaps the very large fabricators. If some of them have the courage and vision to go to market with their customer and distribution networks centred on a branded product strategy, they will provide added value opportunity at all levels of the supply chain and lift their networks out of the commoditised part of the market. Furthermore, those that move in this direction first will have more flexibility about where they position their brands. The followers will be left looking for the gaps.

It’s this type of development that will create the third seismic change that the industry needs and it may well lead on to the window industry moving closer to the US model, where branded products are manufactured and distributed to the homeowner through home remodelling companies. Other factors also point to this development.

The shrinking market means that many sales and installation businesses that don’t fabricate will be forced to diversify; so, rather than being specialist window installation businesses, they may become broader based home improvement or home remodelling companies, perhaps joining up with small builders as well.

No one can be sure how this will all pan out and there are judgement calls to be made. However, the shrinking market is making significant change a certainty; and those major players that don’t grasp the nettle are likely to meet the same fate as the aluminium systems companies of the 1970s, while those that do will determine the shape of the market in the years to come.