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Hot Commodities: Five Ways to Cope with Fluctuating Raw Material Costs

Most retailers know there are just some things beyond their control. For those heavily selling building materials and lumber, constant changes in commodities pricing are almost always at the top of that list of variables.

Between slowed domestic new-home construction for several months in 2013 and growing raw materials demand internationally, building material prices are expected to fluctuate drastically this year.

As two of the biggest softwood producers, the United States and Canada are expected to raise production in 2014. The U.S. is projected to produce 33.62 billion board feet in 2014, up 13 percent from 2013, while Canada’s output is likely to rise 2.6 percent to 26.39 billion board feet, according to industry consulting firm Forest Economic Advisors LLC.

A trade agreement that allows more Canadian wood to be shipped to the U.S. when prices for domestic producers are high may also affect U.S. supply.

With market prices on building materials constantly changing, how do you uphold your margin if prices go down and maintain customers’ positive price perceptions if prices increase?

No matter what the market conditions, expert sales consultant Mark Hunter says it’s important for retailers to always be refining their commodity sales strategies. He shares his advice on developing such a pricing strategy on the following pages.

Advice from Hunter published here is adapted with permission from his article, “Pricing: Strategies to Increase Your Price When Selling a Commodity,” which originally appeared on www.thesaleshunter.com.

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Evaluate Your Cost of Capital

One of the first things you can do is look at your true cost of money. What is your cost of capital? What is your available credit? What are your short- and long-term cash flow needs? After you’ve determined what your position is on each of these questions, then you can begin to explore this with your customers.

The key here is to find an alternative approach you might be able to use that will allow you to protect your overall margin while at the same time allowing the customer to feel he or she is getting a good deal.

Offer Flexible/Extended Terms

One alternative approach to adjusting to increased commodity prices is to adjust payment terms. Offering the customer extended terms to pay could be a key way for him to free up cash flow, requiring the customer not to finance as much of the inventory. If you have access to cheaper capital than your customer does, then you could sell him or her on the extended terms and the higher price.

The key with offering flexible or extended terms is to fully understand your cost of money and to be able to accurately quantify the additional risk you’ll be taking on.

Implement Forward Buying

Another option would be to have the customer forward-buy from you. In this approach, you’re willing to offer the customer a lower contract price if he or she pays you in advance.

Forward buying works for the customer who has access to cheaper money than you do. Allow the customer to continue buying from you at the old price as long as he or she pays you in advance. This then gives you the money to make your purchases, freeing up your money for use somewhere else. You are receiving less for your product, but because you don’t have to front the money to buy the inventory, your overall cost structure will be better.

Alter How You Ship

Many customers have unique supply-chain needs. If you can help them deal with these, you will be providing them added value. When you’re able to do this, you’re able to allow customers to reduce their costs somewhere else, offsetting the increased price you’re charging them.

Just like the other techniques, you need to fully understand in advance how impending cost changes could affect your cost structure. Sure, we wish we all we were fortune tellers for this reason, but look to your distributor for suggestions.

Understand the Customer’s Supply Chain

Regardless of what you sell, there are numerous ways to increase your price or minimally protect and even grow your bottom line when it comes time for you to adjust your prices.

The problem many salespeople have in evaluating and adjusting the pricing of the raw materials they carry is failing to fully understand how the customer’s supply chain works and their key financial issues before announcing a price increase. If you wait to find out this type of information after you’ve announced your price increase, it will be far more difficult to develop a plan that works for you and the customer.

About Mark Hunter

Mark Hunter, “The Sales Hunter,” has been recognized as one of the top 50 sales and marketing leaders in the world. He has worked with some of the biggest companies in the world, such as Samsung, Coca-Cola and American Express, conducting thousands of customized training programs and keynotes on sales and leadership. View his website at www.thesaleshunter.com.

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