Mark Wilson, Akshay Singh | Senior Consultant & Consultant | Retail Reply, London, UK
Version 1.1 | October 2024
In this article we will compare the B2B (Business to Business) trading model used by Construction Merchants and Traders with the B2C (Business to Customer) model more widely seen in the retail sector to highlight the areas of complexity and challenge. We will also provide some insight into managing the complexities.Selling goods and services directly to individual consumers or end-users is common in the retail sector. In this approach, transactions are typically straightforward, involving simple price models and immediate exchanges of goods or services for payment. Standard retail, encompasses various sectors, such as fashion, electronics, groceries, and general consumer goods, and is characterised by:
In contrast, construction merchants represent a more complex branch of retail, supplying materials and products to contractors, builders, and other businesses. The variation of the B2B (business-to-business) nature of construction merchants introduces unique complexities. These complexities require specialised management strategies and systems to handle various aspects of the business effectively. This article explores these intricacies in detail, focusing on quote management, contract management, price management, payments, and customer account management. These areas are selected due to their critical role in ensuring efficient operations, maintaining profitability, and fostering strong business relationships in the construction industry.
Elastic Pricing: Elastic pricing refers to the practice of adjusting prices based on various factors such as market demand, supply conditions, and negotiations with customers. This is in contrast to fixed pricing found in standard retail. For construction merchants, elastic pricing allows for flexibility and competitiveness but necessitates sophisticated pricing strategies and real-time market monitoring to ensure prices remain relevant and profitable. According to the Construction Industry Report (2023), construction material prices can fluctuate by up to 20% within a year due to factors like supply chain disruptions and seasonal demand. This volatility necessitates a flexible pricing strategy that can adapt to changing conditions. Margin Management: Ensuring profitability while offering competitive prices requires meticulous margin management. Construction merchants must consider the cost of goods, operational expenses, and desired profit margins for each quote. Margin management becomes particularly complex when dealing with relatively stable margins because there is less flexibility to absorb cost fluctuations and unexpected expenses such as material price increases, labour cost, equipment breakdown etc. For instance, in 2023, the average gross margin for construction materials was around 30%, compared to about 50% in the retail sector. The lower margins in construction highlight the need for precise cost management. Quote to Order: The transition from quotes to orders is pivotal in order lifecycle for a merchant, requiring precise tracking and clear communication. Accurate and real-time pricing, ensures quotes reflect current market conditions and stock availability. Effective inventory management, including real-time visibility and demand forecasting, prevents over-promising. Clear and transparent quotes, along with regular customer updates, build trust and avoid disputes. Integrated software solutions streamline the conversion of quotes to orders, reducing errors and processing time. This seamless workflow, coupled with timely delivery and responsive service, enhances customer satisfaction. Additionally, accurate quotes communicated clearly with the customer and efficient order processing are critical for successful quote-to-order management. Separate vs. One Price Book: Construction merchants frequently use separate price books for different customers or projects to offer tailored pricing, providing personalised discounts and the flexibility to negotiate rates, which fosters long-term customer relationships. This strategy enhances customer satisfaction and loyalty by addressing specific needs and budgets. However, maintaining multiple price books adds complexity to price management, requiring robust systems to ensure consistency and prevent errors. Effective management of these systems is crucial to balancing the benefits of personalised pricing with the operational challenges it introduces. Terms and Conditions - Bounded Time: Quotations from merchants to customers typically have a limited validity period, smaller customers may have shorter terms such as a 3-day offer, to account for market volatility, while larger customers have longer lasting agreements due to volume. Clear terms and conditions regarding quote validity are essential for managing customer expectations and maintaining price integrity, ensuring transparency and trust between the merchant and the customer. This approach balances market dynamics with customer satisfaction by providing accurate and timely pricing information.
Terms and Conditions: Detailed terms and conditions govern interactions with individual customers, outlining responsibilities, payment terms, delivery schedules, and other critical aspects. These agreements are vital for setting clear expectations and minimising disputes. B2B contracts in construction involve ongoing relationships and complex obligations. Parent Orders: Contracts often act as parent orders from which specific quantities are drawn down over time. This arrangement provides flexibility for customers and allows merchants to manage inventory effectively. Vendor Protection: Contracts often include clauses to protect vendors from price variations. These may involve mechanisms for adjusting prices based on market conditions or predefined thresholds for price changes. Such protections ensure that suppliers are not unduly affected by market volatility.
Separate vs. One Price Book: Maintaining separate price books for B2B and B2C transactions allows businesses to implement pricing strategies tailored to the specific needs of each customer segment. B2B customers, who typically make larger, more complex purchases, benefit from customised pricing models such as bulk discounts and negotiated rates. This approach helps strengthen business relationships by offering value that reflects the scale and frequency of their transactions. In contrast, B2C pricing is generally standardised, focusing on simplicity and transparency, which ensures consistency and clarity for individual consumers. By differentiating between B2B and B2C pricing, merchants can optimise profitability while catering to the unique requirements of each segment. The flexibility of B2B pricing encourages larger orders and repeat business, while standardised B2C pricing maintains a straightforward and competitive retail environment. This dual approach helps businesses achieve both operational efficiency and customer satisfaction. Central Management: Supplier pricing refers to the practices used to set and manage the prices at which suppliers sell their products or services to a business. This is often managed centrally to ensure consistency and control across the organisation. However, local managers may have the authority to apply discounts or overrides based on specific circumstances. This balance between central control and local flexibility is crucial for effective price management in construction, contrasting with the more rigid pricing structures in retail. Tiered Price Model: A tiered pricing model, considering estate, store, customer, and deal/quote levels, allows for granular pricing strategies. This model supports flexible and competitive pricing tailored to various customer segments and purchase scenarios, accommodating different needs and transaction volumes. Unlike the flat pricing models typical in retail, tiered pricing enables construction merchants to offer personalised rates, bulk discounts, and special deals, enhancing customer satisfaction and fostering stronger business relationships while remaining competitive in a dynamic market.
Credit Limits: Establishing credit limits is crucial for managing financial risk. Credit limits are determined based on the customer's financial health, order history, and creditworthiness. In the construction industry, where transactions involve significant amounts, managing credit risk is vital. Payment Terms: Payment terms in the construction industry often extend beyond standard retail periods, with terms such as net 30, net 60, or even longer. Managing these extended payment terms is essential to maintain cash flow stability, unlike in retail, where payments are typically immediate or within short terms. According to industry data from the Construction Financial Management Association (CFMA), the average credit term in this sector is around 45 days, compared to 30 days in retail. Customer Viability: Regular validation of customer viability through credit checks and revenue assessments protects the business from potential defaults and financial losses. This ongoing assessment helps identify any changes in the customer's financial situation that might affect their ability to pay, a practice more critical in construction than in retail due to the larger transaction sizes and longer payment terms.
Onboarding Process: A thorough onboarding process for new customers includes collecting company information, conducting credit assessments, and setting up accounts. This process sets the foundation for a strong and stable customer relationship and ensures that all necessary information is gathered upfront. Credit Control and Debt Recovery: Effective credit control and debt recovery processes are crucial for maintaining the financial health of the business. This includes monitoring outstanding payments, sending reminders, and taking appropriate actions to recover debts. Proactive credit control helps minimise the risk of bad debt and ensures timely payments. In the construction industry, this practice is especially critical due to the high-value property development projects, extended payment cycles, and the need for consistent cash flow to sustain ongoing operations.
The complexities of managing a construction merchant or trader business require specialised strategies across various domains. From elastic pricing and margin management to detailed contract and payment terms, these considerations ensure that merchants can operate efficiently, remain competitive, and maintain strong customer relationships. To navigate these complexities effectively, construction merchants can benefit from adopting specialist software solutions designed to handle the unique challenges of the industry. ERP Software packages like Kerridge K8, Epicor BisTrack and Infor M3 are built specifically to manage the complexities in this sector and offer configurable solutions that can streamline operations, improve pricing accuracy, and enhance overall business performance. By leveraging such tools and understanding these unique challenges, construction merchants can achieve long-term success in a competitive market.
Retail Reply has collaborated with a broad range of traders and merchants to strengthen their business and technical capabilities. Our experience in this sector extends to analysis and design for the implementation of new finance systems, supporting the deployment of Electronic Point Of Sale (EPOS) systems, assisting in resolving inventory management challenges and developing solutions to resolve the inefficiencies of managing large, complex orders placed by housing developers. We have extensive experience assisting our clients in this space to navigate these unique complexities and challenges. Our specialist consultancy services are designed to assess current business processes, identify opportunities for improvement, and create scalable solutions. Retail Reply also aids in selection and implementation of specialised software solutions, ensuring a seamless transition into production. Our expertise in data and analytics empowers businesses to better forecast demand, manage inventory, and make data-driven pricing decisions.