• Jess

Do Small Builders Subsidize Big Builder Profits?

How many dollar bills are you handing your competitor?

Rebates are a popular way for product manufacturers to incentivize consumers to purchase their product. Retailers are generally in favor of rebates as it offers their customers a discount without sacrificing their margin/markup. Customers enjoy a discount, even though it may be delayed by weeks or months due to ‘processing’ and/or ‘handling’. So it seems rebates are a win/win/win. The manufacturer sells more product, the retailer’s profit is protected, and the consumer receives a discount!

Building material manufacturers have engaged rebates as a way to pull through demand for their product while locking in long term customer loyalty. Think products like I-joists, connectors, even sealants. Who should complain about builders receiving rebates from material manufacturers? Well, small builders for one. The dirty little secret in the rebate game is the rebates aren’t offered across the board to anyone purchasing the product. These rebates are reserved for big builders whose annual production drive tremendous volume for the manufacturers. These larger builders are so valuable to the product manufacturers that they have setup rebate programs directly with individual builders to essentially “buy” their loyalty.

How many rebate opportunities exist in this photo?

On the surface, rebates appear to be a perk for the big builders. Good for them, right? If they can negotiate lower costs, however they find them, they should. It gives smaller builders motivation to grow their business, lower their costs and increase their profits. However, what isn’t fully realized on the surface is the effect it has from the goods the small builder is purchasing. Let’s assume both small and large builders are paying the same per unit price for a product. If the manufacturer is offering a 25% rebate on the product, that’s 25% of additional margin the manufacturer receives when it sells goods to a small builder. This additional margin, when aggregated amongst all the small builders is used to incentivize and subsidize the dollars flowing back to big builders. In other words, small builder dollars are being redistributed to large builders, directly to their bottom lines!

Small builders need to find their own solutions to maximize profit!

So what can small builders do about this? Well, to be honest, not much. They can inquire or even complain to their local supplier, but they too are removed from the rebate equation and won’t be able to do much against this big machine. Small builders can be more responsive in their product selection, looking for alternative and more innovative products that can help them compete when building homes. Rather than look to certain products as “industry standards” they can implement solutions with lower overall cost of installation. An instance of this might be the use of floor trusses (or cassettes) rather than I-joists. Work with framing labor, HVAC and other trades as well as suppliers to identify instances where money can be saved. As a result, you’ll hang onto your dollars rather than having them end up in your (much larger) competitors’ pockets!