As a producer of 3D Laminate components, when should you bring in a new color?
First let me say that I'm clearly bias because most of my time is spent trying to convince customers to add more colors. But let me see if I can be unbiased as I write this article. I'd like to address the following issues in this article:
1. COST CALCULATIONS OF MATERIAL: Here I'll calculate the average costs of material.
2. CUSTOMERS WHO ARE WILLING TO PAY MORE: Here I'll examine who is wiling to pay more and why.
3. SMALL ROLLS: Bringing in colors in 50LY quantity that are being promoted widely. Analyzing the cost and break-even point.
4. CUSTOM RUNS: Bringing in custom colors in 600LY quantity (from Dackor) that no other companies have yet. Analyzing the cost and break-even point and lag time before the color is wide spread.
COST CALCULATIONS OF MATERIAL: Lets say that the average cost of a woodgrain is $0.55 per square foot. Lets calculate a 50% scrap rate of material around each component to increase the cost to $1.10 for 3D Laminate material per square foot. For the sake of this article lets say that with board, glue and some other costs the total cost is $2.50 per square of material. This amount needs to be doubled to $5.00 per square to cover labor, rent and other costs of doing business.
According to the 80/20 rule, 80% of your business will come from 20% of your customers. Assuming that you have large customers or project that require an aggressive price that would mean that a big portion of your business is at a lower price point (for many of you). If we use the base cost of $5 per square foot as an average then you can account part of this at $4 for white and $6 for woods to come up with an "average price sold in volume" to these large accounts.
Many manufacturers like to find large accounts (even lower profit ones) to fill up production to cover the over-head. I'm not saying that this is the right way or wrong way but only that its a common way.
Now what do you call sales above the $5 per square foot or even above the $6 per square foot? Obviously this is where the gravy or profit is being made. To make this profit its important to have good customers who are willing to pay more.
CUSTOMERS WHO ARE WILLING TO PAY MORE: With the above in mind, who are the customers that are willing to pay more? There are two types of scenarios in which there exists a premium market. Lets assume that there are multiple companies who give great service and have great quality for the sake of this article. What else can separate you from the rest? Colors.
If you think about it, there are only three ways to make an obvious change to a 3D Laminate component.
A. Having matching backs
B. Having unique profiles
C. The color of the door. Having colors nobody else has.
Stocking matching backs is absolutely necessary if you are targeting closet producers so this is something required by most of that industry. Having unique profiles is a very difficult way to separate your doors. Surely a new profile can excite your customers but is it enough to attract new ones? I think most would agree that the color of the 3D Laminate is the most obvious way to offer something new.
Below I will discuss the dollars and cents of bringing in new colors....
SMALL ROLLS: In the market, most 3D Laminate manufacturers offer "cut to size" or 50LY rolls. After cutting fees lets assume that the average cost of this material is $500. In a 50LY roll there is approximately 700 square feet of material. For this calculation we'll use a 50% scrap rate so that would mean that there are 350 square feet of usable material. This can bump up the cost per square foot by a little however it really does not change the base cost of the door in such small volume. The biggest thing to consider is the amount of money being tied up.
Since the overhead is fixed at $2.50 by my calculations that would be that $2.50 for variable material costs should be used for this calculation. Lets assume that an average order for a Kitchen is 50 square feet of doors. If the order was sold at $7.50 per square foot then this leaves $5 per square feet or $250 for doors. That would mean that you would have to sell two small jobs to break even on the foil however this would only use approximate 20 of the 50LY on hand. A 50LY roll should yield an average of 5 jobs with each job grossing $250 per job or $1250. So we have the break-even at two jobs or 40% of the roll usage.
I should mention, however, that the barrier of entry to the 50LY order is low. Should you present your client with a new color that everyone knew about then you are not really providing a solution to a long term problem. The way to create a solution to a long term color problem would require bringing in a custom run color.
CUSTOM RUNS: Next I'd like to calculate the break-even on a 600LY custom order from Dackor. Yes you read that correctly.... 600LY for a custom order. How do we do it and make a profit? Quite simply we produce 3,000 LY but only require you to take 600LY of it. Essentially we're working with you to build our color offering.
Lets use the base cost of $5,000 for this 600LY order. According to our above calculations you'd need to sell 1,000 square feet of this new color to pay for the material cost. This would equate to 20 Kitchens. So does that mean that you'd have to sell 20 Kitchens to break even? Not necessarily and I'd like to explain... What if this color was your lost leader?
Imagine that there is a key customer that you are trying to land and they've been buying their doors from your competitor (be it a direct or indirect competitor). If you did a survey of this customer and found that they needed a color that matched their TFM supplier but that no other door supplier offered then this could be your loss leader. Essentially you'd negotiate with that client and say that you'd be willing to bring in that color but that you'd expect all of their business. A typical scenario would be that you would start producing their orders that they have now and then wait the 8 to 12 weeks it would take to develop and bring in their new color.
The above scenario would add value by solving a critical issue that the client had BUT, how can you afford to bring in that new color? Quite simply you would need to divide the entire business gained by the $5K. Remember that the $2.50 is already covering your material cost on the floor of the white and standard colors on a per job basis. So if that closet customer is only ordering 50 square feet a week then it would only take 5 months to break even on your investment with one single account. That's not taking into account the other accounts you may be able to sell this new color to.
I know that there other variables such as stocking new MDF back colors potentially however there are also variables such as cost averaging over multiple clients.
If you are an employee of a component producer I hope that this article has given you some ideas of how to present the idea of a new color of 600LY to your company. If you are an owner or partner in your component business I hope that you will see the possibilities of using new colors as leverage to obtain new clients.
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