Is Service Becoming A Commodity?

April 28, 2004
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The topic of whether or not HVAC equipment is a commodity has been discussed for some time. Some industry experts assert that service may become the only profit center for contractors. But could service, too, become a commodity? The News' contractor consultants were given the following statement to comment on:

"A wise man recently said that the products we sell and install will soon become commodities thanks to the big box, and all we will have to sell is our service. Prophetic or pathetic?"

"Who has more knowledge about the benefits of really good air filtration systems, humidification, air distribution, home cleanliness, healthier environments, comfort, and equipment care than the HVACR professional contractor?" countered Aaron York of Aaron York's Quality A/C, Indianapolis. "With the EPA telling us that our homes might be 100 times more polluted than the filthy outside air, who is best qualified to handle these issues? Is it the manufacturer who sits in his office and never talks to a user? Or is it the contractor who spends his days with the end user?

"While I have deep appreciation for the box people, they are not tuned in to the needs and wants of the consumer," York said. "Unfortunately, the consumer doesn't even know what they really need. They know there are problems and issues, they know the steak is not as good as they would like it, but they have no idea why. Solutions only come from those who are constantly analyzing the issues and who are students, with creativity, of this industry."

"We have started to really push the indoor air quality side of things," said Arthur Pickett of Royal Air Systems Inc., North Reading, Mass. "This makes the customer focus on comfort and operating cost, and he stops thinking about buying a furnace or A/C and starts thinking about buying a comfort system.

"You will still have about 50 percent of the public wanting to buy from the big boys because they feel they will get better support on warranty claims. These same people usually need low-cost financing."

Pickett continued, "Yes, we are going to lose the bottom end of our market, along with the low-budget installing contractors who would rather not go out at night on sales calls and don't want to chase their money. But the end result will see the professional contractors - who are real business people - still chasing the high-end buyer."

"There is no doubt that some of our products and services will be-come commodities some day," said Jeff Somers of Monsen Engineering Co., Fairfield, N.J. "A portion of the consuming public will buy this way, but contractors will need to stop warranting the commodities that are purchased directly or will need to cover this in the labor rate.

"Service contractors incur costs to obtain products and deliver them to the job, and also inventory them, so we can get equipment back on line quickly. The large equipment portion is more of a target than service products."

"The problem is not the big box," said Jim Hussey of Marina Mechanical, San Leandro, Calif. "For a long time I have watched the skill sets of field technicians decline. Research shows the vast majority of split-system residential units in the West are wasting energy because they are improperly charged. In California, the government wants that energy back and has spent millions funding research into self-diagnosing condensing units. If folks don't believe this, I can provide names and numbers.

"The results of this research are being given to the manufacturers for free in an attempt to put equipment into the marketplace that does not require skilled technicians. This is still in development, but I promise you it is out there.

"So as the equipment becomes smarter and the need for skilled technicians is diminished, our products will quickly become plug-and-play commodities. This is bad news for rip-off contractors, but good news for quality contractors. Quality contractors already know how to differentiate themselves and sell their ability to provide comfortable environments. These contractors all sell something more and different than price."

We Have Seen The Enemy And He Is Us

"The big box stores are true experts in identifying the needs of the public and in educating them on the value of products," said Dave Dombrowski of Metro Services/ARS-ServiceMaster, Raleigh, N.C. "If we partner rather than fight them, we can take full advantage of this opportunity to expand our market base. Our problem is that we treat the products as commodities ourselves.

"Current mechanical codes - and basic respect for our trade - require detailed heat loads, equipment selection, duct and airflow analyses, and the establishment of a designed and engineered system. This level of detail is contrary to the business model of the big box store.

"Instead of embracing the technical aspects of our business, we either fight the requirements or take advantage of overworked inspectors and personal relationships. We have never just sold equipment; we offer advice, education, and the best and safest design for the comfort of the homeowners."

"The products the big box locations sell will be the commodities products - the boxes manufacturers make - because most of the boxes are based on SEER and tonnage," said Larry Taylor, Air Rite Air Conditioning Co., Fort Worth, Texas. "Most of the contractors who want to stay in that market should be concerned about the big box boys.

"However, if you are moving your company away from the boxes concept and into the whole-house comfort system, the big box boys will not be able to touch you.

"If you can move your company into the position of selling whole-house comfort and only selling the boxes from manufacturers as the accessories, then you have nothing to fear except the fear of learning a new approach to doing business."

"If we believe what we sell are commodities, then they will become just that," said Russ Donnici of Mechanical Air Service Inc., San Jose, Calif. "We sell comfort and solutions to customers' environmental problems. Those problems will never be solved by just boxes and pieces.

"Unfortunately, the manufacturers are more interested in selling boxes and not solutions. If they truly believe what they say, that they believe in systems and not selling boxes, then they would not have entered into the agreements with the big box stores, and they would not be competing with their contractor base through their service organizations."

Professional Guidance

"What I have always told my personnel is that it is who you know, more so than what you know, is what sells," said Hank Bloom of Environmental Conditioning Systems, Mentor, Ohio. "Relationships and people are what sells, with reputation and service to stand behind the sale. The product is important, but there must be support during the sale and after."

"Prophetic or pathetic? Neither," said Ann Kahn of Kahn Mechanical, Dallas. "Good contractors have always succeeded by selling their service and knowledge. The majority of people - whether a home or business owner - know very little about air conditioning. They look for a professional to guide them in making their decisions.

"Sure, some are influenced by glitzy advertising in the media and check out the dealers of a specific brand," Kahn continued. "But what it all comes down to is how well that dealer meets their service needs and is able to explain what those needs are. Yes, we all represent specific manufacturers and that is where the similarity ends. We all have our own methods of presenting what we believe to be the ultimate in customer service.

"In the end, it isn't the big box that defeats us; it our own neglect of offering our most precious product: customer service."

"First of all you, have to sell your company and the services and solutions you have to offer," said Scott Getzschman of Getzschman Heating & Sheet Metal/Service Experts, Fremont, Neb. "If your focus is only on box sales, you will have a difficult time being successful over the next few years. A company providing whole-house solutions to a customer's problems will be further ahead than those trying to just sell equipment.

"We are in the people-pleasing business with outstanding customer service. The big box companies will never be able to provide that service."

"There is nothing holding back the big boxes and manufacturers from turning residential A/C equipment into a commodity," said Todd Morgan of Comprehensive Energy Service Inc., Altamonte Springs, Fla. "The personal computer industry evolved relatively quickly into a plug-and-play commodity.

"The major HVAC DDC manufacturers changed the way they do business as the early programming-intensive DDC controls became more plug and play.

"The HVAC contractors had better be focusing on where their niche market or service is going to be as the big boxes become a force in the marketplace. If we don't have anything to differentiate us from our existing and new competitors we end up in a price cutting commodity market."

New Consultants Speak Up

Two new contractor consultants, Kevin Comerford and Vince DiFilippo (see sidebar below) added their voices to the subject.

"If we bury our heads in the sand and believe that the big box stores don't mean business, shame on us," said Comerford, the owner of Service Champions, San Ramon, Calif. "They are in our business and they are figuring out our business as we speak. Sure, they are making mistakes and it may be a cumbersome process right now with all their paperwork, but I do believe they will become more efficient and more effective.

"It is more important than ever to tie our clients to our companies through an ongoing maintenance program. The maintenance program must be more than it has been in the past. In the past we would give them two visits a year, a reminder call, and offer priority service or a discount on repairs.

"We have to still do that stuff, but we have to do more. That more includes consistent non-selling communication to the maintenance clients. We keep them informed of things to do prior to the winter/summer. Send them gifts in the mail (i.e., calendar at year's end, flags at 4th of July, etc.) so that we stay at the top of their mind and the good feelings they have about us extend beyond the cheap price one of these big box stores or a cheap competitor will offer them.

"We will lose if we fail to build more of a personal relationship with our existing clients."

"People like the service they get when buying," said DiFilippo, owner of DiFilippo's Service Co. in Paoli, Pa. "Granted, people will still buy based on price and they will still shop for the cheapest price on eBay or the Net. Let me give you an example.

"Take the same new HVAC system installed in two identical homes and installed with the same components. One was installed by a qualified, NATE-certified, ACCA [Air Conditioning Contractors of America] member trained in the most up-to-date technology and diagnostics. The other was installed by a fly-by-night guy working out of his station wagon.

"The ‘good' system will have fewer problems, be more efficient, and last longer than the other system. Homeowners now realize that, and they know that you really do get what you pay for. They want to be hand held and taught the difference between a 10-SEER and a 16-SEER system. The top, educated, profitable contractors know - we don't just sell boxes!"

Sidebar: Meet The Newest Contractor Consultants

Kevin Comerford began his HVAC career in 1988, working in his family-owned residential replacement and service business, Comerford's Heating and Air Conditioning (Pleasanton, Calif.), which he took over as general manager in 1995. In 1996, Comerford became a founding member of Service Experts; his company was one of the 11 founding firms. He was promoted to a district manager position with Service Experts after they were acquired by Lennox in 2000, and was responsible for $70 million in sales from the 10 companies he oversaw.

In 2003, Comerford went out on his own and started Service Champions, a solely residential replacement and service business based in San Ramon, Calif. In its first year the company did $3.5 million in sales at a 10-percent pretax profit, Comerford said.

Vince DiFilippo started in the HVAC industry at age 12, working for his brothers' small HVAC business. In 1989 he purchased the service division and became the owner of DiFilippo's Service Co., Inc., in Paoli, Pa.

DiFilippo's Service performs residential service only, no installations. The company's 2003 sales were more than $700,000 from four service technicians, plus Vince when things were busy.

The company has won numerous awards, including "Small Business of the Year" from the Main Line Chamber of Commerce, 1999 ACCA Residential Excellence Award, 2000 "Best Contractor to Work For" by The News, and Main Line Life newspaper 2002 "Best HVAC Company."

DiFilippo is also chief of the Radnor Fire Company, where he has been a volunteer firefighter for 23 years. His wife, Laura, is an ACCA National Board Member.

Publication date: 05/03/2004

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