How to Maximize Your Annual Profits
In a nutshell, and I am paraphrasing, Drucker’s primary business mantra, “In any business venture, always direct your total business resources to the most profitable business opportunities first.” It is to this very point that I direct my comments of this article.
Over a period from 1997-99, I was fortunate to be able to carefully review over 250 of the best independent hvac contractors in the United States in my acquisition management capacity with two national hvac consolidators. I was able to observe in detail what ingredients define the most successful companies in this industry.
Service Sales Vs. ReplacementsThe focus and use of a company’s resources should be used primarily to exploit opportunity. The key question is not how to do things right, but how to find the right things to do. Then, the goal is to focus efforts and resources on the right things to do.
There is a built-in assumption here that the better hvac contractors are doing quality work. Unless hvac contracting management consistently works on channeling efforts into revenue-producing activities, costs will have a tendency to allocate themselves by sliding into nothing-producing activities. Many refer to these activities as busywork.
Many times, the right questions are more important than the right answers. The key question in building a profitable business might be, “What is the simplest method that will give us the results we are looking for? And what are the simplest tools or techniques we can use in achieving the desired results?”
Another key question is, “If it costs as much to do the paperwork for a small order as it does for a large one, what orders should a company pursue to maximize the use of its resources?” This question begs another question specific to our industry: “Does it make more sense to allocate precious human resources (technicians and installers) to the concentration of equipment replacement sales or service sales?”
The average sales ticket in hvac service may only be $200, where the average sales ticket of a complete hvac system replacement for the “more profitable” contractors is about $5,500.
Almost every chief operating officer (coo) in this industry that I talk to just doesn’t get it. The coo’s typical business mantra is, “Cost control, cost control, cost control.”
How many successful businesses do you know that “cost cut” their way to prosperity? The best and most effective cost control is to focus resources on results.
Cost does not exist by itself. Cost is always incurred (at least as it relates to intent) for the sake of a result. What matters most, then, is not the absolute cost level but the ratio between efforts and their results. No matter how cheap or efficient an effort, it is waste (rather than cost) if it lacks results.
Now, let me articulate and outline the very compelling reasons why a greater emphasis and focus on hvac replacement sales is where the contractor needs to direct resources if s/he wants to maximize annual profit dollars. (By the way, this does not mean abandoning the service side of your business. Hold any possible knee-jerk curses or reactions until you finish reading this entire article.)
Typical Contractor MindsetFirst of all, I refer to the idea of a mindset not necessarily as a criticism, but more of an observation and traditional and historical reference. What’s more, to be fair, most contractors do not have a professional marketing background.
Traditionally, most hvac contractors start out as technicians. Many started 20 to 30 years ago when a technician thought he could make more money starting his own business and doing a better job than his former owner/ boss.
Simply put, contractors don’t pursue replacement business first, because they traditionally do not know how to generate replacement leads every week, year round. They have primarily relied on weather and consequent technician “breakdown” service calls to generate system replacement leads.
Because of the lack of a professional marketing background or the understanding of marketing, contractors for years have built their businesses very gradually and deliberately over many years by simply adding a new technician every year or so and relying on the Yellow Pages and weather to get the business. Worse yet, they also try to convert their technicians into professional equipment salesmen.
If we look at the charts accompanying this article, we can draw some strikingly clear conclusions.
First of all, let’s look at a company that decides to “utilize its resources” by focusing on service sales. Even though 99% of contractors today have a certain percentage of business in service and in replacement work, we are going to separate the categories for the purpose of clear comparison.
‘A’ Service CompanyWe will call the first company “A” Service Company in the comparison. Let’s assume that A generates about $110,000 in annual service revenue per residential service technician. After accounting for all of the typical (national average) costs associated with employing the services of one technician and associated overhead costs, A can expect an approximate annual profit of about $8,478 (7.7% net profit).
By reading these charts, you can see that after a three-year period, if A hires nine service technicians, it can expect to generate an additional annual profit of $76,302 per year on sales of $990,000 (using national averages of better contractors).
‘B’ Replacement CompanyWe will call the second company “B” Replacement Company in the comparison. Let’s assume that B generates about $750,000 in annual replacement revenue per residential retail salesperson-lead installer-helper team.
After accounting for all of the typical (national average) costs associated with employing the services of the salesperson-lead installer-helper and associated overhead costs, B can expect an approximate annual profit of about $77,570 (10% net profit).
By reading the charts, you can see that after a three-year period if B hires three salesperson-lead installer-helper teams, the company can expect to generate an additional annual profit of $232,710 per year on sales of $2,250,000 (using national averages of better contractors).
In both cases, you have nine persons employed. In B’s case, three of the nine persons are commissioned salespersons. But here is the difference:
A Service Company (nine employees) = $76,302 in annual profit.
B Replacement Company (nine employees) = $232,710 in annual profit.
There you have it — the Drucker Principle in action. B clearly is winning the game of profit (assuming their retail pricing is correct relative to costs and a 10% net profit margin). B is “directing its total business resources to the most profitable business opportunities first.”
The next question then, is, “How does B generate enough leads every week of the year, year round, with and/or without the help of weather to achieve $232,710 in profit dollars and a 3:1 profit dollar ratio advantage over A?”
The answer uses a proven, multi-pronged, targeted, weekly, incrementally affordable marketing-advertising effort to generate consistent weekly leads year round, which do not rely on weather or technician leads. How this is done will be disclosed in future articles in The News.
Pedersen is president of GroupStrata, LLC, an hvac contracting consulting firm. He can be reached at 770-614-4117.
Publication date: 01/29/2001