PALM SPRINGS, Calif. — John Garofalo believes that in today’s fast-paced world, contractors need to focus their efforts on those areas that produce double-digit profits. He asserts that in order to run a profitable residential service business, selling service agreements is essential.

“You buy into the need for having a service agreement,” said Garofalo, a partner with Callahan/Roach and Garofalo, during his seminar titled “Profitable Residential Service: 10 Critical Keys to Success” at the 2003 Air Conditioning Contractors of America (ACCA) convention.

“Your technicians need to wear professional uniforms, shoe covers, have dropcloths, latex gloves in the home, and a photo ID badge. They [customers] need to see how much value we deliver, so that whatever we are charging, they’re feeling like they got more value than they paid for.”

In his estimation, for every 100 demand service calls made, a technician should sell 15 service agreements. In order to get this 15 percent conversion benchmark, Garofalo said contractors must train technicians to sell agreements, in addition to providing incentives for them.

“And I don’t mean training in a nice, air conditioned office,” he said. “I mean, you get yourself in the truck, you go up in the attic, and you stay there for three hours in a tuneup. And then you crawl out of that attic, wet from your head to your feet, and then you sell that agreement to Mr. Homeowner. … That’s where training takes place. If I can do it, I’ve eliminated the obstacle of you not doing it. That’s ethical training. It builds self-esteem.”

Get Techs Involved

In regard to increasing revenue, Garofalo estimated that each service truck should generate $150,000 in replacement equipment annually. “Analyze the performance of your low revenue producers,” he encouraged. “Change the mix of calls for the technicians in question.”

He also encouraged contractors to increase the average service ticket. One way to do that, he said, is by providing diagnostics, as opposed to troubleshooting.

“When you are going out in the summer time, you do a diagnostics on the entire cooling system,” he said. “So you are checking the condensing unit, you are checking the thermostat, and you are checking the evaporator coil. What you are doing is diagnosing the systems.”

Customers “like it better” than troubleshooting, said Garofalo.

In his estimation, a well-run service department should be able to produce gross margins of 50 percent to 60 percent — sometimes even higher. This means keeping track of revenue produced by technicians.

“If you go a whole month without looking at what your technician did, that’s disaster,” he said. “You wouldn’t let your salesperson go a month without seeing what he’s doing, would you? You need to generate work and not sit there.”

In order to increase profits, Garofalo stressed that contractors reduce the cost of generating a service call.

“You need to track your advertising and marketing costs to produce service work,” he said, pointing out the value of “horizontal” marketing — i.e., door hangers, yard signs, and community activities. “Doing good in the community will produce good, as well as goodwill.”

He also suggested hosting consumer focus groups to “let the customer tell you what they want from you and what they will accept.”

“If you are counting on the Yellow Pages for service work, remember that most consumers shop price in the Yellow Pages,” he warned.

Reduce Those Callbacks

Another way to increase profits, according to Garofalo, is to reduce unapplied labor — “a labor expense that does not produce revenue” — by 2 percent.

“All the paperwork that your people are doing, it ought to be for either a service job or an installation job,” he said. “You shouldn’t be doing paperwork this morning for the work you did yesterday on the clock. It should not be [done] the morning after. The next morning they do not remember how much refrigerant they used. They don’t remember that $6 part.”

At the same time, Garofalo hinted he could spend a month discussing another contractor nightmare: callbacks. If 5 percent of these calls could be erased from the books, look at the profit you’d gain, he said.

“Identify the causes of the callbacks,” he stressed. “There are really only two reasons: attitude and skill. If the causes are technical skill problems, set up specific mandatory training to remediate the deficiencies. Above all, monitor the results.”

He encouraged contractors to produce replacement leads, too.

“This must be a budgeted item, rather than a hope that it gets done,” he said. “Personnel must have activity goals for which they are held accountable. Can your sales department count on the service department to produce the leads necessary? It has to happen.”

To accomplish that end, Garofalo said communication skills are critical. “Being able to convince homeowners to replace a system instead of making major repairs is crucial,” he said. “Remember that technicians love to fix things, even when it is not ethical. They have to know it is perfectly OK to suggest replacement, when warranted.”

To help the cause along, Garofalo suggested having incentive programs in place for technicians. In the end, to avoid problems and lost dollars, Garofalo asked that contractors take care of their own employees.

“You must provide an environment of trust, respect, appreciation, and feedback in the company,” he said. “What is the attitude in your company? When was the last time you surveyed the internal customers? ... You have to do this. You don’t necessarily have a stack of resumes to choose from, do you?”

Rewarding people, he said, usually pays big dividends. “And not just with money,” he said. “A person will stay with a company that pays less and has fewer benefits if the person that they report directly to is a super person.”

Sidebar: Garofalo’s Top 10 Tips

Here are John Garofalo’s keys to having a profitable residential service business:

1. Control raw labor costs.

2. Control parts and material costs.

3. Sell service agreements.

4. Increase the revenue per truck.

5. Increase the average service invoice.

6. Reduce the cost of generating a service call.

7. Reduce unapplied labor.

8. Eliminate callbacks.

9. Produce replacement leads.

10. Reduce technician turnover.

Publication date: 04/07/2003