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Murphy's Law: Spiraling Out of Business

July 26, 2010
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Mike Murphy

Reports from several of The NEWS’ sources in the industry indicate that the Summer of 2010 is shaping up to be a fairly good one. Some contractors said they are having the best year they have ever had, distributors’ inventory levels are up, and manufacturers are suggesting that business could increase by 10 percent or more - some citing up to 30 percent gains. That is a tremendous change since early this year when “flat” was the optimistic word on the tip of everybody’s tongue.

So, what is causing such a nice change in current sales? Perhaps it is a swing from the lopsided repair trend that began in 2009, back to a more normal mix of repair and replacement.

Service has always been the bread and butter of many contracting companies, and the strong glide into more repair work during the early days of the recession was certainly to be expected as more owners found ways to choke a few more months out of some already gasping HVAC systems. Still, there are just as many contractors that swear they cannot make any profit in service, and are strictly construction companies. A betting man might wager that some of these construction-oriented businesses found their way into some service and repair work during the last couple of years.

Whatever the reason, thank goodness for the service work that may have kept a lot of contracting companies in business of late - yet, there has been news of HVAC companies being forced to close their doors in the early part of this summer.

Yes, times are tough for some, even amid the recent good news that industry sales are beginning to climb.

Why the dichotomy? How can things seemingly be getting better for some and worse for others?

LOWER PRICES, SLOW GROWTH

Just as there are those companies that make money selling service and those that make money selling construction, there are those that can lose money at almost anything they do. It is easy to accomplish once the decision to continue lowering prices becomes the primary business strategy.

The story is an old one: New construction is down; replacement business gets flooded with low-ball pricing; everybody suffers. Once the dust settles in a market that has been the victim of too much price pressure, two things usually happen: 1) Contractors who were making good profits lose some business to low-ball practices, and have to fight to get pricing back up to normal levels once the low-ballers move out of the market. 2) Some of the low-balling companies go out of business.

Some of you are thinking, “I’m low-priced and offer good value, and I’m not going out of business.” That may be true to an extent. There is obviously a place for a low-price strategy, or companies like Wal-Mart wouldn’t stay in business, would they? However, consider this example: My local Wal-Mart expanded into a Superstore concept, meaning that it now sells groceries in addition to an assortment of department store offerings. Bananas were going for 48 cents per pound everywhere else in town. Wal-Mart dropped prices to 38 cents per pound during the grand opening of the Superstore, and maintained that ridiculous price for nearly two months. Within six months bananas cost 47-49 cents per pound everywhere in town - including Wal-Mart. Yes, Wal-Mart had a low-price strategy, and still does for the most part. But, the company knows how to make money when and where it can.

YOU MIGHT BE GOING OUT OF BUSINESS

A low-price strategy can be a viable option in the HVAC replacement market. However, continually lowering prices can be the death knell. Becoming the lowest priced option in the neighborhood while everyone around you is complaining about your prices might be more than just sour grapes from your competitors. Maybe they are trying to tell you something.

If your primary business strategy is to cut the price of everyone, every time - to paraphrase the words of comedian (You Might be a Redneck) Jeff Foxworthy, - you might be going out of business.

If you wake up wondering where you are going to buy on credit today - you might be going out of business.

If you find yourself standing by your van violently shaking the hose at the gasoline station - you might be going out of business.

If you are looking for expansion valve coupons in the newspaper - you might be going out of business.

If you are asking the guy at the counter with bloodshot eyes if R-410A is a new tire size - you might be going out of business.

If the window shaker at your mother’s house is broken and she doesn’t know who to call - you might be going out of business.

MURPHY’S LAW: If your primary business strategy is to cut the price of everyone, every time - you might be in the wrong business.

Publication date: 07/26/2010
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