In the first installment of this two-part series, we examined two of the five essentials for HVACR contractor success, which involved employee retention and training. In Part 2, we will explore some of the other essentials necessary to maintain profitability and market share: overhead, presentation, and lead generation.
RECOUP ALL OVERHEAD IN PRICESI have seen HVACR contractor clients of mine that have an annual sales volume as low as $750,000 and others with $25 million, each who struggle with determining their price structure. Some simply rely on what competitors charge and try to be competitive, and others have intricate price structures that the salespeople seldom get right and even the sales manager gets wrong. It is for this reason I always instruct my clients on the Generally Accepted Accounting Practice (GAAP). This method is straightforward and leaves very little to guess work.
The GAAP method simply asks one to determine total direct costs and then apply overhead, profit, and commission. Here is a breakdown:
• Total direct costs = Equipment, material, and labor
• Overhead = All other business costs
• Profit = Whatever you want to earn
• Commission = What you pay the salespeople
Equipment and material costs are fairly straightforward; you have these from your supplier. Labor requires some calculated guesswork based on experience to determine the number of hours involved and you apply individual labor rates accordingly. Together these determine your total direct costs. These three items are usually at the top of your income statement.
Overhead is usually one of the issues that most contractors have difficulty finding on the income statement, as most accountants do not spell it out as such. However, it simply is all of the other line items that must be subtracted from gross sales or gross revenue (depending on how the accountant labels them) to determine profit (gross revenue).
A word of caution: Most accountants will include sales commission with overhead, so when you determine the percent of overhead, you must subtract commissions from that percent and apply it to your sales price as the last item. For example:
• Total direct costs = $1,500.00
• Overhead at 33 percent = $738.80
• Profit (assumed) 10 percent = $248.76
• Commission at 10 percent = $276.40
• Sales Price = $2,763.96
As you can see, this is not a complicated pricing method. However, it does require your analysis of the income statement to ensure that all overhead is captured. I advise my clients to view overhead just like any other costs. No one would estimate a replacement system without including the cost of equipment, which is usually checked from the supplier’s price sheets. So why not check overhead on your income statement and include it in your selling price? Not doing so is one of the greatest reasons for failure.
PROPER POSITIONING OF PRODUCT OFFERINGSProperly positioning your product offerings is one of the best strategic steps a contractor can make to generate the greatest profit dollars for his company. If you listed each of the gas furnaces a manufacturer offered they might look like the following:
• 80 percent AFUE Standard Furnace
• 80 percent AFUE Two-Stage Furnace
• 80 percent AFUE Two-Stage, Variable-Speed
• 90 percent AFUE Standard Furnace
• 90 percent AFUE Two-Stage Furnace
• 90 percent AFUE Two-Stage, Variable-Speed
It has been statistically proven that consumers will typically not make a decision, on the spot, when given more than three options. So how can you improve first time closing if you offer so many choices? Why not recognize that the 80 percent AFUE standard furnace is the minimum as mandated by the federal government and assume that no one will buy it! Why not position your three choices to generate the highest profit dollars for you and get the sale on the spot? Example:
• 80 percent AFUE Two-Stage: Choice No. 1
• 80 percent AFUE Two-Stage, Variable-Speed: Choice No. 2
• 90 percent AFUE Two Stage, Variable-Speed: Choice No. 3
Often times my clients ask, “Why move directly to the 90 percent AFUE two-stage, variable speed?” Well, why cloud the issue? If the homeowner is really interested in the 90 percent AFUE furnace, then his buying preferences probably indicate that he is an “upscale” buyer. Do you not think he would prefer the benefits of having two stage and variable speed as well? This same philosophy would apply to air conditioners and heat pumps.
Additionally, I ask clients to look at pricing higher-efficient products with greater profit margins. Consider that you are no longer in the wholesale contracting business when you are selling to homeowners; you are now in the retail business. Retailers position products and prices when developing product offerings, so why shouldn’t you?
CONSISTENT LEAD GENERATIONIn Part 1 of this series, we discussed 12 leads per week per sales person, which is 48 a month or 576 leads annually. Generating this volume of leads consistently is a challenge and can only be accomplished with a great deal of attention to marketing.
First, let us clear up something. Marketing includes advertising and advertising alone is not marketing. One way to distinguish the difference is to ask yourself if you would send replacement system flyers to recently completed new home projects? Obviously that makes no sense, as a new homeowner would not be in the market to replace his heating/air conditioning system.
It might be a good market to target for IAQ products but not a new furnace. That is what marketing is all about, targeting people who need your services and keeping your company in front of them. So marketing is one important step in lead generation.
Advertising is placing an offer in front of your targeted market and hopefully encouraging the need for immediate action. Yellow Pages ads are best used to generate service business not replacement sales. If you asked the next 10 prospects that called you, “Where did you get our number?” the response would most likely be “From the Yellow Pages.” But if they were looking to replace their furnace and/or air conditioning system and you asked the same question, you might get the same answer.
That is why you must ask a second question, “Where did you hear about our company?” You might find that they looked your name up in the Yellow Pages to find your number because someone, or hopefully your targeted advertisement, prompted them to look up your phone number. The point here is to start thinking smarter about your advertising efforts and you might get closer to 576 leads a year per salesperson.
Another area, often overlooked by most HVACR contractors, is your service personnel. These people are your most creditable asset when they are in front of prospects and they are in front of more prospects than anyone else, including your advertising efforts, but have you trained them to bring in leads? Do they understand the benefits to the homeowner of replacing his 12-year-old furnace rather than replacing the heat exchanger? Does he understand the same philosophy - replacing his 12-year-old air conditioner rather than replacing just the compressor? More importantly, does the service technician really believe it is in the best interest of the homeowner and not just a way to get another lead?
You cannot simply tell a technician these things are true, you must show them, through training sessions, why this is true. Have you established a compensation program for all the technicians so that they may help the company prosper and make more money for themselves?
Statistics have proven that the typical service technician who makes just seven service calls a day (not warranty calls) can bring in two leads a day. If you just have three service technicians, that is six leads a day, 30 leads a week, 120 leads a month or 1,440 leads a year.
These three essentials, plus the two previously discussed are almost always the primary needs of my clients even when they do not realize that to be the case. Once I have shared this information with my clients, they invariably see immediate results to their bottom line. So take it from the voice of experience and start looking at how your company addresses these essentials.