Insulate Your Business from Risk
Know your lead sources and never have too many eggs in one basket
There are two general types of leads in the HVACR industry, those that someone outside of your company generates for you (third-party leads) and those your company generates for itself (in-house leads). Both types can be excellent sources of short-term revenue and can successfully address current budget shortfalls and cash-flow constraints. However, it’s important to realize that in-house leads are far more valuable than third-party leads in terms of reducing risk, building a stream of recurring revenue, increasing the strength and quality of your customer database, and increasing the value of your business.
In-house leads are generated through your own direct marketing efforts, which can take an almost infinite number of forms. Third-party leads are leads that come your way through resources other than your own. A great example of a third-party lead is a lead generated through a partnership with a big-box store, so I will use that as the example for the remainder of this article, even though there are several others. It’s a great example because nearly every large big-box retailer or wholesaler is now offering repair and installation of HVAC equipment through their store, which is almost always sub-contracted to a local HVAC contractor like you.
I am quite sure that many of the readers of the ACHR NEWS currently engage in or have engaged in the provision of repair or installation services through a big-box store, and I’m not suggesting, even for a moment, this is a bad idea or poor business decision. To the contrary, it’s an excellent way to augment your business and acquire leads quickly, some of which will undoubtedly close and contribute to top- and bottom-line growth if your finances are managed correctly.
However, in order to reduce overall risk to your business, it must be said that you should proceed with caution in regard to what percentage of your business you allow third-party leads to account for. I recommend you make every effort to limit revenue driven by an outside program to 20 percent of your business and in no case allow it to become more than 30 percent. The primary reason for this is that third parties can change their business models whenever and however they like. Here are a couple of questions to consider:
What’s to say that big-box store X will be doing business with the same equipment manufacturer(s) tomorrow as it is today? If you take just a cursory look at the programs that are out there today with respect to which big-box stores are working with which manufacturers, you’ll see that many changes have taken place in many relationships over the past couple of years.
What’s to say that big-box store X will be in the HVAC business at all tomorrow? Any store at any time can decide that the provision of HVAC services no longer fits into its business model. Where will that leave your company if the majority of your business is derived from a program that was just scrapped?
Who is the customer really calling? Don’t make the mistake of automatically assuming that satisfied customers you acquired through a big-box affiliate are now automatically loyal to you and your brand, because chances are they are not. Remember that these customers are people who went outside of the traditional channels when selecting a company to perform HVAC work in their homes in the first place. They went with a big-box store because they trust that big-box store and believe it will be there for them if you are not. And it will, and that is the point.
Now, top-notch HVAC companies can turn any lead into a long-term win for their customers by converting the customer into a long-term customer. But, know it doesn’t come easy, and this approach requires excellence at every level so the customer has a compelling reason to think of you as the industry authority instead of the big-box store. Taking it for granted is a mistake.
Keeping the percentage of your business that is derived from a third-party program at or near 20 percent or less should sufficiently insulate you from the risk of losing your business if and when the program ceases to exist or ceases to use your company when you’re least expecting it. How you limit this percentage is absolutely critical, and there’s a right way to do it and a wrong way to do it if you are in growth mode.
Please do not take away from this article that I am encouraging you to look at the amount of business you do today and limit your involvement in third-party programs to 20 percent and stop there. In other words, if you’re doing $5 million a year in total revenue, don’t limit the amount of third-party program work you are willing to accept to just $1 million, unless you are happy with the size of your company as it is, don’t want to grow now, and don’t plan to grow in the future. Instead, make sure you budget no less than 10 percent of the net revenue (after the big-box takes its cut) that you acquire through big-box jobs to marketing your brand to generate your own leads. With this approach, you’ll be using the big-box program successfully in the short term and building your own business in the long term. Here’s an example:
A $10,000 installation minus $1,000 in big-box fees (estimate based on an industry average) equals $9,000 in net revenue. No less than $900 of this ticket needs to go directly to your marketing fund so you can grow your non-third-party business at a rate that outpaces your third-party business. When you start to take the cost of equipment and material, labor, overhead, and, most importantly, your profit from the remaining $8,100, you’ll see what a delicate balance this becomes and how important it is to price these jobs correctly in the first place.
This is where knowing your true cost per lead (excluding third-party leads) and your closing percentage and average tickets on those leads is critical. Let’s assume your cost per lead is only $300. This job would provide you with three additional leads. If you’re closing at 33 percent, you can count on selling only one job from this $900. It’s absolutely essential to understand these numbers.
Please note, I’m not advocating that this be the only way you fund your marketing budget if you want to grow. Companies in growth mode should be spending somewhere in the neighborhood of 10 percent of all revenue on advertising and marketing. I’m simply making the point that revenue generated through third parties should not be exempt from this discipline. In other words, you should never say, “This job through the big-box X store did not cost me anything [because it did], therefore the job is immune from the same budgetary discipline that I apply across my non-big-box leads [because it’s not].” Taking that approach will ensure your third-party leads will start to account for a higher and higher percentage of your business, putting you at great risk by having too many of your eggs in one basket.
You’re probably thinking that the money you already spent to convert that third-party lead into booked business was advertising expense (the big-box fee, cost of lead generators, etc.), and it was. But, you still need to take an additional 10 percent out to grow your in-house business. Again, you’ll quickly arrive at the conclusion that pricing these types of jobs correctly on the front end is absolutely critical.
In closing, please always keep your finger on the pulse of how your business is growing and pay close attention to what percentage of your overall business each lead type is driving. Allowing too much of your business to be placed in someone else’s hands is a very dangerous proposition.
Publication date: 11/16/2015