7 Third-party Risks to Your Future
The riskiest move in business is ceding control to a third party. Sometimes it works out in the short term, but never without a sword of Damocles hanging over the company and its owner.
Most business owners started their companies, in part, because they wanted to control their own destinies. Otherwise, they might as well work for someone else and avoid the hassles and risks of business ownership. Yet, many HVAC contractors sacrifice control to pursue short-term gains. Ironically, not only is business risk still present, it grows. Here are seven common ways contractors risk their futures by giving control to third parties.
THE RISKS OF THIRD-PARTY LEADS
Control lead flow and you control a company’s oxygen. Turning to a third party for leads is tantamount to becoming hooked on drugs. It feels good at first, but withdrawal is a bear. All may seem good from the addict’s perspective until the supplier turns off the lead flow or starts ratcheting up the demands on the contractor.
The Big Box Risk — Contractors give up lead control when they allow too much business to flow through big-box retailers. A new manager may have a longstanding relationship with a different contractor and cut off the lead flow virtually overnight. If the majority of the contractor’s business was driven by the retailer, the contractor is likely done. For this reason, it is critically important that contractors engaging with big-box retail make a concerted effort to ramp-up marketing efforts outside of the big box. Build the rest of the business up to the point where the big box is providing no more than 30 percent of revenue. A loss of 30 percent may be crippling, but it is survivable.
The Home Warranty Risk — Likewise, contractors can become too dependent on home warranty companies. The risk is not from doing business with the warranty companies, it’s from not converting warranty customers into future service and replacement customers. The risk is also becoming a lazy marketer, or worse, not marketing at all. Warranty business can work if contractors’ technicians are skilled at letting consumers know what is and is not covered. Even then, it’s important to keep the majority of service calls flowing from the contractor’s own marketing efforts.
The Internet Play Risk — A new and relatively seductive way contractors are giving up control of their leads is by allowing someone else to market for them using the internet and then trying to dictate installation pricing. It appeals to contractors that just want the work. Yet, contractors should always perform their own internet marketing that features their own brands. If this seems too daunting, there are a number of well-established companies that will provide contractors with custom websites built from industry templates that make such services surprisingly affordable.
The Concentration of Sales Risk — The final way contractors cede lead control is by allowing one customer to become the dominant source of business. This has been the bane of many residential new construction contractors. They became too dependent on one homebuilder who went under, switched subs after getting bought out, etc. In an instant, the majority of the contractor’s business was wiped away.
All of these examples result in contractors essentially becoming subcontractors to others. It may seem obvious in the case of a homebuilder and less obvious in the case of an internet play, but they’re all the same. Letting someone else control lead flow is the same as giving someone else control of the business’s lifespan. It may work well for a time, but eventually the company with the power (i.e., the company controlling lead flow) will start squeezing the contractor by dictating less favorable terms and pricing or simply pull the business altogether. Even if the guy feeding leads is the contractor’s best boyhood pal, he might execute his exit strategy and leave the contractor dealing with new, much more aggressive owners.
THE RISKS OF THIRD-PARTY BRANDS
When a contractor starts a business, the company’s brand is worthless. It takes time and effort to build a brand. Most contractors know their brands carry little initial value, so they try to piggyback manufacturer brands or rent a brand.
The Manufacturer Brand Risk — There is nothing wrong with contractors identifying the brands they sell, especially if co-op advertising allows the contractor to advertise more. The risk occurs when a contractor’s marketing and sales professionals over-emphasize the manufacturer brand at the expense of the contractor’s brand so that preference is built for one and not the other. This makes the contractor a commodity installer and leads to consumer price shopping for a contractor willing to install the preferred brand of equipment for less. Contractors should always emphasize their company brand as the most important, noting that all of the equipment is a collection of parts until the contractor field engineers and assembles it into a comfort system. Even the best equipment will make a home miserable if it is installed poorly and the contractor does not stay around to honor warranties.
The Licensed Brand Risk — Some contractors rent a brand by paying to license a brand name owned by others. The risk is the contractor does not own the brand. If the contractor builds up the brand in his market, he is building brand equity that someone else owns. If the relationship goes sour, the brand and all of the brand equity the contractor invested can be given to a competitor, just like that. Contractors should never build a brand they do not own exclusively or cannot license in perpetuity, including successors. Even if the license is forever, they should check to ensure the brand is trademarked. Unscrupulous operators in the HVAC industry have been known to license brands for a fee they did not own and have not trademarked.
The Franchise Brand Risk — When a contractor buys an established franchise with a well-known brand, it can be an instant way to take advantage of brand equity (at least as long as the franchise agreement lasts). However, like licensed brands, the franchise brand may not have any equity in a given market. Franchise brands, like all other brands, need to be built over time. Usually, they are built by their franchisees. Before investing in a franchise, invest in some marketing research to see if the franchise brand has any consumer awareness. The franchise may still make sense without brand equity, but the contractor owes it to himself to know what he’s buying. And while that franchise agreement may seem lengthy, a decade can pass in a flash. Fail to renew the franchise agreement, as many contractors do, and the contractor essentially starts over from a branding perspective.
Publication date: 11/7/2016