Why Are You Earning Below The Industry Standard Profit For Hvac Businesses?
You can see your HVAC business is growing. You’re hiring more people, you’re getting more customers, you’re spending more money on tools but one thing’s missing: profit. Most HVAC business owners decided to embark on the journey of being an entrepreneur both for the freedom it entailed and the financial independence it promised. With industry standard profit margin for HVAC hovering between $50 000 and several millions, it looked like entrepreneurship would deliver. Except it hasn’t… yet.
Could there be some things that are holding you back when it comes to running your HVAC business? Maybe it’s one of the following:
Are you curious to see how you can overcome these hurdles and begin to make the big bucks? Let’s get started!
What makes your business better than the competition? Why are they earning way more than the industry standard profit margin for HVAC? If you answered with things like number of technicians, years of experience, or even quality of tools & workmanship, then you’ve got one reason right there for earning less than the industry standard profit margin. However, your answers are perfectly logical and do contribute to what makes you stand out from the crowd but they’re not the most important thing.
Do you know what makes a customer choose an HVAC business over another? Price would be the natural answer but, according to a Walker report, that’s not it. Rather, the key decision factor in 2020 is something you should’ve seen coming miles away: customer experience. So the right question to ask yourself when you see your profit margins slipping, is how does the experience you offer differ from what your competitors can do? How does it outperform theirs?
A premium customer experience is what allows you to set prices that will make your business thrive, not simply survive.
Understanding your customers and anticipating their needs is a lot more valuable than simply fixing their issue. More often than not, customers won’t be able to tell apart an excellent HVAC install from an average one, but they’ll definitely remember the company that sent them service reminders exactly when their filters were causing their unit to use up more energy.
Since we’re on the topic of prices: most business owners, regardless of experience, engage in a fight to the bottom when it comes to what they should charge for their HVAC services. This stems from not having an accurate overview of their overheads and what these include (it’s not just labor costs and spare parts) and from the fact that they’re not aware of which parts of the business are bleeding money. Not all jobs are the same. You might be doing more service work than replacement or specialize in industrial fittings with the occasional residential work but it’s rare that all types of jobs bring in the same amount of profit.
Your customers should also inform your decisions when it comes to ordering stock, hiring, marketing, and other business related activities. There’s no point in setting prices to match the competitor’s; you don’t know the price of their materials or what they pay their techs, just like you don’t know how much they’re winning or losing. But if you compartmentalize your business, calculate exactly how much each type of service costs you, then decide how much your profit should be (the industry standard profit margin for HVAC is approx. %10) and add that to obtain the final price, you’ll always end up in the green and the customers that will pay for your service are the ones worth keeping around.
Imagine an HVAC technician goes to a repair job, diagnoses the issues, then realizes they don’t have the spare part they need in the truck. They call the office where someone checks a spreadsheet (or worse, a paper list) and lets them know that they don’t have it in the warehouse either but that they’ll place a purchase order and have it in 2-3 business days. The tech informs the customer, they’re not happy but what can they do (except call another HVAC company in those 2-3 business days) then goes back to the office only to find that the part they needed was in fact in stock but someone had forgotten to write it down.
Sometimes it’s overstock (which takes up pricey storage space) or understock (which annoys customers to no end) or even damaged stock that rattles around in a truck for weeks, but the end result of this scenario is familiar to any owner or manager and one of the reasons they’re not making anything close to the industry standard profit margin for HVAC specialists like them.
It’s the same situation with jobs that are scheduled whenever there’s an available tech instead of using a digital tool to judge which route is more efficient when it comes to fuel consumption and time spent on the road (since that time is a billable resource). You can read more about the variety of field service business money leaks that can put your HVAC business in the ground but the general consensus is that more often than not, it’s the little costs you brush away under the rug that will hammer the final nail in your coffin.
And the truth of the matter is that you don’t even have a choice about it. You might be thinking it’s a sign of a growing business that you need to keep hiring admin and office staff but if said office staff is outnumbering your techs, that’s not growth. Your technicians are the ones that put tangible money in the bank. Your office staff is also vital: they make sure the technicians have their schedules full, customers are happy and kept up-to-date, and the business is fully stocked when it comes to parts and tools.
This is a valuable service but if you want to make anything close to the industry standard profit margin for HVAC, you’ll want to have a ratio of 1 admin for every 5 techs – if the admin is fairly new to the job. As they get more experienced, 1:7 would be a recipe for success. But the only way to do this is with the help of digital tools and a solid customer database, connected to a schedule optimization software.
On the same topic of hiring the wrong people is a follow-up to our first point on offering the best customer experience: you need to hire with this value in mind. You can teach an employee skills but you can’t teach them personality. Hiring with soft skills in mind is just as important – if not more – than experience. No HVAC installation will ever be good enough to make up for a rude technician, as well as poor customer service on the phone.
A lot of HVAC business owners and managers have either worked their way up from technicians or started their business after being on the field which means they know the industry in and out, they know how to manage other techs, and are experienced in dealing with customers.
No one would blame them for having little patience to sit down every quarter and audit the business from top to bottom, starting with every sheet of paper bought and paid for with company funds and down to every truck. Then list every customer, the type of service provided, the cost, the profit, the time it took to get it done, and so on and so forth. Every 3 months.
This is what running your own HVAC business means. There’s rarely a lot of time left for anything else and it’s simply part of the entrepreneurial journey. You don’t need an MBA to know that if you can’t measure it, you can’t manage it. If you don’t know your business processes in and out, with the exact numbers, how can you hope to improve them?
For example, if you looked at your database and separated your new customers from your returning customers in the last quarter and realized that the latter makes up only 5% of your business, you’d deduce that you need to improve your customer retention rate. A good manager will always know that acquiring new customers can be 5 times more expensive than retaining existing ones then they’ll act on it with the confidence solid data offers.
Cash flow is a fickle thing and if you have to keep the jobs coming constantly just to make sure you can pay your own bills, then you don’t have a healthy one. This can be due to any number of things, from the aforementioned misunderstanding of overheads and profit numbers, to inventory management errors, to the very way you’re invoicing. Late invoices mean late payments and there are plenty of customers who like to pretend that they’ve “forgotten” about paying, much like you did about requesting payment. Not to mention errors on said invoices because the tech didn’t write down the parts they used, and we haven’t even started on the customers who simply refuse to pay for whatever reason.
These are all taking a bite out of your profit margins as you have to cover the costs somehow, and more often than not, it’s from your own pocket. So not only do you end up missing profit targets, but you’re in debt too. All this happens while customers keep calling which can make you think that things will get better with time – you’re working so money must come in at some point – but, as the business grows more chaotically, it will only get worse.
A solution to all these problems? Find out how an HVAC database can help!
The takeaway on the industry standard profit margin for HVAC
All in all, identifying the problem is only half of the job but if you know why you’re not making the industry standard profit margin for HVAC companies, you can get started on fixing the underlying issues. If any of the scenarios we mentioned hits close to home when it comes to your business, then you need to keep an eye out for next week’s article which holds the key to all these problems. Stay tuned and, in the meantime, check our free downloadable 2020 guide to level up your business!