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A person with two paths to choose from, and one side has more money than the other.

Include Profit, You’re Worth It! | HVAC Pricing Series Part 6

Profit is not a four letter word, but loss is, and no one wants to lose money. That is why when you set the right price for almost any job it should include profit. Profit is the amount of money that you decide you want to make on a job. Profit is why you went into business in the first place: to make money to support your family and to be able to live the lifestyle you want to have. However, many HVAC dealers are afraid to set Right Prices in order to charge enough to make the profit they want to make and need to make.

So, how much profit is enough? Interestingly, the average profit for HVAC dealers in the $500,000 to $1,000,000 range is about 2.3% based on data provided by the banking institutes. Therefore, on a $4000 job the entire amount of profit comes to about $92; and, for a $600,000 HVAC business, the average yearly profit is only $13,800.  That is just the average, 50% of the businesses out there make LESS than that. These statistics are the main reason that HVAC dealers go out of business. If you look at all the literature published by the HVAC trade associations, magazines, consultants, and if you read the books published by successful HVAC owners you will find that most of these folks recommend that an HVAC business should strive for at least 10% profit, and preferably 15% profit.

Aren’t you worth at least a 15% profit? Absolutely! HVAC dealers are one of the few businesses that actually still come out to the home to perform their work. You show up in a valuable vehicle filled with thousands of dollars of parts and tools. You have the extensive training that is required to be able to perform your jobs. You are required to be in compliance with a multitude of governmental regulations. You are responsible for the comfort and health of the customers you serve. More importantly, you are responsible for the safety of your customers. After all, you install and service equipment that can potentially kill people in multitudes of ways. You tame fire, you harness gas, you deal with high pressure gases, you vent carbon monoxide, you harness water and you route electricity in lots of voltages and amperages. Then why do most HVAC dealers think they are not worth enough to enjoy a decent profit.

From the practical side, a 15% profit also allows the HVAC dealer to run a good, responsible business. By having enough profit, you can pay your employees a decent salary with decent benefits. You can offer health insurance, vacation, and sick leave. You can afford to train your employees better so they are more efficient, and so they can do a better job for your customers. Most importantly, a decent profit allows you to stay in business for years to come; thereby, providing your customers the long term value and commitment they deserve.  The great bonus is you get to have a decent income to provide for your families and to retire with a reasonable nest egg.

Now that you know you are worth 15%, let’s do the same math we did above but with this proper profit percentage. Now, if you do a $4000 job your profit will be $600. And if you have a $600,000 company, your profit for the year at 15% will be $90,000. You will finally be making the kind of profit necessary to have a responsible business with good salaries, benefits, and where your customers will feel your long term commitment to them.

In the next article, I’ll dive deeper into some tips on how to include profit, and how seasons can affect a profitable pricing structure. If you have any questions about how to include profits to your right price, let me know in the comments below. You can also contact cfm directly @cfmdistributors on Facebook and Twitter, or call us toll-free @ 1-800-322-9675.

A person with two paths to choose from, and one side has more money than the other.

Can You Change Your Costs | HVAC Pricing Series Part 5

If determining the right price for a specific job you are bidding requires that you know the direct costs and the overhead costs for that job, how do you find and figure those costs? And if those costs are too high, how easily can they be lowered?

We have already discovered, in a previous article over direct costs, that the costs you have because you get the job are fairly easy to determine. You already know the prices of the equipment, parts and materials you will use because those are published by your suppliers. You know the cost of the subcontractors you will use because they have already bid the job you are working on or have established prices for that work. You know what the charges are for permits and you have a pretty good idea what your freight costs will be. Once you gather all those direct costs together you can add them all up and determine a dollar amount for your actual direct costs for that potential job.

But, if you feel those costs are too high what can you do to lower them? In reality, not much. Sure, you can go to different suppliers and perhaps lower your equipment, parts and material costs. But how often can you do that? Certainly not on every job you bid, and changing suppliers comes with its own set of costs: familiarity with the part numbers, training on the equipment, new people and processes to figure out, new sales and technical people to work with. So eventually you choose your suppliers and stick with those suppliers because they offer the best all-around value for your company. This all leads to the fact that you have very little opportunity to change or reduce your direct costs. So, in summary, direct costs for a specific job are easy to determine and don’t change much.

Figuring your overhead costs for a specific job is a little more complicated. Overhead costs are basically all the other costs in your company that are not related to the actual jobs you get. But, you have to get jobs and the sales dollars those jobs provide in order to pay for the overhead costs (and the direct costs for that matter.) As we discussed before, in a previous article over overhead costs, it is fairly easy to determine the overhead costs for the entire company. They come from the invoices or bills you receive for such items as utilities and rents; or, they can be seen on the bills you pay for such things as taxes and governmental items.

And frankly, just like direct costs there is very little you can do as a business owner to reduce overhead costs; because, once you elect to have an overhead cost, it is difficult to reduce that cost. For example, if you decide to move out of your garage and rent a building for your company, then the new rent you are paying doesn’t go down as time goes on. In fact, it usually goes up. Or if you decide to hire a dispatcher for your company that expense doesn’t usually go down over time, it usually goes up (unless you decide to eliminate that position). Sure, you can diligently watch some expenses such as cell phones or warranty or unapplied labor and successfully manage (reduce or keep constant) those expenses, but normally overhead costs are constant and, if anything, are increasing every year.

So, as we have already stated, at the end of the year, all of your individual overhead costs are compiled into different categories and then added together to come up with a total amount of all the overhead costs. This compilation of all your overhead costs is usually shown on your financial statement as overhead costs, overhead expenses, or operating expenses. There is a specific dollar amount that is known and shown for these overhead costs. That amount is also shown as a percentage of your total yearly sales (also called revenue) for your company. For example, a company has total yearly sales of $300,000 and total yearly overhead costs of $90,000. $90,000 divided by $300,000 equals 30%. In this example, this company has overhead costs that are 30% of the total yearly sales.

It is this overhead cost percentage that will be used in the mathematical formula to determine the right price for a specific job. You use the overhead cost percentage to figure the right price because you know that the total overhead costs for your company are a percentage of the total sales. Therefore, the overhead costs for any one specific job have to be the same percentage as the overhead costs for ALL the jobs we have or will have (total yearly sales for the company.)

But, there are many companies that do not have financial statements. Therefore, those companies can’t determine the total overhead costs and the total overhead percentage they should use to figure the right price. So how is that overhead cost percentage determined? Over the years lots of data has been gathered from lots of different companies that give business owners a very good estimate of what the overhead cost percentage will be for most types of HVAC companies. The data shows that the overhead cost percentage is different for different types of activities within an HVAC company. Usually, the overhead percentage is highest for the service portion of an HVAC company, a little lower for the replacement portion, and lowest for the new construction portion. This is proven by the fact that the service portion of an HVAC business has a lot more overhead costs compared to the new construction portion: costs such as more warranty expense, more travel time, more unapplied labor, more vehicle expense.

The data also shows that these overhead cost percentages don’t change much for different companies. Therefore, based on the job you are pricing, you can use an average overhead cost percentage and be very close to accurate for your own company. Of course, it is always best to use your own overhead cost percentage when determining your right price for a specific job. Which makes it even more important for your company to have an accurate financial statement to be able to determine that overhead cost percentage. However, if that is not available for your company, then below are some average overhead cost percentages that can be used with confidence to determine your right price.

Service  40 to 45%
Replacement  28 to 35%
New Construction  22 to 28%

If you have any questions about setting the right price for your company, or determining your overhead and direct costs, let me know in the comments below, I’d be happy to try and help. You can also ask them on our Facebook page, fb.me/cfmdistributors, or tweet us @cfmdistributors. In Part 6 of this HVAC Pricing Series, I’ll start to get more into how profits contribute to finding the right price for your business.

A person with two paths to choose from, and one side has more money than the other.

Overhead Costs | HVAC Pricing Series Part 4

There are two kinds of costs in any company: direct costs and overhead costs. In our last article, Direct Costs | HVAC Pricing Series Part 3, we covered some of the more common types of direct costs you have because you get a job. In Part 4 of this Finding the Right Price HVAC Series, we turn our focus towards overhead costs — which are the costs you have whether you get a job or not.

Overhead costs are all the costs you have in your company that are not specifically related to a job. These costs are varied and in a few cases they are difficult to identify and determine. But most of these costs are pretty straightforward and here are some examples: rent or mortgage payments on your shop, utilities, employee benefits, advertising, insurance, shop furniture and equipment, office supplies, some types of taxes, office salaries and FICA taxes, vehicles, gas and vehicle maintenance, training, travel and entertainment expenses, governmental compliance expenses, legal and accounting expenses, communications expenses, computer and software expenses including ongoing support/training, consumer financing expenses (points paid). These overhead costs are easy to determine because they have invoices, bills and paychecks associated with each of them.

The Top Four Hardest to Determine Overhead Costs:

Cell Phone Expenses:

Cell phone expense has grown into one of the biggest expenses in a service based HVAC company. Your employees use their cell phones in an amazing variety of ways to help themselves and your company, everything from driving instructions to tech support on the job to receiving their next service call. It is important to continually update to the latest phones and phone service to be able to take advantage of the latest technology. However, it is just as important to be diligent in watching these expense to be sure they are paying for themselves in increased production and to be sure that you are getting the best service and coverage for the lowest price. It is up to you to monitor the cell phone service providers to be sure you are getting the most for your money.

Owner Salary Expenses:

When the owner of the business actually works in the field on specific installation jobs or when he runs service calls, the dollars he earns for that work are considered direct costs and need to be shown as part of those direct costs when setting the right price for a job. However, as the business grows the owner usually is less active in actual jobs and spends more time “working in the office.” Therefore, it is usually appropriate to split an owner’s salary into both direct costs and overhead costs based on the estimated percentage of both office work and field work.

Warranty Expenses:

Most new HVAC companies neglect to accrue dollars into a warranty expense account. However, in any service business, especially HVAC businesses, warranty expenses are real and reoccurring expenses. In fact, most HVAC companies actually offer their own warranty for most of their work, usually a one year parts and labor warranty on most jobs performed. But, techs don’t always fix things correctly or install equipment properly, equipment will break down occasionally, service parts don’t always work. It costs you money to send someone back to a job, so a smart business owner will accrue dollars into a warranty expense account to cover those future expenses. Oftentimes that accrual will be as high as 2% of the company’s total sales (revenue).

Unapplied Labor Expenses:

This is one of the largest overhead costs in most service companies, and one that is almost always overlooked. Unapplied labor expense happens when you pay your employees that normally work on specific jobs for work that is not specific to any job. This is most common for installation or service techs. Examples of unapplied labor include paying your techs to come into the shop every morning to get their daily assignments, drive time to and between jobs, time to pick up parts at a supply house, training, and employee meetings. Many of these expenses are good and necessary, but these expenses add up fast and need to be watched carefully. Every business owner should be diligent about reducing unapplied labor. Every business owner should track unapplied labor and include those expenses into their overhead costs. The best tip I can give a business owner is to NOT have techs come into the shop except when absolutely necessary: route your employees to their first jobs by text or email or computer communication from their homes.

Overhead costs are accumulated and calculated into a multitude of different categories, many of which were discussed above. Those categories are then added together to get the final overhead cost for a company. That final overhead cost is then used specifically in the calculation of the right price for any job. That final overhead cost is generally shown as a percentage of company’s total sales.

The right price you set for any job must cover the entire amount of the direct costs you have for that specific job. And, it must cover its share of the overhead costs. No one job will cover all the overhead costs for the company for the entire year, so each job must cover its fair share of the overhead costs. Therefore, all the combined jobs you get during the year will cover the entire amount of overhead costs the company will have for that year.

Now that we’ve established a general understanding of the types of costs, the next article in the series will help you look at your options to consider when trying to change your costs. I recommend using our free direct costs worksheet, download link provided below, to assist you in determining what some of your costs are. If you have any questions or comments over direct or overhead costs, or any general pricing or HVAC topic, let us know in the comment section below or give us a call toll-free at 1-800-322-9675.

A person with two paths to choose from, and one side has more money than the other.

Direct Costs | HVAC Pricing Series Part 3

Part 1 & 2 of the series covered Pricing Awareness and What is the Right Price. Part 3 will start to take a deeper look into how we can begin thinking about where your bottom line is before you can find the right price point for your products and services. To do this, there are two kinds of costs in any company: Direct Costs and Overhead Costs. Direct costs are the costs you have because you get a job, while overhead costs are the costs you have whether you get a job or not.

Direct costs happen because you actually get a job and you have to buy things to perform that job. These kinds of costs would include most, if not all of the following tasks. Each of these items should be written down and have a cost assigned to it so that there is a record of the materials used on the job. Writing down these amounts makes sure that you don’t forget anything and they act as a permanent record of what you estimated was needed on the job. Having that record helps you do a better estimation for the next job.

The six most common Direct Costs:

Materials:

For a typical HVAC company examples of these items could be furnace, coil, condenser, line set, thermostat, pad, whip, disconnect, wiring supplies, fluing supplies, brazing supplies, gas piping supplies, sheet metal supplies, grills and registers, drain supplies, repair parts, cleaning supplies. Freight costs to deliver these materials to your company or the job site are also included. The costs for each of these items are easily found from your invoices or receipts. Usually you have a very knowledgeable idea what the specific material costs for a specific job will be before the job is performed.

Subcontractors:

These costs are incurred when you hire another contractor to do part of the job. Examples of subcontractors are electricians, chimney sweeps, plumbers, cranes, core cutters and others. You will know before you set your price exactly what the cost will be for these subcontractors because they have bid the job and given you a price (or you can reasonably estimate their prices because of your experience.)

Permits:

These are the state, federal or local permits needed to perform the job legally and to code.

Labor:

These costs are the actual costs of the labor to perform the job. These costs are probably the hardest costs to estimate to be able to come up with the Right Price as they have the largest elements of the unknown. How long will it really take to do a specific job? Who will perform the labor on the job, the fast guy or the slow guy? Do we need a helper on the job? Will we run into unexpected problems such as rain, heat, breakdowns, illness, and customer issues? Most experienced HVAC professionals have a pretty good idea how to estimate the labor for any job based on the prior performance of their techs (or themselves) on similar jobs. So, based on experience determine the number of hours of labor to complete a job for each tech and multiply those hours times the labor rate of each tech. That labor rate should include the fringe benefits you pay such as taxes, FICA, health insurance, vacation, sick leave, etc. So if you pay a tech $10 per hour base rate and he also gets $5 per hour in benefits, that tech has a labor rate of $15 per hour. If it will take 20 hours to perform the job, then multiply 20 hours times $15 per hour to get a total labor cost of $300. When in doubt add a few hours to the job.

Specialty Equipment/Tool Rental or Purchase:

These items could include scissor lifts, fork trucks, unloading equipment, jack hammer rental, lifting devices and others. Oftentimes, an owner will include a portion of the replacement costs of the specialty equipment/tools if the company actually owns the items.

Sales Commission:

This is the money that is paid to your salespeople once the sale is made. It is only paid if there is a sale so it is considered a direct cost.

Once you have written down all your direct costs, add them all together to come up with a final dollar amount. Knowing your actual (or professionally estimated) direct costs is a key number in the mathematical formula used to determine the Right Price for your job. Obviously, the right price must cover the direct costs incurred to perform the job or you will lose money on the job.

Download cfm”s Direct Cost Worksheet to make figuring out your direct costs a little easier. In the next article, Overhead Costs | HVAC Pricing Series Part 4, I will cover overhead costs in more detail, and help you to better understand the complexity that they too add to your price planning. If you have any questions or comments about direct costs, let us know in the comment section below or contact us directly at 1-800-322-9675.

A person with two paths to choose from, and one side has more money than the other.

What Is The Right Price? | HVAC Pricing Series Part 2

In the previous article, “Pricing Awareness,” we discussed how difficult it is to know what price to set for any job you sell.  Will you get the job at that price?  Will you make a profit at that price?  Will you have any profit at that price?  Will you lose money at that price?  Did you forget any costs when setting that price?  The pricing fears go on and on. 

But in actuality, setting the Right Price for any job is really not that hard if you use some basic logic and knowledge to set that price.  So let’s look at the five basic factors that are required for setting the Right Price.

The Right Price is not necessarily the price that gets the job.  Huh?  That doesn’t make sense: if the price you set doesn’t get the job, was it really the Right Price?  This will make more sense when we look at the other factors that go into setting the Right Price for a job.  So, we will come back to this after we look at a few of those other factors.

The Right Price must satisfy the financial constraints of your company.  This is really the important factor for any business if it wants to be profitable.  So what are the financial constraints of your company?  First and foremost, you must recover your costs.  The Right Price must be high enough to cover both your direct costs and your overhead costs.  (We will further define both of those costs in a different article.)  Secondly, the Right Price must allow for some profit for your company.  Profit allows you to fund your future growth and it allows your company to be a great place to work for you, your employees and your customers.  So, the Right Price must be high enough to cover your profit as well as you costs.  The key to setting the Right Price is knowing exactly what the financial constraints of YOUR company really are. 

The Right Price is always determined using simple math.  This simple math can be easily taught and easily learned.  It can be repeated over and over so you will always come up with the Right Price for any job you do. 

There is only ONE Right Price for any job.  That Right Price will cover the financial constraints of your company including what you feel is the appropriate amount of profit at that given time.  And since it uses a simple mathematical formula based on those financial constraints, then there is only ONE right Price for YOUR JOB!

But here’s the rub: your financial constraints are not the financial constraints of your competitor(s), the other folks that are trying to get the same job.  Your competitor’s costs may be lower or higher.  He may not need or want as much profit as you.  He may not even know what his costs are on a job.  He may not even know if he is making money or losing money.  So, his price will NOT be your Right Price.  Therefore, the only rational, prudent way to set your Right Price is to base that Right Price on your company’s needs, costs and profit.

Which takes us back to the first basic factor in setting the Right Price: the Right Price is not necessarily the price that gets the job for your company.  Your competitor will get his fair share of the jobs, even if his prices are exactly the same as yours (or if they are higher or lower than yours.)  That is because people make choices based on lots of factors, with price being merely one of them.  The Right Price for your company must cover all your costs and your profit.  But that Right Price may not be the one that gets the job. 

Finally, the Right Price may change depending on the time of the year or the needs of your company.  First, your Right Price should always cover the costs of the job.  But, at different times of the year the needs of your company will change.  For instance, it is difficult to even find a job to bid on in the cold months of January and February.  Your company may consider bidding a job with a lower profit level in those months compared to the hot summer months when your techs are very busy.  In fact, you may decide to set your Right Price with no profit at all just to be able to keep your techs working.  Conversely, in the hot summer months your Right Price may increase because all your techs and all your competitors’ techs have plenty of work and the market will allow you to make more profit.  The point is that your Right Price can change based on the needs of your company, but it is YOU that is determining what that Right Price should be at any given time.

The important thing to remember is that the Right Price should always cover your costs and the Right Price should always be calculated using the same mathematical formula. 

In Part 3 of the series, “Direct Costs,” I will begin discussing the different types of costs and their affect on finding the right price.   If you have any questions or comments about finding the right price, leave them in comment section below or contact cfm directly at 1-800-322-9675.

A person with two paths to choose from, and one side has more money than the other.

Pricing Awareness | HVAC Pricing Series Part 1

Knowing the Right Price to use when you set a price for a job is difficult to determine. Will you be too high, or too low? Will you make any money? Will you be fair to your customers? Will you be fair to your company, your employees and yourself? Will you get the job? Will your competitors be higher or lower than you? Do you need the job to pay your bills?

And perhaps you always wonder about your pricing after you get the job. Could you have sold this job for more? Should you have added more profit to the job? Will there be ANY profit on this job? Will you even know if you made a profit? Will there be unforeseen problems on the job that will cause you to lose money? Will you get paid on time, or paid at all?

If you have asked yourself any of these questions, then you know there is really not any one perfect answer to know if your price is the “right price”. So, here are some situations to consider that could help you be more “price aware”.

Your pricing may be too low if:

  1. Your sales are steady or growing and your profit is dropping
  2. Very few people discuss or complain about your prices.
  3. You are popular with shoppers who are driven by price
  4. Many of your sales come from Yellow Page or mass marketing leads

Your pricing may be too high if:

  1. More than 20% of your customers/prospects discuss or complain about your prices being too high
  2. Your sales are flat or dropping
  3. Selling a job is getting harder to do
  4. People who buy on quality are asking you to justify your price
Pricing awareness can help you feel more comfortable with the prices you set for your jobs. If you find yourself in some of these situations, you can consider raising or lowering your prices to better fit your market at that time. However, as you will read in future articles, you should actually set your Right Price based on the financial constraints of your company. And you should use a repeatable mathematical formula to figure your correct Right Price on every job you bid.  Part 2 of the series, “What is the Right Price?,” will cover the 5 basic factors required for setting the Right Price.
HVAC-R Contractor's Guide to Successfully Launching Business Facebook Page

Successfully Launching Your Company’s Facebook Page

In Part One of our HVAC Contractor’s Guide to Facebook—missed it? Read Part One herewe covered the simple steps involved to creating your business’s Facebook page. In this article, Part Two, we start to focus on how to generate traffic to your newly created page. Like any new business venture, your new Facebook page will take a little time and effort to generate results. The steps below are designed to help guide your page to success by including timeframes and tips/tactics. These steps will aid in reducing the efforts needed to maximize your results.

Step 1: Internal Activation

Timeframe: On go live date

  • Invite employees, friends and family to “Like” your company’s Facebook page
  • Add a Facebook icon with a link to your company’s Facebook page to the upper right hand corner of every page on your company’s website
  • Add your linked Facebook icon to the email signature of everyone in your company

Step 2: Business Partner/Vendor Activation

Timeframe: 2 weeks after go live date

  • Send an email blast to your vendors and other strategic business partners inviting them to “Like” your Facebook page
  • Invite vendors and business partners to “Like” your page when you meet with them

Step 3: Existing Customer Activation

Timeframe: 4 weeks after go live date

  • Send an email blast to your existing customers inviting them to “Like” your Facebook page
  • Offer a prize giveaway when your Facebook page reaches a certain amount of “Likes”
  • Offer rewards to customers when they visit your Facebook page

Step 4: Prospective Customer Activation

Timeframe: 6 weeks after go live date

  • Use the bulk email upload tool to upload an email database containing your prospective customers’ email addresses
  • Use Facebook ads to reach your target prospective customers and invite them to “Like” your Facebook page
  • Offer a contest to obtain more “Likes”

Step 5: Integrate Facebook into your Displays

Timeframe: 8 weeks after go live date

  • Update your point of sales and other on-site signage to include your Facebook icon and the URL to go to access your Facebook page
  • Use QR codes in your point of sale displays and signage for customers to scan with their smartphones to access your Facebook page

Step 6: Integrate Facebook into your Traditional Marketing

Timeframe: 10 weeks after go live date

  • Add Facebook URL to your printed marketing materials including invoices, statements, magnets, company ID stickers, vehicle wraps and decals, newsletters, postcards, TV ads, newspaper ads, etc.

Conclusion

The most important part to take away from this short timeline guide is that this process is continuous.  Always be talking about, promoting, and encouraging customers to visit your business’s Facebook page.  Getting visitors isn’t the only important part to getting Likes.  The more engaged you are with your business page–status updates, shared images, replying to followers comments–the more successful your page will be in the long run.


 

Increase profits with flat rate service pricing

The Financial Power of Flat Rate Service Pricing

About 95% of all HVAC dealers have one trait in common: they are not charging enough for their service work. So, why is it important to charge enough? Charging enough allows a dealer to stay in business for many years thus ensuring continuous service to his customers. Charging enough allows a dealer to pay his employees good wages and to provide important benefits for those employees so they stay with the dealer for years to come. Charging enough allows a dealer to offer excellent employee training which equates to excellent customer service. Charging enough helps the dealer to provide a good living for his family. Charging enough insures the dealer that there will be enough money for his retirement. Continue reading

HVAC Guide to Facebook Series Part One - Building an Effective Facebook Page

Building an Effective Facebook Page

The HVAC Contractor’s Guide to Facebook Series – Part One:Building an Effective Facebook Page

Social media has taken the working world by storm, and for many businesses, a strong social presence is every bit as crucial as a standalone website. Of particular importance to small, consumer-facing companies is Facebook – one of the greatest tools for customer acquisition, community outreach and long-term business-building.
Continue reading