By John O’Connor
Ah, the rites of spring. For baseball fans that can only mean one thing: Time to get going on another season of America’s favorite pastime. Every day, sports pages will once again be filled with statistical analyses of your favorite team. Home runs, doubles, triples, runs scored, on base percentage, batting average, strikeouts, saves, earned run average. All influencing the most important number of all – wins and losses.
In the HVAC business, you may track your “wins and losses,” but what are the key numbers to benchmark against that lead to a winning season? That build your dynasty? What kind of stats are the superstars in the industry putting up, and how do they do it?
Let’s focus on residential service and replacement companies that are able to achieve 20%+ net profit on a regular basis. That alone may seem unrealistic. But, rather than say “I can’t do that,” ask “how can I do that?”
Does 20% seem too high? Does that make you uncomfortable? Why?
Here’s what happens at 20%: The customer wins every time. No need to argue. You can afford to let them win every dispute that arises. Think that would increase repeat and referral business? Your employees would be the highest paid and have the best benefits. Think that would reduce turnover and make hiring easier? You might be able to take some real time off and spend it with your family. Think that would make your life better?
Where to Start
First, concentrate on the same things your favorite baseball team focuses on during spring training — the fundamentals. Most in our industry understand the technical fundamentals, but what about the business fundamentals? Let’s face it, the majority of business owners in the trades are there because they know how to do the technical work involved, not because of business acumen. But to truly develop, any business owner needs to identify, track, understand, and make adjustments based on information gained from valuable performance and financial comparisons.
The superstars aren’t concerned with what their competitors are doing. They don’t care about the “going rate.” For the most part, they understand they may be the highest price option in their market, and they’re focused on delivering the value to justify it. Their prices are set based on what they need to be to reach their goal of 20%. And they understand that more referrals and repeat business will come their way with quality work and excellent customer service than by low price.
With their eye on the goal, they drive home processes, procedures, and systems so that they are an inherent part of their company culture and all employees understand, act, and deliver in accordance with this culture. Additionally, customers come to expect a familiar experience and know that their best course of action is to do business with this company, building trust and loyalty.
Follow a System
The first and most important number is revenue per employee. Because in almost every case it has a direct relation to profitability. What we know from studying many companies in the residential service and replacement field is that $120K/employee ($10,000/month) generally means a company is marginally profitable; $160K/employee typically results in a company approaching double digit profitability. The best (20%+ net) companies will be able to attain $200K/employee. That means that for every new hire they bring on, they expect to increase revenue by $200,000.
There are only two ways to improve this ratio. Increase revenues (raise prices, sell more, or both) or decrease employees. On the surface, both seem tough. But, nearly every underachieving company can find opportunities in both areas, and they can be put in place quickly.
One of the biggest opportunities available is related to technician opportunity, which leads to the second key number: technician lead generation. This should be a minimum of 12% — a conservative number, if you think about it. Most repair calls are on older equipment. Often, it doesn’t make sense to sink money into a repair, but on the surface the homeowner doesn’t understand their options. Does your company explain it to them in a non-threatening manner that allows them to make the best financial choice for their situation? Do you have a documented repair vs. replace scenario, and can all your technicians adequately portray it to your customers? Do you even know how many replacement opportunities your technicians are in front of every day? The best companies do.
Keep in mind that these opportunities are already paid for. But again, you must have a system to track and manage these opportunities. Do you?
In the best companies, technicians will directly or indirectly bring in a minimum of $2 in replacement revenue for every dollar in repair. And they will do it because it’s in the customer’s best interest and it’s what the customer wants to do. Your goal should always be to present the homeowner with options and then let them decide.
Have you educated your staff using a repair vs. replace scenario? Are you sending the right technicians to the right calls? Does your software promote success by keeping an adequate customer history and is it communicated to the technician? Management has a responsibility to put these things in place, otherwise you can’t blame your technicians for a lack of success.
A common question is, “Should technicians sell?” The answer is easy: it depends. I’ve seen it work both ways. The selling technicians who have the most success are highly trained and motivated individuals with great communication skills. They turn repair calls into a million dollars plus in replacement revenue.
The more common scenario, however, is the company who allows or asks their techs to sell because it’s the easiest thing to do. These companies have low average tickets ($3,500 or less) because the technicians sell boxes rather than systems, have very little or inadequate training, or aren’t comfortable being put in a position of selling something. Additionally, management does not track opportunities or results. These companies would be better off having the technicians identify opportunities that get turned over to a comfort advisor.
When it comes to comfort advisors, you have to have an expectation or goal. It’s hard to come up with that until you know how many opportunities you have. There are three key numbers you must track if you are in the residential replacement business: leads run, leads closed, and dollars sold. From these numbers you determine closing rate and average sale. Without this information, you can’t effectively manage your business.
It used to be that a $1M+ salesperson was considered a true superstar in this industry. Today, however, $1.5M is the new million. Progressive sales management, marketing, training, and tools have raised the bar. Where do you stand?
Do you still blindly turn incoming phone inquiries over to your salesperson, thereby losing control of the opportunity to identify and track what happens next? The best companies have a lead coordinator who takes all incoming calls, sets the lead, documents it, turns it over to a comfort advisor, then tracks it’s progress through completion. Without this system, you’ve lost control of your opportunities and are wasting marketing dollars. The best companies maintain a closing rate of more than 60%, which fluctuates based on where the leads come from. These days, high achievers in residential replacement sales will have an average sale of more than $6,000. They concentrate on selling systems, not boxes. They finance more than half of all their sales. They consistently offer and sell high dollar indoor air quality (IAQ) and other accessories.
The phone call gets this whole ball rolling. Do your calltakers feel like they are the bottom rung in your operation? Most do and that’s too bad. Have you ever stopped to consider the value of an incoming phone call? If your average sale is $6,000 and you close 60%, isn’t each replacement phone inquiry worth $3,600?
Do you think they realize they’re on a $3,600 phone call?! Or do they look at their job and say, “Oh, I just answer the phone.”
I’m starting to sound like a broken record, but again, it’s a system. Do they follow a script? Do they set the lead when all decision-makers are present? Or do they just wing it and hand it over to a salesman?
The best companies not only track their incoming call conversion rate (for both replacement and repair), but record their calls, train, hold meetings, practice, and constantly look to improve their process. They understand how important this is.
Finally, consider one last number. It’s a sensitive one: 10.
Ten is the minimum percentage of people who are currently in your employ, who you’re holding hostage by not allowing them to work in a different profession or for a different company. Now, let’s be clear about something, I’m not telling you to fire anybody!
However — and I’ll try to be as diplomatic as possible here — these people are sucking the life out of you!
And you already know who they are, don’t you? Trust me, despite the fear you might have of not having them on your staff, you’ll be better off. Your life will be better and your team will be stronger. Life is too short.
Lastly, I want you to know that you shouldn’t try and do all this stuff yourself. Proven systems are available now. Get help. It’s out there. No one is smart enough to figure all this stuff out on their own, and you’ll waste too much time trying.
John O’Connor is a former contractor and current business consultant with One Hour Heating & Air Conditioning. He can be reached at 612/369-1246 or john.oconnor@ onehourair.com.
This article is based on the presentation, Benchmark Against the Best, which John O’Connor gave at HVAC Comfortech 2007, held in St. Louis, MO, Sept. 26-29, 2007. For more information about HVAC Comfortech 2008, which will be held September 10-13, 2008, in Atlanta, GA, call 216/931-9550, or watch for updates on the show website: www.hvaccomfortech.com.