Leads Leads Leads

June 12, 2015
Referred leads cost a pretty penny. Some of the referral companies charge contractors as much as 25% of the total invoice. That’s right, 25%! Why not invest 10% to 15% of sales in your own marketing?

Leads, leads, leads – who doesn’t want more leads?  The number of companies generating referrals for contractors is exploding.  Everyone from big boxes to automobile clubs to online retailers to specialty dot coms are helping consumers find contractors.  It sounds wonderful on the surface, but in truth it is not good for contractors or consumers.

Referred Leads Are Not Cheap

Referred leads cost a pretty penny.  Some of the referral companies charge contractors as much as 25% of the total invoice.  That’s right, 25%!  Why not invest 10% to 15% of sales in your own marketing?

Some referral companies lay claim to a percentage of all current and future work with any consumer referred to the contractor, even if the consumer was a previous customer of the contractor or never again has any contact with the referral company.  It’s like your own personal IRS agency, taking a percentage now and forever, except the IRS takes its cut off the bottom.  Referral companies take theirs off the top.

Lead Addiction

Cost aside, contractors generally suck at marketing, so isn’t the provision of leads a good thing?  Uh, it’s only a good thing in the sense that a gambling addiction is good for a bookie or a drug addiction is good for a pusher.  The contractor who becomes hooked on third party leads is, well, hooked.

Being dependent on a single source for calls is similar to being dependent on a single source for labor.  It’s like unionizing your lead flow.  Yuck.

Thus, the biggest cost of a referral company isn’t monetary.  Contractors who allow themselves to be dependent upon others for leads, give away their independence and their freedom.  They become dependent on the referral company.

Referral Company Lead Quality Often Stinks

As Leads Nearby’s Bob Misita pointed out last year on the HVAC Roundtable, a number of referral companies generate their leads from pay per click advertising where they promote low, rock bottom, cheap quotes.  Every contractor wants more price shoppers, right?

Consumers are Also Poorly Served

Consumers are led to believe that contractors have been screened for quality and that the referral company will help with problem resolution if things go wrong.

In all fairness, the referral companies couldn’t screen for quality if they wanted.  How could they?  They aren’t qualified to evaluate HVAC service quality.  At best, they can survey satisfaction after the call, which measures the pleasantness of the service personnel since consumers aren’t any more qualified to evaluate HVAC service quality than the referral companies.

Yet, based on the promise (actual or implied), consumers are lured into a false sense of security.  Without the referral company, they might seek safer, more established contractors who have a greater presence in the community.  This doesn’t guarantee quality work, but consumers have a better shot with these companies than the white-truck contractors who are self-employed because they’re unemployable by reputable companies.

Where Referral Companies Make Sense

Despite the problems and pitfalls, referral companies do have their place.  They are good for supplemental business when you find yourself with excess capacity.  This helps with operational efficiencies as long as the marginal revenue of taking the business exceeds your marginal costs.

Furthermore, not all leads companies are the same.  Home Improvement Leads, for example, appears to utilize better marketing to generate better quality leads at a low maximum price per lead, with an emphasis on larger contractors.  For full disclosure, Home Improvement Leads is a Roundtable Rewards Partner with the Service Roundtable

Expect More Referral Companies in the Future and Expect Them to Struggle

The success of Uber and Airbnb has people in every industry, including HVAC, thinking of ways to take advantage of underutilized capacity.  Uber and Airbnb work well because it’s easy to add supply.  Anyone with a decent vehicle and time can drive other people around.  Anyone with a spare room can rent it out.

A sharing economy model will be more difficult to pull off in the HVAC industry.  Contractors are too contrarian and independent.  It’s taken over a decade to build the Service Roundtable into an organization of thousands of contractors, despite the extensive library of business content, immediate help from other contractors, and a free buying group that pays contractors more money in rebates than contractors pay in membership fees.  Based on the Roundtable experience, building a network of contractors around the proposition of paid leads will not be easy.  Unless doing business with referral companies becomes less one-sided in the future, it will be near impossible.

White-truck contractors, one-truck-Chucks, and moonlighters will be attracted to a shared economy model because they don’t know how to market and will work for subsistence level pay.  These are the contractors on the fringes of the industry.

Good contractors, on the other hand, will control their own destiny by marketing their companies and building their brands.  Good contractors don’t need referral companies and don’t have to participate in a sharing economy model.  Some might choose to participate, but they won’t need to participate.

For more information on the Service Roundtable, click the link or call 877.262.3341.

About the Author

Matt Michel | Chief Executive Officer

Matt Michel was a co-founder and CEO of the Service Roundtable ( The Service Roundtable is an organization founded to help contractors improve their sales, marketing, operations, and profitability. The Service Nation Alliance is a part of this overall organization. Matt was inducted into the Contracting Business HVAC Hall of Fame in 2015. He is now an author and rancher.