Perry Mandarakas, the Coleman Brand Manager for Johnstone Supply in Kenilworth, NJ showed me how one simple change in a contracting business can more than double net profit. It sounds crazy, but it is not.
According to Perry, the number one thing people search for about HVAC is financing. He says the research shows 60% of the public is living paycheck to paycheck. Thanks to our “friends” in the government, the installed price of HVAC systems is dramatically higher than a few years ago. Today, the only way most people can afford to replace a comfort system is to finance it.
Perry has research that shows financing increases leads by 10%, closing percentages by 10%, and the average sales price by 25%. Using Perry’s approach, the impact is dramatic.
Take a contracting business with $3 million in sales and a 10% net profit. Sixty percent of the company’s sales are change outs. The rest is service. The average job is $6,000. The gross margin is 45%. The closing rate is 70%. The company does not offer financing and provides manufacturer financing only when requested.
What happens when the company begins offering financing on every job and advertising financing and payments is stunning.
Impact on Leads
Sixty percent of the company’s sales were replacements. That equals $1.8 million ($3 million X 60% = $1.8 million).
The average job is $6,000. That equals 300 sales ($1.8 million / $6,000 = 300 sales).
The closing rate is 70%. That means company salespeople run 429 leads (300 sales / 70% = 429 leads).
With the new emphasis on financing and promoting payments, lead flow increases 10%. The 429 leads become 471 leads (429 leads X 1.1 = 471 leads). The company now has 42 more leads.
Impact on Jobs Sold
With financing, the closing percentage increase 10%, so it is now 77% (70% X 1.1 = 77%).
The number of replacements increases from 300 to 363 (429 leads X 77% closing rate = 363 sales). That a 21% increase.
Impact on Sales
With financing, the average replacement sells for 25% more. The average sales increases from $6,000 to $7,500 ($6,000 X 1.25 = $7,500). Moreover, the company is now selling 363 installations, which raises replacement sales to $2,722,500 (363 jobs X $7,500 per job = $2,722,500). Total sales jump from $3 million to nearly $4 million ($2,722,500 replacement sales + $1,200,000 service = $3,922,500).
Impact on Profit
Before the emphasis on financing, the company enjoyed a 45% gross margin on $1.8 million of replacement sales. This results in $810,000 of gross profit. Assuming the same gross margin, the gross profit increases to $1,225,125 (45% gross margin X $2,722,500 replacement sales = $1,225,125). This is $415,135 more gross profit!
With 63 more installations and higher value installations at that, meaning more accessories or system enhancements, more efficient equipment, etc., overhead is likely to increase. However, it will not increase proportionate to the jump in sales. For calculation purposes, assume it stays constant. The $415,125 in extra gross profit falls straight to the bottom line, increasing it from $300,000 ($3 million X 10% net = $300,000) to $715,125. That’s an increase of 138%! Instead of a 10% net profit company, it is an 18% net profit company.
Financing is the Future
Perry Mandarakas’ presentation is brilliant. But let’s say he’s overstated everything. Cut the 10% increase in leads to 5%. Cut the 10% increase in closing to 5%. Cut the 25% increase in the average sale to 12.5%. Total revenue still increases to $3.4 million. Net increases to just under $500 thousand, over 14% of sales.
Considering the escalating price of system replacements and the financial reserves of most Americans, contractors will have no choice but to offer multiple forms of financing, including extended term installment financing (e.g., 10 year notes), second look financing for credit challenged customers, home equity financing, and so on. Though it is becoming mandatory for contractors to offer financing, it is also incredibly lucrative as Perry Mandarakas demonstrates. What are you waiting for?
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