At Contractor 20/20 - Plumbing, Marketing and Advertising, HVAC Marketing and Advertising & Electric Marketing and Advertising is our Specialty. Contractor 20/20 serves over 100 independent contractors in 40 states with complete direct mail. TV and radio advertising agency services and consumer research services. We have developed, researched and tested the "most successful" marketing techniques. We are the largest advertising agency serving independent contractors in the nation. If you wish to maximize your sales to prior customers and new customers - if you want to learn how other contractors hav achieved 15-20% net profit, give us a call at (607) 770-8933, ext. 80 and request a referral list.

DRIVING GROSS VS. NET PROFITS
Gross profit is about pricing.
Net profit is about proportion.
Your gross profit (the amount left over from a sale left over after you deduct the cost of goods like; direct labor and parts). Is driven by 1)your pricing, 2)how accurate your cost estimates were, 3)cost of errors, waste and downtime.
Your net profit (gross profit minus overhead) is maximized when your fixed overhead is in proper proportion with your sales.
For a healthy service department you might budget sales revenue as follows, 25% labor, 15% materials, 2% gas, 40% overhead, and 18% profit.
As you examine these numbers you'll see relationships develop.
In this model, to hit your maximum profit you need to budget overhead to less than 40% of sales or push sales to be 2.5 times overhead. So that means if the overhead you need is too high, cut unneeded costs (your unskilled brother in law on the payroll) or push sales. Be careful that as you push sales you account for the cost of getting new customers in your pricing; otherwise the advertising cost will eat your profit. Another way to set your sales goal is to take your profit goal times 5. (Then make sure you have the staff ready to do the work and the advertising tested that will be needed to drive the sales.

The other day I was doing a consult for a company that was at 8% profit on 1.6 million in sales. He wants to expand his company. He is at a difficult stage of growth. His overhead is about to step up. To grow he must add another layer of management, he can no longer do it all himself and maintain quality control or his own sanity.
You should notice I said step up. Unfortunately overhead does not grow in a straight line, it steps up. The layer of management he needs to be able to grow at 1.6 efficiently mil is the same as he will need to maintain sales at 3 mil. He must protect profit to get him through this difficult stage, like a bear getting ready for winter he needs the extra layer of fat in his bank accounts.
So I asked him the key "green light question" when it comes to pricing. "What is your current closing rate at the tech level?". He responded over 95%.
Then I asked him "would he rather make 8% profit and keep 95% of your customers happy or 20% and make 93% of your customers happy", he responded that he was already the most expensive in town (his response shows why a lawyer that defends himself has a fool for a client) even a smart lawyer needs objective control ... in my opinion the fact he is already the highest priced is really a on-issue ...
The 95% closing rate was all the green light he needed.

In fact I believe that most residential contractors that have service dept. closing ratios over even 74% should be able to increase prices to drive profits given that they have solid customer retention.
Now this DOES NOT mean that there is not a downside to price increases. I have seen that as you raise prices you lose customer retention, I have seen that with a 20% price increase you lose 10% customer retention. That's why you need to track new customer costs so you can spot the point of diminishing returns (when the price increase does more harm than good).
However, quite frankly, most are better off firing your old cheap customers and then advertising to replacing them with new customers willing to pair a fair price.
Both Toyota and Cadillac make money ... it is up to you to decide what level of service and image you want deliver to your customers.
Both Toyota and Cadillac make money by delivering a quality product, efficiently produced so it can be priced right to dominate their market class, then they mark-up price based on costs to drive a profit.

MAIN POINT
So here it is ... Get your product to market efficiently, track the cost and then add 25% for you if the market will allow you to.
Pitfalls ... "when the only tool you have is a hammer ... every problem looks likes a nail."
Some owners just keep increasing prices to cover up sloppy practices.
That's like spraying deodorant rather than cleaning. It does not work over time. Worse yet others even sell customers things they don't need. There is no blessing in either slothfulness or dishonesty, indeed, ill begotten gains are quickly lost.
For most companies ... your overhead will drive your sales budget, the shortage between your sales budget and sales reality will drive your advertising budget. The red lights and green lights for individual moves as to efficiency, scale of business, quality of service and pricing are all market driven, just as Adam Smith the founder of capitalism predicted. The successful businessperson as always, knows how to read the signs heed their warning and take advantage of their opportunities.
What kind of signs?

For example
1)if your flat rate book is based on 50% hourly efficiency and you drop below 50% pump up sales or drop staff.
2)if your closing rate at the tech level or CSR level is sub par drop prices or get some good training or new people on staff.
3)if your average ticket is too low or get some good training or new people on staff.
If your need to pump up sales, track down some good advertising test it. Track its cost, add that cost to your prices and hit your sales and profit budget.
Too often many owners work 30 years to earn 10 years worth of profit. Unfortunately by then the damage done to their physical, mental, financial health and family relationships is not repairable.
Unfortunately it is a self evident fact that the skill set that makes you a great leader of men and a great technician are often not the same as the skill set needed to set pricing and budget goals. How else can you explain the ultra low profitability and ultra high customer satisfaction rates of the HVAC industry overall?
If you don't know how to read the signs for yourself find a good guide who will show you how.
I would rather see my client keep 93% of his customers h appy with his price and have 20% profit then keep 95% of this customers happy and have to struggle financially.

What do you think?



I am proud to be associated with the largest and most respected contractor groups in the nation as a
PHCC/QSC (Quality Service Contractors Industry Partner) and as a Service Roundtable Consult Partner.

---

A Final personal note.. The marketing industry has a long dark history of disreputable operators. If you have been in business for a time, no doubt you have your own story to tell. That is why I urge you to check our referrals … see for yourself how our counsel has been a blessing to contractors from Coast to Coast. If you do, you will learn how faithful to our clients' interests we are, so different from too many clients' past experiences. Click Here to E-Mail Mike