Are your HVAC profit margins lower than you would like? In this blog, we share 6 strategies to improve your HVAC business’s profit margins.
Following record industry growth the past few years, HARDI analysts predicted a slowdown in the HVACR market in 2023. While there’s no reason to panic (analysts say the market is simply returning to normal), there is good reason for HVAC owners to take a good look at the books. It’s easy to get comfortable during an economic high point; but slowdowns have a way of showing you just how thin those HVAC profit margins really are.
Whether you hire an accountant or handle it yourself, how you manage money can make or break your business. So, let’s discuss how to calculate the profit margins for HVAC business — and how to improve them if you find you need more cushion.
WHAT’S THE AVERAGE PROFIT MARGIN FOR AN HVAC BUSINESS?
When it comes to profit margins, how do you know what you’re really looking at? Is your profit margin good, or could it use some improvement? Typically, you would look at an industry average for that answer — except there isn’t an agreed-upon average profit margin for an HVAC business.
Some say it’s around 3–5%, while others say it’s about 15–35%. Pretty big difference, right? On the other hand, the Department of Energy suggests a successful HVAC business needs to make at least a 12% profit margin. Regardless of industry numbers, only you know what your business needs to make.
To find your profit margin, start by figuring out your costs. This includes rent, utilities, products, labor, and more. If you spent money on it for your business, count it. Then, figure out your total revenue (if you’re just starting, it may be easiest to use your revenue from the previous year as a starting point).
Then, use this formula to find your total profit margin:
Total Revenue – Total Costs – Taxes = Your Income
Then, find your profit margin in the form of a percentage using this formula:
Your Income/Total Revenue x 100 = Profit Margin
Finding your profit margin can show you how financially successful your business is and reveal areas for improvement.
HOW TO BRING IN MORE PROFIT FOR YOUR HVAC BUSINESS
Like we said before, it’s easy to get complacent during periods of economic growth. You know what they say, after all: If it ain’t broke…
The truth is, even if your profit margins are in a good spot, no business is truly 100 percent recession proof. And if you don’t take time to evaluate what needs to change — and, more importantly, commit to those changes — you’ll find it harder to stay afloat if your business hits a rough patch.
Take Gordon Ramsay’s show Kitchen Nightmares, for example. In this show, Ramsay visits struggling restaurants to help figure out what’s going wrong and how they can fix it. By the end of an episode, the featured restaurant has a makeover, a new menu, and a new sense of motivation. However, some owners are unwilling to make the changes Ramsay put in place, and once he leaves and they don’t see immediate success, they return to their old ways. After seven seasons of the US show, only 16% of the featured restaurants are still open.
Now, we’re not suggesting your HVAC business will close without change; these businesses were already close to closing before Ramsay showed up. But without change, your business may eventually plateau. Trust us: it’s worth it to take the time now to trim fat and boost revenue. If you’d like to give your profit margins a boost, we have a few strategies that could help.
1. Increase Team Efficiency
Labor accounts for about 25–35% of your business expenses, meaning your profit will take a hit if your team efficiency is low.
Dispatch and scheduling are good starting points to improve team efficiency. Are you still manually making schedules, or do you use dispatch software? Are your techs driving across town for jobs, or are jobs grouped by location? Do you consider hours already worked when making schedules, or are you scheduling techs unnecessary overtime?
An automated schedule and dispatch software can help eliminate these problems. And not only will it improve profits, but it could increase team morale, too. Our team at FTL Finance has found that inefficient tools and processes lead to burnout. If your techs are scheduled efficiently, they’ll likely be happier with their jobs, too. A happy team is a productive team.
2. Improve Inefficient HVAC Business Operations
Inefficient processes are a huge money-sucker for HVAC businesses. Time is money, and spending time doing something longer than it needs to take can eat right into your profit margins.
For example, do you still take appointments only over the phone? Or do you offer an online booking system? Although it could be an additional expense, an online booking system will increase your efficiency and profit margins in the long run. Your office staff won’t be on the phone as often, so they can get other things done. And potential customers who don’t want to call or are looking at your site outside of business hours can easily book services. This could have been lost business before.
There’s also a chance you’re already paying for an online booking system or other digital tools with your website subscription. If you’re paying for tools you’re not using, it’s just more money down the drain. Auditing and re-evaluating your HVAC business processes and resources can uncover small changes that increase your profit margins in the long run.
3. Understand the Root of Your Cash Flow Problems
Sixty-one percent of small businesses have cash flow problems — and if you’re in that camp, too, then your HVAC profit margins are likely suffering. It’s hard to make a profit when you have more cash flowing out of your business than into it.
You may have trouble with your HVAC business cash flow for a few reasons. First, the HVAC industry itself is a seasonal business. Naturally, you’ll have more business coming in the summer and winter and less in the spring and fall, so it’s important to budget accordingly.
Pricing also plays a huge role in your HVAC business cash flow. Have you continued to adjust your pricing along with HVAC price increases? Are you accounting for all expenses in your pricing, including rent, utilities, and mileage?
You also want to be sure your operating fee actually includes all of your operating expenses. Rent, utilities, mileage, insurance fees — everything. Make sure it also includes fees you may not think to pass on to customers, like dealer or contractor fees. While we don’t charge a fee just to offer financing, some lenders will. And most lenders charge a fee to offer promotional discounts, lower interest rates, or deferred interest loans. It’s best practice to account for these fees in your prices, just like you would credit card fees.
And while you’re at it, look at your inventory again. Are the products in stock still your fast movers, or have your customers’ needs changed? Sitting inventory is spent money and lost profit. Adjusting your inventory to the changing market can help increase your profit margins and improve your cash flow.
4. Ask for Referrals and Reviews
Word-of-mouth referrals have been foundational to the HVAC industry as long as it’s existed. And although it’s still an important part of business today, it’s not the only way people hear about your business anymore.
Instead of going to people they know for referrals, many people check online reviews to assess a contractor’s reliability. In fact, almost 9 out of 10 consumers trust online reviews more than word-of-mouth referrals. Asking for reviews is just as vital to your marketing strategy as asking for referrals.
In fact, 8 out of 10 customers will leave a review if asked — emphasis on “if asked.” And if you want to make it worth their time, offer an incentive. For instance, if you already run an HVAC referral program, consider expanding it to include reviews. Maybe they get a certain discount on their next service if they refer someone or leave a review, and a larger discount if they do both.
Asking for both referrals and reviews increases the chance of earning more business from one interaction. And with more business comes more profit.
5. Offer HVAC Service Contracts
Service contracts can bring in over 50% of your profits when implemented effectively, making them a great tool for improving HVAC profit margins.
Typically, you only see your customers when something is wrong with their HVAC system. Your tech enters their home, fixes the issue, and then leaves. Maybe that customer will remember your business the next time they need a repair, but that could be years from now.
Service contracts give your techs more face-time with customers in a non-stressful situation. With each visit, the customer grows more comfortable with your tech, who is now quite familiar with their home and HVAC system.
These contracts also provide your team with more upselling opportunities. Not only does the customer trust your tech knows the system well, but they aren’t stressing over how to pay for a large emergency repair. That means they may be more receptive to optional upgrades.
Routine maintenance is also a great opportunity to train new techs. These services are scheduled in advance, allowing you to schedule full training days instead of waiting for calls. This efficiently uses your trainer’s and trainee’s time — and as we already discussed, scheduling can make a big difference in your profit margins.
6. Offer Financing Options
While asking for reviews and referrals, offering service contracts, and building in more overhead will all help improve your profit margins, one other solution is pretty much guaranteed to help: offering financing to your customers. With rising inflation, many Americans are unable to save for emergencies. And credit cards are no longer the ideal option for large purchases due to increasing interest rates; instead, fixed-rate installment loans offer consumers a guaranteed interest rate for the life of their loan, often at a lower rate than credit cards.
When you offer financing, you can close 30–50% more jobs, which can help improve your profit margins. Plus, you help your customers by offering an affordable way to pay for your services.
IMPLEMENTING THESE STRATEGIES
Just like there’s no agreed-upon “average profit margin” for HVAC businesses, there’s no surefire way to improve your profit margins. And it’s not going to happen overnight. As you have time, evaluate your team’s efficiency, business operations, and cash flow — one thing at a time. Or, if you find adding new strategies easier, start by asking for reviews or offering service contracts. Only you know your business and how your team best adapts to change, and following your instincts will help your business get the greatest benefit from these strategies.