Why does the total cost of an install matter?
By calculating the total cost of an install, you can more accurately determine if you are making money or not. Owners tend to forget the costs of the business when calculating their per-job profit. This can lead to a false sense of success for HVAC businesses. In fact, without knowing the true cost of each install, you may be losing money without knowing it.
Oh, wait, HVAC installers want to make money?
Let’s be clear. The cost of the HVAC install to your business is not the same as the price you will charge the customer. Although homeowners might not like it, for a business to be sustainable, you must make money on any service. That means charging a reasonable margin for your product.
What complicates things for heating and cooling businesses is that you are selling more than just a product. You are selling your time to install the product, too. This is commonly referred to as parts and labor in the HVAC industry. Before we get too deep on the subject, let’s explain how gross profit margin works.
Understanding Gross Profit Margin
When it comes to actual HVAC products, it’s essential to balance fair pricing with competitive pricing.
A good rule of thumb is that a healthy gross profit margin is 50%. A 50% gross profit margin means that you sold a product for $10,000 when the cost to you was $5,000. Anything higher than 50% margin could be perceived as price gouging.
On the other hand, many dealers choose to charge lower margins. For example, if your competitor, let's just call him Captain Low-Bid, can buy a product at $5,000 and then sell it at $7,500, that’s only a 25% margin. That is his choice.
One other thing to consider is what the market can tolerate for an HVAC install. What’s the going rate in your area? If the normal price is $7,500, and you’re limited to buying a product at $5,000, it can be difficult to compete with other businesses while building a profit. However, consider if you were able to get that same product for only $4,000. You could still charge $7,500 but make significantly more money than your competitor. That’s how it works here at Sensible!
Gross profit margins are an important concept for all HVAC business owners in understanding the cost of an install.
The Cost of Labor for HVAC Business Owners
Most HVAC businesses charge a flat rate for hours of labor. For simplicity, let’s say the rate you charge customers for labor is $100 per hour. So let us assume that you pay your technician $25 per hour.
If the installation takes 4 hours, the labor charge would be $400 while your labor cost is $100. That’s a margin of 75%.
Before you get too excited, let’s combine that with our product pricing.
Total price to customer = $10,000 for product + $400 for labor = $10,400
Total cost = $5,000 for product + $75 for labor = $5,075
Total Profit = $5,325
Margin = $5,325 / $10,400 = 51.2%
So, even though we have a very high margin on our labor, the total margin for the project only increased slightly.
By comparison, Captain Low-Bid, the one that is slashing pricing on the product, keeps the exact same labor rate as you. With his pricing, he would have made $2,825 of the project with a 38% margin. His margin increases dramatically, from 25% to 38%, even with the same labor rates. So, you can see how impactful your pricing decisions are.
Let’s talk about the Net
Savvy business owners know that parts & labor isn’t all that goes into a single HVAC install. A business incurs all sorts of other costs that make that installation happen. Consider these other costs to your business:
Cost of office or warehouse space
Time spent ordering or picking up equipment (In case you’re looking to save here, we offer online ordering and direct shipping)
Time spent on the phone scheduling the appointment
Drive time to and from the customer
The cost of any business systems you use, like scheduling tools or email
Cell phone bills for you and your employees
Cost of uniforms or other employee supplies
Money spent on marketing your business
Costs of training, such as ongoing training courses or trade school
Net Profit is your true profit. It is the actual amount of money you have made, once you add up all of the business costs and incorporate that into the cost for any individual service.
The good news is that the more jobs you complete, the less of an impact these business costs have on your HVAC business. The bad news is that the more jobs you complete, the more tools and costs you will likely have. For example, if you hire more employees, then you’ll have to purchase more uniforms.
Determining the net profit for a job is simple. Add up all of your business costs, and divide by the total number of jobs completed. Then, add that cost to your profit calculation. For example, if your per-job business cost is $50, then your net profit percentage is :
Total Cost = $5125
Divided by the price you’re charging the customer = $10,400
A Net Profit of = $5275 or 50.7%
Because business costs change all the time, it can be helpful to summarize at the end of the month.
Knowing Cost of Install Makes you a better HVAC Business Owner
Understanding the true cost of an install builds your business savviness. It can be easy to ignore the numbers but knowing the total cost of performing service can help you make more informed decisions about pricing. You might see opportunities to build up margins, or, realize that you’re making no profit at all.
So many HVAC dealers we know got their start as a highly successful technician. Most don’t get training in business skills or finances. That’s why we offer these articles to help heating and air conditioning business owners build successful businesses with steady growth. Sensible HVAC Wholesale is here to help small businesses grow.