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In this episode, Mary Carter and Stephen Ross break down the real ways contractors approach job costing, from flat rate and time-and-materials to divisor methods and gross profit per crew day. They also dive into the hidden challenges behind pricing, including team confidence, customer objections, and how growth impacts your overhead.
If you’ve ever wondered whether your prices are too high, too low, or just right, this conversation will help you connect the dots between pricing strategy, profitability, and long-term growth.
Interested in becoming a Trane dealer? Visit us at partners.trane.com to learn more about how you can partner with a leader in HVAC innovation. Explore opportunities to elevate your business and stay ahead in the market with Trane!
Creators and Guests
Host
Mary Carter
Mary Carter is a seasoned sales and marketing leader with over six years at Trane Technologies, currently serving as Regional Sales Manager. With a strong foundation in RHVAC, consumer finance, and strategic account management, Mary brings valuable insights and real-world experience to every conversation.
Host
Producer
Editor
Kerianne O'Donnell
Kerianne O'Donnell is the Digital Learning Manager at Trane Technologies and serves as the editor of the HVAC Full Blast podcast. With a background in graphic design and a strong passion for developing digital learning experiences, Kerianne brings her creative expertise to the podcast, delivering engaging and impactful content to listeners.
What is HVAC Full Blast?
HVAC Full Blast is your bi-weekly dose of HVAC business growth, powered by Trane. Hosted by Mary Carter (Trane Technologies) and Stephen Ross (Sandler), this podcast is built for residential HVAC dealers who want to scale their business, sharpen their sales, and lead with confidence.
Tune in for expert interviews, dealer success stories, and practical tips on pricing, service agreements, workforce development, and more. Whether you're in the field or in the office, HVAC Full Blast helps you stay ahead in a competitive market.
Interested in becoming a Trane Dealer? Visit our website at https://partners.trane.com/
We'd love your feedback and suggestions on future episodes. Please email us at hvac_full_blast@tranetechnologies.com.
This podcast channel is for general informational purposes only. The views and opinions expressed in these episodes are those of the panelists and do not necessarily reflect the official policy or position of Trane Technologies. Trane Technologies makes no warranty or guarantee concerning accuracy or completeness of the content presented in this webinar.
Trane does not provide tax, legal, or accounting advice. This material is for informational purposes only and it should not be relied on for tax, legal, or accounting advice. Tax law is subject to continual change. All decisions are your responsibility and you should consult your own tax, legal, and accounting advisors. Trane disclaims any responsibility for actions taken on the material presented.
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Today, Mary Carter and Stephen Ross are live in Nashville, Tennessee and diving into one of the most important and misunderstood topics in HVAC, job costing and pricing. They break down how contractors actually set their prices from flat rate to divisor methods, and why confidence in your pricing can make or break your success. Whether you're trying to improve your margins, understand your numbers, or bring more consistency to your business, this conversation will help you price with purpose and grow with confidence. Let's get started.
Welcome back.
We are live and in person together. Is I know.
Second time we've been live?
I think so. Yeah.
Live and in person. And we're in beautiful Nashville, Tennessee, which is also kind of a treat.
It is. It is.
And I heard that you were having some life changing foods while you were out here.
Oh, yeah. The the doughnut shop around the corner has French toast doughnuts. Life changing. Absolutely life changing.
Well, I might have snuck it out and grabbed one. And Yeah. After I saw your text, and I thought, yeah, that was pretty good.
That was pretty good.
That was pretty good.
I've never had a French toast donut and so I'm I'm bought in at this point.
It seems like it would be a lot until you have it and then And then it's just magic.
Magic. Yeah.
Yeah.
I agree. I get to travel a lot which is a privilege in my role. And it's hard sometimes between maintaining, like, good health and fitness goals within wanting to be in the foodie city and do the foodie thing. And last night, I caved and had some hot honey wings.
And Yeah.
I don't know if I get I'm a buffalo girl, but that was so good. Nice. It might be my go to.
Nice. We we also get some feedback from listeners every now and then. Right? Our email address, h v a c underscore full underscore blast at train technologies dot com.
Well done.
But we also got some unusual feedback from one of our listeners.
Oh gosh. Yeah. Am I read it on this?
Your grandmother said you sound amazing.
She does.
Thanks, You know, so shout out. I mean, we gotta do a shout to our viewers and listeners.
We so appreciate her.
Heck yeah. Driving up our Spotify listener count.
Yeah. I like it. It's really good. And we do we do appreciate all of you who have liked, shared, followed, subscribed. I think I said at a meeting like smashed that like button like four hundred times. So thank you so much for the support so Again, I think a couple episodes we said we were over the twenty episode mark and that still blows my mind.
Yeah.
So far so good.
Yeah. So, as we keep this thing rolling, and as we're traveling along, lots of conversations coming up with people. Think you and I have demonstrated that we're open to talking about different topics.
That has just kind of naturally led its way into more business development discussions.
One that's on top of my mind today is around job costing.
Okay. Yeah. Let's jump into it.
I know, right? It sounds so fun, doesn't it?
If we just had a few people drop off, I wouldn't be surprised. Right?
Yeah.
Job costing in our industry is is interesting. I think having had this is a this is a privilege, I think, in that because we travel for a job, we are exposed to so many different types of companies and so many philosophies and so many mentalities that you kinda get to learn how different people do it in different markets or different sized companies. Yeah. And one of the things about pricing that I always laugh about, I think, you know, if you think about driving. If you're driving down the interstate and the speed limit's sixty five, you've got some people that are that are maybe not even quite at sixty five.
Got some people that are exactly at sixty five. Then you got people who are a little bit over the speed limit. And then you got people who are a lot over the speed limit. Yeah.
And if you asked any one of those drivers what they thought about the other drivers, They would say, well, the people going faster than me They're they're going way too fast. And the people who are slower than me, they're idiots, they need to get out of the way. And so it's one hundred percent just based on my relative point of view as to how fast I'm driving. I'm comfortable with that.
But people driving faster, crazy. The people driving slower are idiots.
Right.
And we might offend some people when we when I I'm using we. I might offend some people when I say this, but pricing our industry is almost the same way. Anybody who's more expensive than me is ripping people off, and anybody who's less expensive than me is a chucking truck. They don't know what they're doing.
Right.
So the the relativeness sometimes of pricing, and and it's not it's not easy to figure out how much do I need to charge. If I'm charging too much, then customers are gonna go somewhere else and buy from somebody else. If I'm charging too little, then even if I get the job, I might not be making enough money to cover my bills and pay and stay open. And so it is both a little bit of an art and a little bit of a science to figure out, hey. What what's that magic point where I'm not so expensive that people won't buy from me, but I'm not so cheap that I'm doing the work for free.
Right. Right. Now it's so interesting. I think that's an amazing analogy because so often we do car comparisons, but that one's almost like, you know, a car comparison within a market, right?
And you're right. I mean, it's so true. It doesn't matter where I go. Every time I sit down with a dealer, the first thing they usually start with is, well, my market is different.
I'm like, really, really, once again, found another different market.
Yeah. And then those judgments, I'll say of what people do in their markets kind of start to creep out. Well, everyone around me is so ridiculously high or everyone around me doesn't know what they're doing. So I love that analogy that you put together. It really brings it true.
Yeah.
And it's, you know, it's different, maybe your perspective, if you're a selling technician or you're a sales rep for a heating and air company, you may or may not really have much control over the price.
Fair. And and that's a challenge a little bit because what we teach from a sales training standpoint is that you have to have confidence. You have to have confidence in the products that you're selling. You gotta have confidence in the company that you're working for. And you have to have confidence that there are buyers in the market who are looking for what you sell at the price point at which you sell it. Right. Which is not every buyer.
So the challenge sometimes is if you're a selling technician or if you're a salesperson and you had no hand in creating the pricing or you don't understand where the pricing comes from, sometimes that could erode your confidence in your pricing. And so that I think that's one challenge when it comes to how are we job costing, how are we coming to our price is does everybody in the company go, yeah, that's where we should be charged that's what we should be charging.
And then, you know, having been on both the salesperson side where I didn't really have any control and then the owner's side where I did have control, obviously, maybe as an owner, I had a lot more confidence in the pricing because I'm the guy that came up with So I'm like, this is exactly what we should be charging.
And so I think I learned from my experience, part of that challenge is how do I transfer that confidence that we're at the right price point to the other people in the organization. Right. So why don't I mean, that's a huge topic. I know.
But we should just Good places to go.
Yeah.
So what are I mean, you having been all over the country, what are some of the typical ways that you see heating and air contractors come up with pricing? Maybe we should just start there.
Yeah, definitely. We see, I would say, four primary ways that people approach pricing. First one, maybe the easiest, maybe the most common, being flat rate pricing. And flat rate pricing really does just say, this is my price regardless of how long it's gonna take or where it is, this is the price to do this job. And we see that a lot on the service side of the house, honestly.
And maybe not the worst approach, honestly, you know, just really being honest, right?
If you know that this is a quick job and it normally takes a three minute timeframe, and it doesn't require a lot of technicalities or parts, no chance that there's going to be multiple trips.
Maybe flat rate is the way to go, keeps the business moving and is pretty simple layout in terms of price book. Do you think you agree, especially maybe on service?
Yeah. And this is where I would industry, I was the young guy, and now I'm the old guy. And, you know, when I first got into it, time and materials was maybe on the service side, a a very predominant way. I mean, I remember in maybe the second house I owned, I needed a water heater.
And I had a couple of guys come out and quote water heaters. They all quoted time and materials.
And what was interesting about that was when one guy came in and said, well, look, I am a master plumber. And so my hourly rate is gonna be higher than everybody else's hourly rate, but I'm a master plumber. And I said, well, I guess if you're a master plumber, this means you'll get it done quicker. And so he had quoted four hours, and it took him six hours, but he was so embarrassed that he had bragged about being a master plumber and how good he would be that he only charged me for the four hours.
So even though his hourly rate was higher so I think, you know, if you look at kind of our evolution as an industry, time and materials, hands down, was it. And then people went, well, wait a minute. You're penalizing the people who can work more efficiently and smarter if you're only charging by the hour. So, therefore, let's go with flat rate.
And we say, alright. This compressor change out is gonna take six hours. Well, if you had somebody who's preskilled and they know what they're doing, they might get it done at four. Right.
And so we're not gonna lower our price. We're gonna reward the employee that could get it done at four, assuming that he could do it correctly.
So I think that's where that flat rate came from. Sure. The question then is, okay, that might be a great way to do your service pricing. Is that a great way to do install pricing?
Well, totally. And time and materials, I think, is where we see install pricing.
Okay.
For those that love that right service and love a time and material install. That's what I normally see.
No kidding.
And I think it's because of exactly what you said of where they came from and then the ease at which that becomes to price. You don't have to, you don't really have to dig too hard into your P and L to determine what that is. You know what the time is gonna be or you have a rough estimate based on who's doing it. And then you know what the materials are gonna be because you have a price sheet from your distributor or whoever you're buying equipment from, That's kind of it.
And you don't actually have to do any inward looking to the business to see what you need profitability wise. You can set price, you can go, honestly, you can register for a company and do that tomorrow. Yeah. Yeah.
So, very common time and materials and flat rate pricing. Those two by far in a way are what I hear people talk about the most. Now not necessarily is what they're talking about what they're doing.
I think the third one that a lot of people are actually doing is the divisor method.
Okay.
Which essentially takes your cost of goods sold divided by one minus your desired margin. Okay. So, if I needed to make thirty percent on all of my jobs, I would take my costs divided by one minus point three, that gives me my job costs that I'd have to charge on all of those jobs in that thirty percent.
Okay.
So, that's one school of thought as well. Any experience or stories that come to mind when you hear a divisor method? I know you've got some of those.
Yeah, well, it's you know, people call it a divisor method. Some people are just doing a multiple method where they're just saying I mean, I first got into the industry, again, whole now. So this is like two thousand and six, two thousand and seven. The company I worked for, we would just take the equipment cost and multiply it by two.
So three thousand dollars worth of equipment, six thousand dollars worth of install. And we we figured out pretty quickly, like, we're not making any money. So then we went to well, let's add in labor. So if it's three thousand dollars worth of equipment and a thousand dollars worth of labor, we were using that's labor.
Then I got four thousand dollars of cost of goods sold if you're doing it that way. So therefore, my price should be eight grand. And then we realized too, though, you just still have a lot of variables that maybe you're unaccounted for. And so, you know, when you're doing averages, if you have an average year, it works out great.
But you you could have some swings where you're like, hey. We did more attic installs or more basement installs or, you know, we had to run more of these types of flue pipes or whatever, and those things can really throw a wrench in it. So that it's tough. It's tough to to do your pricing where you're shooting from the hip a little bit, which is what that methodology feels like.
Definitely. And multiplier and divisor, they have the desired outcome in mind but they don't always take into account what's happening behind the scenes which is what you're saying. Yeah. And by the way, I throw out thirty percent as total example, no by means is that a best Right.
Lots of different ways that you can go about thinking it. Now, I mean like on its face, the divisor method is good math. It will net you that desired outcome. It just, again, like there's a little bit of risk inherently if things change or if you're taking on like lots of varieties of work or, you know, efficiency, right?
It doesn't take into any sort of account how efficient a crew might be or what might happen if problems occur.
Absolutely.
Which is where those risks kind of come in. But on its face, I mean certainly whenever we teach the weighted average cost of financing, that is a weighted average and then part two is the deviser to get the job cost. So, I don't wanna like knock it and say like, oh no, that doesn't work. It works.
We just gotta make sure that what you're putting into those costs is true. And that desired outcome is the right desired outcome. And I think that's like the level two to that where people get a little stuck. Is thirty percent the right gross profit?
I don't know. And, a lot of times people will ask me what is that number? I don't know. Cracking into your P and L, like, you really need to, like, dig deeper and find out what that is.
Thirty percent is a gross profit. Does that feel I mean, I'll I'll just ask you the wrong question. Right? Is that the right number?
You know, I would say thirty percent is maybe a residential new construction number.
I think if you're in the add on replacement business, you're targeting forty, forty five, and fifty percent as a gross margin because I think that's actually the cost.
Yeah. I mean, customer service is so much more important that in order to provide the level of customer service you need to that add on replacement customer, you gotta bake it in your margins. It's just new construction and nobody's at the job site and we can ship whenever and leave whenever and all that, like, then you can you get pretty slim. So I I would say, I don't know of a company at all that is in the thirty percent range in the add on replacement space.
Sure. And again, like, we're talking gross profit. Right? There's still all of that. You're right, if you're going to have good customer service, your gross profit better be higher because then all of those expenses and your overhead to make that good customer service happen are gonna come out to your net profit.
Yeah. So, I feel like anyone who's maybe driving in a car right now could be thinking like, Woah, we're getting deep into it. And it's true, it is deep, but it doesn't have to be unapproachable and it certainly is a conversation that I would say a good business owner worth their salt is thinking about constantly. Yeah.
And this will we'll probably get some emails.
Oh, have.
Let's go ahead and just prep this. What are the emails gonna be? Well, you're gonna have somebody that emails in and says forty five percent is the right number. Anybody over that is ripping people off and anybody under that doesn't know how to run a business. So we we can just go ahead. Hey.
I'll send those emails to you right now just so they're good and It's the speed limit.
Right? Yeah. We're we're we're ready. Oh, that's so true, isn't it?
Okay, so flat rate, time of materials, some sort of multiplier maybe in there, our divisor method. The last method that I often see with our base is the gross profit per crew day method.
Okay.
Which has a lot of words and it's got a lot into it. Right?
Yeah.
That's gonna basically look at our cost of goods sold, our gross profit per crew day, and our overhead per day.
Okay.
Bake that down and put that into a job cost. Yeah. Yeah. And, it's cumbersome. It takes a little bit more of like a peel back the onion, look at everything that's going on in the business, divide that by different efficiency scores or maybe a number of working days in the year, and then bake that down into a number. And, by no means is it just like a set it and forget it.
You absolutely have to go back and For sure.
And I think that's where maybe with the first three that we mentioned, people get a little caught.
I said it, I forget it. We had TJ on the podcast talking about the Contractor of the Future study. He actually found that nineteen percent of customers don't do any sort of in season or variable pricing as the year changes.
Yeah. They are like, what's that, eighty one percent of people set and forget. That's shocking.
It is shocking. Yeah. And it really is to some extent we get emotionally attached to our pricing. And so if you see pricing, very variable pricing, you feel again, it's do you believe in your pricing?
And that that really is you know, if you're gonna go out and sit down in front of a homeowner and the homeowner says, Mary, I just wanna let you know you're a thousand dollars more. If you don't believe in your pricing, then it's almost impossible to control your body language and your facial expression and your immediate response which is, okay, well, let me call the owner and see what we can do. If on the other hand, you believe in your pricing and the homeowner says, hey, Stephen, you're a thousand dollars more, you go, yeah, that that sounds about right. We hear that a lot.
So that that confidence piece, you know, hotels, airlines, I mean, just about everybody uses some sort of variable pricing, which is taking into account supply and demand.
It is probably the better way to do it. The challenge is, can you do it and maintain the belief of your employees in your pricing model?
Right.
Because if they don't believe it, if the employee believes, hey, we're ripping off this homeowner, then, man, you're gonna have a hard time. Your sales are gonna struggle. Your closing ratios dip. And so there's pros and cons to almost every business decision.
The pro of variable pricing is probably the better way to do it mathematically to run your business. The con is that the emotional side of running the business, where do your employees believe in it, do you believe in it, do you feel good about it, that's the trick. That's the hard part.
Yeah. That's so true. And kind of going back to what you had said at the top of the podcast, I've always I actually, not yet, keeping in a growth mindset, I have not that in the ownership role, but being in the sales role, especially when you're first starting out, you don't really know if you're high or if you're low. And then you go out there and you get a few rejections or you get a few yeses.
And you start to kind of get that feeling. And I've absolutely had those moments where I'm like, I am so high. Wow, I didn't even know I was this high. And you go back to your leadership and you kind of say like, our prices are too high.
And you're right, either they say, yes, and here's the reason. Or, they say, well, that's tough, go sell it. Yeah.
I've got that experience too. One thing I would say that maybe we could empower salespeople with though is anytime that I've given the feedback that, hey my prices really are too high and I'm really having a hard time closing. And here's what I've tried. You really can't go to that conversation without a few examples of what you've done, right?
So, here's what I've tried, here's where I'm losing, here's where I need help. Anytime I've been able to do that, I have been brought into the solution of, okay, well what would help us get to the finish line? What could a promotion look like? What would create an enticing opportunity for someone to say yes?
I think when salespeople can be involved in some promotion planning, there is a chance of a little bit more higher success. I didn't know if you had any experience with that or if you've seen that also, being able to give that feedback.
Yeah. I think, you know, I had a call probably two or three weeks ago, and I won't name the company, but they've got three or four sales people and so they're like, Hey man, we need to talk to you. So we get on a call and they said, Hey, we need you to talk to the owner of the company and tell them that our pricing is too high. We're getting our butt kicked out there.
So I said, alright, let's talk through it. I'm kind of curious because it could be that your pricing is too high. Maybe. Alright.
But how would we know? What would we check and see? So they give me some examples. Well, I went out to Mr.
Smith's house and we were three thousand dollars too high. And I went out to this job and we were eight thousand dollars too high. So, I mean, we had a bunch of examples, right, of individual case studies. And so we talked through a little bit and I asked the question, hey.
What percentage of jobs, when you lose them, do you lose based on price? And the salespeople are like, oh, one hundred percent. And that's what the customer tells us. Right?
I mean, why didn't you go with me? I mean, I thought we were buds. I thought you liked me. Well, your price was too high.
So almost one hundred percent of the time, customers are gonna tell you that the reason they didn't go with you is that your price is too high. Yeah. So that is just a mental toughness challenge of being in sales. A lot of times, you get more no's than yes's.
And so if you allow the customer telling you that your price is too high to impact your belief system, you're in trouble because the customer will always tell you your price is too high. So then we went back and we said, okay, well, what's your what's your closing ratio and what's your average ticket? Well, their team closing ratio was forty five forty six. There was one guy that was at, fifty one, and then a couple of guys a couple of people in the low forties.
And so I said, hey, guys. I mean, here's the thing.
Forty five percent closing ratio based on the kind of leads you're getting, how much of those are general market leads, your existing customer base, and based on your average ticket and your margins, you're right where you're supposed to be. I mean, you're gonna you're gonna lose more than you win But you're winning forty five percent of the time at a good average ticket and good margins.
I told them to shut up and go sell something. Yeah. Yeah. Said it the podcast.
But it but it I can completely empathize with that because Sure. When you lose we don't like losing. And when you lose, you know, like, we lost by a lot of money. Like, then it it does it does threaten your kind of belief system in your company.
So just going, hey. Your KPIs are right where they need to be. Right. You're doing great.
Just keep doing it.
Yeah. That's a great point because even as you were saying what the close ratio was for that company, I was like, well, it's not so bad. You know? That was that was my first internal reaction. Was like, that's good thing.
And then maybe peel back some other KPIs like how many callbacks are happening or how many times do we have to fix something or what's our warranty rate look like. If all of those things are ahead of in line too, then I'd say you're doing really well, right? Like not only are you closing a good percentage, but then you're doing good work, you're justifying your price in the market.
Yeah, so we now that I don't have a sales team that reports to me anymore, I can tell my secrets.
But, you know, one of the things that I did at my company was every time our closing ratio got over forty percent, I would go into PriceBook Plus and I would raise our margins one Yeah.
And so by raising our margins one percent, we started out at maybe thirty five percent when I first bought into the company. But two years later, we're at about fifty two percent, fifty three percent in terms of margin on markup on the equipment.
And so the sales team's closing ratio continues to hover around forty, forty five percent. But the the other piece of that is if we've got more money coming in, what do we do with the more money? What we spend on the market?
Absolutely.
And so that the the salespeople are getting more leads. So yay.
But when you get more leads I mean, you work at a small company and all you do is is handle referrals and repeat customers, your closing ratio is gonna be seventy or eighty percent. Right. If I go spend a bunch of money on marketing, and I bring in a bunch of Google leads, well, your closing ratio on those Google leads is gonna be thirty percent. So the more money you spend on marketing, the lower your closing ratio typically is. But you've got more installs, and you've got more sales and whatnot. So that's that mental toughness too when you're believing in your pricing.
If you don't believe in your pricing, if you're job costing and you're going, oh, we were probably too high, and you cut, say, five hundred bucks out. The five hundred bucks you cut out was probably going into your marketing budget. Yeah. That's the lowest priority in terms of paying bills. And so, therefore, you create this death spiral of now we don't have any marketing, so we don't have any more leads coming in. And so, that's that's that belief system.
Right. Right. Well, we've talked about that too with slower times in the inclination to just slash everything.
But then all of a sudden, you cut the fountain off, and now what?
Yeah.
Yeah, You turned a slow season into a dead season, and that's no good either. And then I imagine too, definitely a lot of that increase in profitability is going go towards marketing, but it also has to at some point go to your growth too, right? You're selling more, and you need to invest more in employees, in materials, in trucks, maybe space, all of that is going to require profit dollars.
Yes. I would say this was probably my steepest learning curve as a business owner. Yeah. I would say I'm a pretty good sales guy.
I like sales. I like marketing. I'm good at those things. I'm a mediocre business owner.
So but you're exactly right. I mean, the way we were building our company out, one of the things that would happen would be let's say we did four and a half million in revenue this year. We're like, okay. For next year, we wanna do maybe five point seven five or maybe even six million.
Okay.
Well, the challenge is, how are you gonna do that? You probably can't do six million revenue with the same overhead that you did four and a half million with revenue. Right? So to some extent, you've got to say, okay.
Well, we probably in order to do six million, we probably need one more person answering the phones, which means we need another desk and another cubicle, and where is that gonna go? And then we need another install truck and probably another service tech, and we might need another sales guy. And so to some extent, you're building the infrastructure before you actually get there. So a lot of times, we would look at our books, we would go, man, we we did four and a half million, but our margins were thin.
The reason our margins were thin was we were investing in future growth. So then the next year, you do six million, and you're like, oh, that was great. Except that we were building the infrastructure for the following year. And so that we we had to be very careful in terms of growing is great.
It's very expensive.
And so there's that balance between, well, yeah, it'd be great to spend more money on marketing, but we also at some point have to recoup the investment we spent last year. How do you balance all of that?
I am finding that purely even with my own time management and as my sales career has grown and even my targets from the company have grown because we're always growing. It's wild, they never go down. It's crazy.
Boss never comes to you and says, Harry, ten percent less sales next year.
I mean, you know, I keep an open hand for all outcomes but that has not happened. And, as that happens, Now, all of a sudden, some of the little operating tasks that I used to do, I can't really do them anymore and you do have to learn to delegate and network. And part of that is just kind of like growing up, right? Just gotta get better at those things.
I think what often happens to good salespeople or even good business owners is that operating work is very comfortable and it's very task oriented and they're free to check it off and move on. And you have to let that go.
Yeah.
And you've got to move on to like the bigger strategy or the bigger picture work. And it's hard, it's hard to do, but essentially in essence, same concept.
You have to grow those support roles and support functions if you're actually gonna grow that bottom line revenue because it just naturally is gonna require more time to do.
Absolutely.
So, okay, let's zoom back in maybe because we've gotten very big and broad, right? And if not so our industry.
It is.
We talked about four different job costing methods and then we got into like, you know, and what does that mean to expanding cubicles? I mean, that's kind of how it goes. We did maybe a too broad of a brush stroke on gross profit per crude day.
Why is that method so critical? Why do dealers like it?
How does that help the conversation with job costing versus maybe a flat rate or divisor, what have you?
Yeah.
It's it's great because you're essentially burdening your labor rate.
And the the theory, again, this is maybe ten or fifteen years old pre pandemic, was that equipment for the most part is an unlimited supply. We learned during the pandemic that's not really always true.
Not not totally.
But if if if in theory, we could you know, if I wanted to buy a million dollars from you, I could buy a million. If I wanted to build buy a million five, I could buy a million five.
Right.
So the limiting factor is your labor. How much labor do you have? So if you can tie all of your overhead and and basically all these fixed expenses to that gross profit per mandate, that's our limiting factor. And therefore, we know, hey. We're gonna cover these costs.
You know, the the worst feeling ever is to get to the end of the month and go, we lost money. And, you know, I think with the other thing that happens with that gross profit per mandate, and this is not necessarily a flaw just with that methodology. This is something, to your point, you just can never set it and forget it when it comes to pricing.
Is if you said, okay, you know, the rent for the building and I've got somebody answering the phones and we've got the power bill and water bill and what the so we have fixed costs. And let's say our fixed costs are twenty thousand dollars a month, and I do twenty installs a month. I say, okay, well my quote unquote overhead is a thousand dollars per install.
The problem is that some months you're only going to do fifteen installs, and then some months, you're gonna do twenty five installs. Right. And so, you know, that that's a challenge is you're constantly reevaluating. Hey.
What are our fixed costs? I mean, the incremental costs like a permit, let's going to charge each job for those. You don't worry about, hey, what's the variable expense? The variable expense is absorbed in your margins, but it's the what are the fixed costs.
And I think, you know, I got to go ride around in a NAS CAR driving thing. Have you ever done that before?
I like one of those experiences in the cars. I have not. Oh my god. So sorry.
As soon as I said it, I knew you were gonna think.
Yeah.
But so here's what they told us is, you know, you go through, four hours of training, and then they put you in a car and you're you're going around the the track.
By yourself?
Yeah. Oh my goodness. In in the one I did, they had a professional driver in the car in front of you. Okay. And so, obviously, stock cars don't normally have blinkers. But this specific car was outfitted. The right blinker was green, and the left blinker was red.
Okay.
And so that professional driver wanted you to stay right off his rear end because you gotta go high enough up on the bank and so on. And so if you started getting too far behind or too too close or something, he's using his blinkers to tell you speed up, slow down, speed up, slow down. Okay. But the other thing they tell you is that car is built to do a hundred and seventy five miles an And so if you're only doing, say, seventy five miles an hour, you are actually damaging the car. You're burning on the engine. And, you know, I thought when I was doing that, was like, that's a heating and air cover. If you're built to do three million and you only do two and a half million, you're going bankrupt, you're going under.
Yeah.
Could you do two and a half million and be profitable? Sure. But you gotta be built to do two and a half million. So that was our challenge.
You know, I had a business partner, so we were always bouncing ideas off off of each other. But you're both forecasting, like, what do we think we can do next year realistically from a sales and marketing standpoint? And then how do we build the infrastructure that can do that? If we overbuild the infrastructure, no matter how much we grew, we're gonna lose money.
I heard it.
If we under grow the infrastructure, then we can't support the volume that we're trying to do, and so then we have bad customer service and customers burn out. So the the ability to accurately forecast what are we gonna do next year, and then line up your overhead to say, okay. We are gonna do that. Like, we can support it with this overhead amount.
I think that comes before job costing. You've gotta know, hey. What's our overhead? What do we have to do revenue wise to cover our overhead?
And then how do I build my pricing to make sure that my margins are covered and I'm good? Because if you overshoot or undershoot your revenue, you can make money at any price point in this industry. But not if you have too much overhead.
I think that's the trick.
That's totally the key. The other piece of that, and the reason why I like this method a little bit more than the others, is overhead doesn't sleep.
That's true.
Yeah. And overhead is going to exist whether it's Christmas vacation or whether it's spring break or not. Know, rents don't take a break just because you're closed for a week.
Yeah.
And, this method kind of helps build that into a more realistic and actualized cost versus, okay, here's the month where I only have those fifteen jobs, I've covered overhead on these fifteen jobs. But then like, oh my gosh, what if I come up short? Like, how am I going insure payroll and for all of my fixed laborers and whatnot? I mean, that thing, we see that with people. Then you're talking about like business loans and lines of credit and upside down.
It can get a little overwhelming, I remember we have I mean, we had one year where, you know, we we kinda had an idea of what's a breakeven number on a monthly basis for us.
So, you know, one year, we said, okay. We gotta do at least three hundred and fifty thousand dollars in a month to cover all of our overhead. If we hit four hundred thousand in a month, we're probably making pretty good profit. If we hit four fifty, we're doing great.
So it wasn't just, hey, if you do three fifty, you make ten percent. If you do four hundred, you make ten percent. Or you do four fifty, you make ten percent. That's not how it works in this industry, right?
I mean, at three fifty, we made zero. Right. At four hundred, we probably made eight percent, and at four fifty, we probably made fifteen Right. And so that was the trick.
And I remember kind of one year just really dialing in on that, and then we did our business planning for the following year, we upped our marketing spend, we hired a few more people, and then I remember sitting down with my business partner Tim, I'm like, hey, how did our month do? He goes, well, we hit six hundred thousand. I'm like, man, that is awesome. How much money do we make?
He's like, zero. Because now our new breakeven is six hundred thousand. Yeah. And I remember just wanting to puke.
So I'm like, oh my god, we gotta do six hundred thousand a month just breakeven.
But but that ultimately is how you grow. Your your your floor is always raising.
Right.
And and so you again, you gotta be checking your pricing. Are we pricing accurately to cover our costs? Are we making sure that we've got enough in there?
And if you want to grow the customer's experience, hey, we want to make sure we have great installers. We want to make sure we have great service technicians. Well, great installers are more expensive than average installers.
So if you want great installers, you might as well just go ahead and bump your margin up now.
And that's the other trick. I approach everything from a sales standpoint, right?
I thought you were going say from a trick.
No, yeah. But salespeople say, man, if I had great installers, then I would be able to sell more.
Yeah.
And that's not how the real world works. The real world works by if you can sell more, I will get you some great installers.
And so that other piece is that we have to bring the money in first so that we've got the money to spend And if you're waiting if you're in sales and you're waiting for the company to get great installers until you feel comfortable about the price point you're charging, you're never gonna get there. You have to get comfortable with, hey. We're gonna raise our so that we can go get great installers. Yeah. And, that's tough.
That is tough. So, one of the earliest memories I have as a kid is my dad was in the camera sales industry. And at the time a lot of consumers bought cameras at Best Buy or big box retail stores. Okay. And one of our favorite things to do on Saturday mornings, and I think it was as a collective family our favorite thing to do because my mom was like, I need some time alone, get these kids out of the house. As we'd go to big box retail stores and get all the flyers and we would compare prices of all of the different cameras and the styles.
You know for all I know my parents were making it a learning project for me and it was subliminally you know a math project but whatever that's what we did. So, that was just something that my dad did routinely as a sales guy to just kind of see what was out there.
Is once you set your price, is it a good idea to compare yourself against others? Or do you just take that confidence stride and go forward? I could make the argument that you got to do both. You do have to be confident, but also it is a good idea to see what the market is marrying out there. You don't necessarily change based on every flyer you see, but you do want to know, right? I would assume.
I think so. I mean, if you had a stay at home mom that you knew, one of the employee's wives or your buddy's wife or whatever, or a stay at home dad, and you're like, Hey, I'll pay you fifty bucks for every heating and air estimate you give me. That's a great way to just get a little bit of market intelligence. That's why I love Just go, Hey, what are we competing against out there? I think, on one hand, I'm not changing my pricing because of what other people are doing, but I do have to know what are they charging because what am I going to have to overcome? I had a phone call literally probably an hour and a half ago and the sales guy goes, I'm at twenty eight thousand dollars two systems, the homeowner has another quote, dollars twenty two thousand. And so, we're talking through how do you sell that?
Fortunately for him, he's got a pretty healthy belief system in his company. He's like, we have great installers.
Okay.
We have good systems in place. And so from that standpoint, he's able to sell it because he believes in it.
But, man, it it it would be tough to sell that price difference if you really do feel like, well, hey. This is a cabinet and a condenser fan motor and a coil, and that's a cabinet and a condenser fan motor and a coil. And they got installers and we got installers and so therefore our pricing should all be the same. Yeah. That's your belief system stuff.
Oh, interesting. So, what's his strategy? Has he has he picked a path yet?
Well, you gotta pay extra for that if you want the sales training that goes with the price.
Woah, we're not on a subscription mode yet.
No, no. Yeah. I mean, it's you know, we talk about belief systems, behaviors, and techniques. So in his case, he's got a pretty good belief system.
So that's step one. Yep. The behavior is you gotta get in there and fight for it. And you don't run from it.
You don't hide from it. You're like, yeah. Own it. We are more expensive. And then the technique is, can you successfully explain that and handle it?
And then the last part is what I told him kind of at the end, which is, hey, you win some and you lose some. So if your closing ratio is forty five percent, that's right where you should be. If your margins are good, that's right where you should be. And so if you go and you win this one, awesome.
But if you go and you lose this one, it doesn't mean that you should lower your margins. It doesn't mean that you should do anything different. You should keep doing what you're doing because if you can close twenty eight thousand dollar tickets at a forty five percent closing ratio at good margins, you'll be great in this business. Yeah.
So just stick with it.
Great advice. Love that a lot. So, yeah. So, basically, I mean, there are lots of different ways to go about it. None one is necessarily better or worse than the other depending on what you're looking at. However, if you wanna get the most technical and really account for all three sixty five days of the year, we would certainly look towards the gross profit per crew day model as a best practice, so to speak. However, you can get pretty far with advisor methods or flat rate depending on what kind of job it is.
Just lots of different ways to look at that conversation.
And then moreover, once you set that price, be confident and go win that business.
I think Can we revisit the variable pricing a little bit? Sure. Can I put you on the spot? Okay. Do manufacturers have the same margin on their builder grade equipment that they have on their twenty SEER variable equipment.
Oh, wow. Interesting.
Am I allowed to ask very direct pointed questions?
Oh, you know what? Pay and find out. No, I would say I don't think I'm spilling any beans when we admit that that's true. Yeah. Absolutely.
And and the reason for that is that the price point at which the entry level equipment is sold, those buyers are very price sensitive. Right? So, therefore, we have to recognize those folks are price sensitive. But the kind of person that maybe does go out and buy a twenty SEER variable speed system with a good indoor air quality component and so on, they're typically not as price sensitive.
So the other piece to say to a dealer is I would say, well, if the manufacturer who has a massive marketing department with all of these big brains that have studied pricing strategy, if that's how they do it, then don't you think maybe you should do it too? And so I think going into it to say, okay, we do wanna use gross profit per mandate, meaning we've got to account for our overhead no matter what. Right. But we can scale up our our margins as we go up because that's what everybody does.
That's what Cadillac does. Sure. Like any any big brand. Mean, it does you know? And so I I think that's the other piece is to say, okay.
Gross profit per mandate. You're covering your overhead. You got your built in margins. Fantastic.
But, like, go get that higher end equipment.
Yeah. Yeah.
Because that's where your margins are.
Well, and you'll be able to, right, because it will increase the cost of goods sold that you're building into that job, but then based on the efficiency, you're winning at a rate that is gonna allow you to make money.
So we love that. Yeah.
I think, again, learned lots of lessons as a business owner that maybe I didn't learn as a sales guy. But product mix becomes so important as a business owner because you only got a certain number of days per week where you can do installs. You only have a certain number of of of manpower you could put at it. So that product mix, if you can get your average ticket up and the margins are slightly better at that price point, and all of your referrals come from the higher end equipment because people notice the difference, then as a business owner, I would say I almost focus on that as my top KPI.
Yeah. What is our product mix? If it's all just basic equipment at low margins, man, we're gonna have to sell a lot of those to make any money. If, on the other hand, we can sell some better equipment, our margins are gonna be better.
We can get better installers. We can expand the company. However, we could add more money to the marketing business I mean, into the marketing plan, and that's our repeat referral customer base.
It makes sense. It makes sense. Well and with that, another best in class episode of HBAC Full Blast.
HBAC Full Blast.
When are we seeing each other again? Are we having to this far?
I think it's twenty twenty seven.
Oh, Isn't that the truth?
Well, it's only because we're out there making money as we love to do. Yes. Well, I'm Mary Carter. He's Stephen Ross. HVAC underscore full underscore blast at train technologies dot com. Is that right? Hello.
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