In Pursuit of Profits
Originally published: 09.01.13 by Greg McAfee
6 strategies for increasing your profit margins
Let’s assume there are two very reputable HVACR businesses that operate within the same area, deal with the same economy, and serve very similar customers. The first is Steve’s company, a 20-yearold firm with 40 employees that generates $7 million in revenue each year. The other is Tom’s company, which has only been around for 12 years, has 18 employees and generates $2.8 million annually. Which would you rather own?
If we were to stop right here, Steve’s company would win, hands down. We tend to judge a company’s profitability based on one measurement. However, Steve’s company only had a net profit margin of 2 percent last year: $140,000. Tom’s company, on the other hand, runs more efficiently, with better systems in place, and enjoyed a profit margin of 15 percent, or $420,000. As a matter of fact, Tom has doubled his net profit three times in the last eight years. Here are six strategies that will help you increase your profit margins, just like Tom!
1. Control Expenses
Before you even consider increasing profits, you have to get your expenses under control. A person recklessly
overspending is often told they need to get their house in order: spend less and save more. That same sound financial advice works for companies as well. Throwing money at a problem without first fixing the problem only makes a bigger problem. Too many business owners think their problem is not enough sales. While that very well might be the case, the problem could also be too much debt, poor collection procedures, or the wrong people doing the wrong jobs.
Finding ways to cut costs and eliminate profit holes in your business is essential for a better bottom line. For example: find ways to get more value from suppliers, such as quicker turnaround times, better systems, consignment options, etc.
At McAfee, we control our spending by first forming a plan. In his newly released book Double Double, lifelong entrepreneur Cameron Herold, former COO of 1-800-GOT-JUNK?, shares his plan for 100 percent growth.
The process of doubling your revenue and profits starts with what Herold calls “the painted picture,” a written document that vividly details what your company will look and feel like in three years. Herold says, “To make your painted picture a reality, you have to take action. And in order to take action, you have to focus on setting goals for that action.”
Each year, we at McAfee create a budget for spending that aligns with each month’s sales projections. It’s much more accurate to compare percentages monthly and annually rather than real numbers. Some challenging questions when formulating your plan might be:
- If we sold today and a new group bought us, what would they change or cut first?
- If we were going under, what would we cut first to stay afloat?
- If we didn’t have to impress anyone, what expenses would we eliminate?
2. Generate More Leads
Once you have fine-tuned your spending, you can focus on generating more sales leads. There is a plethora of ways to generate leads, including: TV, radio, website, blogs, social media, direct mail, word-of-mouth, leaving business cards everywhere, going door-to-door, placing door hangers on doors surrounding the homes you serve, yard signs, joining clubs, joining networking groups and associations, telemarketing, vehicle signs, newspaper ads, writing an HVAC article, gathering references from your customers, and many more.
Some of the leading companies in our industry belong to networking groups and have found them to be a great way to generate more leads. We belong to at least six groups. For the most part, they all generate several leads per week. My good friend and mentor, Mark Swepston, president of Atlas Butler Heating and Cooling Co., says an owner should be on the golf course or volunteering their time somewhere more often than they are in the office because there are more potential clients to reach out there.
3. Know Your Target Market
We thought we knew ours, but after investing in a market research study we found we were only half-right. Knowing your market allows you to know where to advertise and where you should be more often.
According to Peter Francese, a demographic trends analyst and the author of 2010 America: What the 2010 Census Means for Marketing and Advertising, thinking about who your customers are and how they might be changing often becomes a low priority amid the daily chaos of overseeing sales, accounting, hiring and technology. But when you don’t think about who your customer is or who you serve the most, it really means you’re not paying attention to your future.
For the first time in American history, we have five generations working side by side, owning homes and buying HVAC systems. We have the traditional generation (born pre-1945), Baby Boomers (born 1946-1964), Generation X (born 1965-1980), Generation Y (1981-1995), and the linkster generation (born after 1995). We know that Generation Y would enjoy high-tech equipment, such as thermostats that think and talk back, but traditionals, in most cases, want easy-to-read and operate, reliable equipment. By knowing who you serve, advertising and marketing is much easier.
4. Price Your Way to Greater Profits
Your pricing system has the biggest effect on your net profit margin. Many owners were mentored and trained for years in the trade as employees in order to be successful technically, but have never been trained in business skills and lack what is required to run a profitable business. The National Federation of Independent Business (NFIB) estimates that, over the lifetime of a business, 39 percent are profitable, 30 percent break even, and 30 percent lose money, with 1 percent falling in the “unable to determine” category.
How do you know your prices are right? I’ve heard it said that some contractors raise their prices until they get a certain number of customer complaints. Others have said, “This is how my grandfather did it and it worked for him, so I’m sticking with it.”
What you charge for your products and services must be enough to make a good profit. Sure, there are times when you can help someone and even do a job or two pro bono. That, in and of itself, can be profitable in other ways. But the majority of what you do needs to be profitable — even very profitable.
Although we vary in other areas of opinion, Ayn Rand had it right when she said, “America’s abundance was created not by public sacrifices to the common good, but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America’s industrialization. They gave the people better jobs, higher wages, and cheaper goods with every new machine they invented, with every scientific discovery or technological advance — thus, the whole country was moving forward and profiting, not suffering, every step of the way.”
5. Have More Than One Profit Center
Let’s face it, HVACR business people are as seasonally driven as farmers. It can be feast or famine for many companies if they don’t create other streams of income from areas such as air duct cleaning, air duct sealing, plumbing, electrical, filtration, air testing, insulation, sheet metal shop, carpet cleaning or any other home/business service they can perform well.
In 1993, we received several calls for air duct cleaning, even though we barely had our heating and air division off the ground. However, during my research about this service, I found a used truck and purchased it. We became one of three companies performing air duct cleaning in our area at that time. Soon after, I became certified and marketed that service with every heating and air ad we ran. Today, we are the number one air duct cleaning service in our territory and consider it another profit center for McAfee Heating and Air.
Let’s look at McDonald’s. They were number one in fast food for lunch, dinner and anything in between, but they saw a gap in the market for inexpensive and easy breakfast meals. They altered their processes, menu development and kitchen management capabilities to close that gap, producing a supersized new revenue stream with all those Egg McMuffins! Since they began serving breakfast after midnight, more than 25 percent of Golden Arches revenue now comes from its breakfast foods, and a growth of 25.7 percent is forecasted through 2017.
6. Hire the Right People
According to Adam Baker, the founder of Blotter.com, “Smart, talented people will make a bad product great. Bad people will kill your business.” With great people in your business, you’ll reach heights you’ve never expected you could achieve. If you hire the wrong people, you’ll have to endure poor performance, unhappy customers and poor morale among co-workers. All of this will require more management and more training.
We hire right when we interview well, asking questions that require specific answers, such as, “Tell me about a time when you had a disagreement with a supervisor. How did that end up?” We test each applicant not only on technical ability, but also for personality, aptitude and performance.
We hire for attitude and train for skills. We are more concerned about our employees fitting into our culture than about how they turn a wrench or balance the books. A recent study by Lauren Rivera, a management professor at Northwestern’s Kellogg School of Management, found that hiring managers evaluate candidates based on cultural fit over qualifications. At McAfee, we tend to attract those with a strong work ethic, high level of integrity, and people who are flexible and goal oriented.
As an owner, being profitable means earning enough money to cover all of your obligations, both business and personal, with some left over to invest as you please. It’s a must-have for survival. We are a for-profit business and proud of it.
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