A firm grasp on expenses and steady demand for repairs can help in a downturn
Economic forecasters have earned a bad rap when it comes to predicting recessions in the market. Then again, if it were easy to predict the future, everyone would do it.
According to the National Bureau of Economic Research, the U.S. has had 33 recessions since 1854. On average, recessions come every five years, and it’s been almost nine years since the last one, per The New York Times. So, past evidence suggests the U.S. is due for a recession in the near future.
Additionally, there are plenty of concerns for the HVAC industry, including the new tariffs on steel and aluminum, that experts say will disrupt supply chains and increase inflation, increase mortgage and interest rates, decrease the rate of savings, and increase automobile delinquency rates.
However, small businesses all across the country have weathered — and survived — recessions before. The key lies in being prepared for anything and everything. As Benjamin Franklin supposedly put it, “Fail to plan, plan to fail.” And HVAC contracting business owners are certainly not slackers when it comes to planning for the future success of their businesses.
Steve Lauten, president, Total Air & Heat Co., Plano, Texas, never actually budgets for a downturn in revenue. He does, however, have a plan in place for when his company does not meet revenue goals.
“The key to managing budgets and goals is to look at daily revenue,” he said. “If you know how many service calls you need for your service department, then you know if you are short on calls. When we are short on calls, we follow up on open repair quotes and see if the customer is ready to schedule. We have CSRs that do that type of follow-up along with scheduling maintenance agreement calls. One of the biggest challenges HVAC companies face is off-season is revenue. Maintenance agreements are the key, and it helps our team stay busy year-round.”
Lauten added that his company’s focus does not shift during a recession, but he does keep a closer eye out for opportunities.
“For example: someone calls asking how much a service call or a tuneup costs,” he explained. “Rather than just quoting the price, we ask the CSRs to dig deeper and to see what’s going on by asking more specific questions, such as: ‘I’ll be happy to give you a cost on a service call, could you describe what type of problem you are experiencing with your system today?’ The point is to get away from price and focus on what your company brings to the table, show them you care, and that you will help them find the best solution.
“In addition, if your CSRs or dispatchers know how many calls the company needs today, they are motivated to help you reach your goal,” Lauten added.
For Manassas, Virginia-based Parish Services Inc., planning starts with strategy.
“I want our strategy to be able to weather any economic condition,” said Linda Couch, COO, Parish Services. “Our tactics might change with a recession, but our strategy won’t. In general, we limit our services, so we can optimize, but just like with any investment, we want to mitigate risk by being diversified. In our case, that means offering both repair and replacement services across three trades.”
Couch added that the HVAC industry ends up being very similar to the auto industry in a recession: People still need their equipment to work, so they opt for repairs over replacement.
“Frankly, that’s a higher margin business for us — it creates more work, and, eventually, that client will still need a replacement,” she said. “A recession presents opportunities to tout the benefits of things like proper maintenance and water and energy conservation.”
Parish Services practices consultative selling, which means its strategy is to listen to the customer and offer an appropriate solution based on their needs and budget.
“With this approach, there’s no need to change just because there’s a recession,” Couch said. “In fact, we’re even more valuable to a client during his or her economic hard time. It doesn’t take a recession for any one client to struggle with paying for services.”
Butch Welsch, owner of Welsch Heating & Cooling Co. in St. Louis, said he definitely attempts to make plans if he sees a recession coming.
“I have regular meetings with businesses in other industries in an attempt to maintain a feel regarding the status of industry in general,” Welsch said. “The most important thing we have done to prepare for a recession is to change the mix of our business from predominantly new residential construction to where we are now: only 30 percent new residential construction, and 70 percent service, replacement, and architectural sheet metal. Whereas new residential construction is greatly affected by downturns in the economy, the need for service and replacement of furnaces and air conditioners is much more weather-driven than economy-driven. Additionally the architectural work we do is mostly intricate copper work, which is also necessary regardless of the economy.”
It’s important for contractors to keep in mind that recessions don’t affect all geographic areas at the same time, nor to the same extent, Welsch added.
“For example, we in the St. Louis area have not really experienced any ‘boom’ times from the most recent recession,” he said. “In fact, many question whether or not we are completely out of the recession. Therefore, we would not expect to see a great deal of change even if there were a recession affecting other areas of the country.”
PRICING AND STRATEGIZING
One of the greatest challenges facing the industry as a recession looms on the horizon is the ongoing labor shortage. Because of that shortage, some experts are advising contractors to be more aggressive in their pricing.
Lauten said he reviews his costs of doing business every year and then budgets based on the goals he needs to accomplish within the next year. This is how he determines his rates.
“Rather than lower my rates, I look at what I can do to lower my overhead and expenses,” he said. “On the list is managing unbillable time — that’s windshield time between calls, shop time, or any labor I pay that does not have revenue associated with it. No doubt all of us have times when we need more work. I’ll reduce prices for jobs that keep my team busy if things are slow. That could mean reduced commissions for salesmen or lower spiffs for CSRs. The most important aspect is to know where you are now, then look at options. I always leave my price books at the rates I want, then discount as needed.”
Lauten said budgeting for a recession is difficult, and smart business practices should be used at all times, not just during a recession.
“It all begins by knowing where I’m at,” he said. “What’s my hourly break even, how many calls do I need, or which jobs fit my company best? I avoid high labor, low material jobs. If you look at the total business opportunity for your area of service as a ‘pie,’ the question is how much pie do you have now and how much more pie do you want? In all respects, the way to get more pie is to be better at what you do than the competition, because the pie represents all the opportunity for everybody. Train, practice, and train. Don’t cut training expenses in a bad economy. Instead, find ways to be better.”
Couch said there is an implicit assumption that a recession means less revenue, and that’s not necessarily the case.
“Regardless of the economy, we always want to maximize profit, so we’re always making cuts where it makes sense,” she said.
Welsch Heating & Cooling doesn’t do an overall price increase when it sees a recession because of its volume and the fact that many of its customers are existing customers or come from referrals, Welsch explained.
“That said, however, I teach a class on the HVAC business, and one of the issues we study is the effect of volume and pricing,” he said. “One of the points I make is as your volume decreases, you need to raise your prices to avoid losing money. Unfortunately, when work slows down, most contractors tend to lower their prices. It is because of reactions like this that the turnover of businesses in our industry is so great.”
PREPARING FOR THE INEVITABLE
Preparation has long been the key to success, and that is no different when it comes to surviving a recession. Lauten advises fellow contractors to be sure to have enough funds set aside, so they can ride out a downturn in business.
“Having enough cash available to operate your business for six months is good,” he said. “Manage costs — when things are slow, it’s common to see productivity drop. Manage those labor hours. Have a line of credit available that you can use to fund operations until things turn around. If your business is set up properly, provide better value, rather than a lower price. Offer free maintenance on systems you install, free filters, etc., whatever builds value rather than lowering your price.”
And if revenue is declining, it’s important to recognize if it’s because the overall industry revenue is declining or if it’s just your revenue that is declining, Couch noted.
“The first scenario is a fundamental shift in the industry, but the other is about losing market share,” she said. “I would approach those situations very differently, but in either case, I’d cut in some areas and increase spending in others. As for pricing, it’s part of an overall marketing strategy, and I wouldn’t change prices in isolation.”
Additionally, diversifying your business is equally important, Welsch added.
“My greatest advice to contractors would be to diversify your business to the extent that you are not wholly dependent upon any market which may have significant swings in the amount of business available,” he said. “Recessions in every industry are inevitable. The secret is to be positioned so that when the recession comes in a particular portion of the business, it is not devastating to your company.”
Publication date: 6/18/2018