Don't Forget the Business Basics
September 03, 2009
A version of this article appears in the September/October 2009 issue of Home Energy Magazine.
There has never been a better time to focus attention and invite action on home energy efficiency. The Obama administration and the current Congress are moving quickly to put in place widespread energy efficiency targets, programs, and resources. Another likely development is the proliferation of property-assessed financing tools. These financing tools, such as AB811 in California, attach long-term loans for energy efficiency, and the resulting loan payments, to the property rather than to the homeowner. This provides lower interest rates and makes it less expensive for homeowners to retrofit their houses.
Home Performance with Energy Star is active in 27 states, and it is receiving increased support from residential contractors. Utilities facing both state level efficiency mandates and constraints on regional generation capacity are also recognizing the need to increase the energy efficiency of existing homes.
“Eighty percent of success is showing up”
– Woody Allen
At GreenHomes America, we believe this is a great time to be in the home performance business. The consumer drivers are in place. Policymakers are beginning to recognize that we need deep savings in huge numbers of existing homes, and they’re setting up programs to make that happen. It’s important to remember, though, that good ideas and good intentions don’t automatically lead to sustainable success. At its core, home performance is still a business, and to succeed, you must not ignore the critical elements of running a business.
This special issue of Home Energy looks at the business of home performance contracting from a variety of angles. Rather than zero in on a particular area, however, I am going to touch on several areas in which most residential contractors could improve—areas that experience has shown can have a real impact on profitability and success.
Figure Out What Business You’re In
Let’s say you’ve got a chance to deliver a big insulation job where you’d make nice margins. Should you pursue it? What if the local community college asked you to spend one day a week teaching two home performance courses. Should you accept? Should you try to get the home energy rating on the new 200-home development that’s going up in your community (if new construction ever ramps back up)? Are you a rater, an A/C installer, a PV company? What business are you in?
GreenHomes has answered these questions for itself. We focus almost exclusively on existing homes, delivering comprehensive assessments and a full suite of in-house installations, including insulation and air sealing, HVAC, windows and doors, and solar applications. These answers make sense for us. But you need to figure out for yourself what makes sense for you. You need to evaluate the demand, what you’re good at, your competitive advantages, and your financial situation. For example, if you buy a spray foam rig, you’ve got to pay for it. So you need to look at your business and determine if the monthly revenue and margin will allow you to pay for the rig not just on one job or for one month, but for the next ten years. Can you sell more foam? How will focusing on selling foam affect the rest of your business? If you’re going to expand for a project, how will you train the new staff—and what will you do with them when the project is over, and you can’t find enough work to keep them busy?
The way to approach these questions is to map out a business plan and the financial models that go along with it. You don’t need a team of MBAs and CPAs to do this. Many state and local small business agencies can help, often at low or no cost. Take the time to develop a plan. This never prevents you from taking advantage of a great opportunity when one comes along. But by looking ahead and planning, you can avoid investing your life savings going down the wrong path and focus your energy and resources on your real objectives. Sometimes you’ll get it right and sometimes you’ll get it wrong. But even when you get it wrong, you can learn and help yourself do better next time.
Make It Easy for Your Customers
Once you’ve figured out what business you’re in, you’ll spend much of your energy trying to win customers. And again, from the common sense department, we learn that the easier we can make it for our customers, the more likely they are to do business with us. People want their problems solved, they appreciate responsiveness, and they don’t like hassles.
So I’ll take a moment to state the obvious. When people call, answer the phone. Return calls when you say you will. Show up on time, in clean clothes, and protect your customer’s home and property. This means don’t leak oil in the driveway, don’t track dirt on the carpet, and don’t let the dog out. Do keep your customer informed and make sure you clean up after yourself. It’s not always easy. But it is always important.
Beyond the obvious, though, there are many things you can do to make the diagnosis, sales, and installation process easier.
First, and too often ignored by contractors and programs alike, is financing. Home performance jobs are complex; often they include multiple measures and some combination of insulation, air sealing, heating, cooling, windows, doors, lighting, and even appliances. It is not uncommon to see work scopes exceeding $10,000 or even $20,000. Most customers can’t—or don’t want to—pay cash for big-ticket jobs. If you don’t help them, you’ll either lose them altogether or wind up with a smaller and less complete job. At the minimum, you need to be able to steer customers to financing. Even better, you should facilitate the process and directly connect the customer to the program or lender. (See “Growing Your Performance Contracting Revenue,” p. S58.)
With financing, more attractive rates do help. But they don’t have to be 0%. We feel the sweet spot is in the range of 4%. At least as important as the rate, though, is ease of access. The simpler, faster, and more hassle-free the financing, the more likely you are to get the job.
Money is important. But so is time. A process that requires multiple visits to the home is a recipe for failure. Bringing in the HVAC guy one day, the air sealing crew another, the insulation crew yet another means the homeowner has to take off work or otherwise adjust his or her schedule to meet yours. The harder you make it, the less work you’ll have. Contractors who can offer one-stop shopping will have a very distinct advantage. We take care of the whole project—with our own crews—for our customers. A related element is the ability to fully spec and price a project on the first visit. To do this, you really need to equip your salesperson with an automated system that can provide the estimate on the spot. A customer who is ready to proceed today doesn’t want to have to spend time another day going over the project.
Other ways to simplify things for the customer include facilitating program paperwork and incentives, and providing tax credit information and documentation. We go so far as to help customers fill in forms; provide copiers for IDs, tax forms, and so on; and even drive to the county clerk’s office to pick up a copy of property tax information if that’s what it takes.
Get the Right People on the Bus
While determining whether someone is the right person for a job—or the right person to reinvent a job—is difficult, some screening is pretty straightforward. GreenHomes uses preemployment screening that includes background checks, drug testing, driver’s license checks, and employment eligibility documentation. And we look hard for people who don’t just have the technical skills but also embody our culture and core values.
This works. Three years after acquiring our Syracuse location, we actually have fewer staff delivering higher revenue and higher margins than we had when we started. People are happy—and those who had been with the original company a long time report it’s the best environment in the last 27 years. People tend to stick around, and not just because we pay better than our competitors and offer good benefits—which, by the way, we’re happy to do to have the right people stay with us.
On the other side, not only do bad apples not contribute—they hold everyone else back. As a result, they decrease morale and profits, too. This doesn’t mean you should instantly fire anyone who doesn’t meet expectations. It’s important to make sure people know what’s expected, and to give them a chance to succeed. But be honest with yourself, too. When you know you’ve got the wrong person, don’t procrastinate. Move on.
To attract and retain good people, match people to the company and the job. Check on their goals and their long-term plans and make sure it’s a good fit. Of course, paying well and offering good benefits helps. But making work fun and rewarding is important, too.
Reward What You Want to See
If you want to see efficient, high-quality work done in a way that is consistent with your values, that is what you should reward. If you pay workers by the hour to air seal an attic, the longer they take, the more they make. And if they do a poor job and have to go back and fix it, they make even more! The same applies whether we’re talking about installing a furnace or replacing windows. Rewarding slow, inefficient, poor-quality work isn’t good business—either you lose money or you frustrate your customers. Neither is a good way to stay in business.
But what if you paid only for work that is done according to your quality standards, and that satisfies your customers? Some high-performing HVAC companies use pay for performance with great success. This does mean, though, that you need good standards for installation, quality, and customer service, and you need to be able to measure performance and enforce these standards. (See “Improving Your Home Performance Contracting Business Through Quality Management,” p. S55.)
At GreenHomes, we try to reward almost everyone in the company based on his or her contribution, whether through pure pay for performance or a combination of salary and performance-based incentives. When an employee does a great job, the company earns more and the employee earns more—we all win together.
It really is true, though, that money isn’t everything. There are a variety of ways to provide nonmonetary rewards and incentives. Praise is an easy and often forgotten reward. Make it a point to catch somebody doing something good every day, and let him or her know about it! Regularly call out performance that aligns with company values in a company meeting or when you notice it on the job site or in the hallway. Introduce a bit of friendly competition (but only in a way that doesn’t harm the collaborative effort). Ask for ideas—and implement the good ones.
With local and federal incentives on the rise, home performance contracting makes more sense than ever. Demand will certainly be increasing. But if you want leads, if you want business, you have to market yourself. Despite program level campaigns, you shouldn’t—and can’t—rely on any program to do it all for you. And even if you could, you wouldn’t want to, because programs change over time and are subject to outside funding decisions that have nothing to do with your business.
Marketing doesn’t mean you have to do a lot of mass media advertising. In fact, for many smaller contractors, mass marketing won’t make sense. There are several good articles about marketing in this issue (see “Marketing Home Performance: Tactics of Successful Contractors,” p. S18; and “Green Marketing and Leveraging the Internet,” p. S22).
I want to make one point about the marketing message. If you’re reading Home Energy, it’s probably because you and your business are concerned with energy efficiency. And rightly so. But energy efficiency isn’t the driver for most customers. People call us for comfort problems, like rooms that are too hot or too cold, or both. They call us for home safety issues like indoor air quality (IAQ), and for replacing or improving windows, HVAC systems, insulation, and so on. And they call us to address moisture problems, such as leaks, ice damming, or window condensation. Notice I haven’t mention energy efficiency or high utility bills yet. Sure, we do get calls on that. And the calls spike when energy prices spike. But most of the time, that’s not why people call. It’s not what is driving them. And you need to remember that in your marketing messages. Energy efficiency is not front and center for most people most of the time. Find the drivers for your market and tailor your message accordingly.
The second critical point is to make sure you ask your customers how they found you. You should try to capture this every single time. This allows you to keep tabs on what channels and what messages are working. Regardless of your budget, you can then spend your marketing dollars most effectively. Be careful here, though. This is only telling you how well the things you are doing right now work—they won’t tell you how well the things that you are not doing could work! It’s important to continually test new messages and different vehicles to adapt to a changing market, changing competitors, and changing conditions. Is some vendor approaching you about a new Web advertising scheme? Try it out for a while—and track and measure how it’s working. If it works, do more of it!
To help capture what’s working you want to record information somewhere. A napkin by the phone in the kitchen probably isn’t the best tool for this. Very few contractors use a lead form (see p. S36). All contractors should. The lead form allows you to do several things. First, its help you collect all the important customer contact information. Second, it provides a series of prompts for that initial phone conversation to make sure you or whoever answers your phone collects important information—including the way the customer learned about you and what prompted them to call. We call this the “lead source”. The prompts can also help you gather details about the customer’s concerns so you’re better able to respond to them when you get to their home. And a well-crafted lead form can include scripting and prompts to help prepare your customer for the home visit and the sales process. (By participating in the Home Performance with Energy Star program, contractors have access to helpful marketing tools, such as a lead form.) The lead form can be electronic, and that certainly makes analysis easier, but even a paper-based system can be very useful in a smaller business.
Track, Measure, Evaluate, and Adjust
It’s very important to track information so you can measure how well you’re doing and where you need to make adjustments. This is important with respect to marketing; you want to know whether your new TV commercial is working, if your new direct- mail piece brought in any jobs, and how much business you’re writing from the Yellow Pages, for example. But the importance of tracking is not limited to marketing. You want to be able to look at all aspects of your business, see what’s on track and what isn’t, and make adjustments in as close to real time as possible. Here are some examples of the questions you should be asking:
- How many leads do you need today to meet your production targets the week of May 25?
- Are sales on target for April?
- What margin did we make on the Rogers job? If it was high or low, why? Any pricing or production adjustments needed?
- What is our expected profit for April?
- Should we be hiring, adding trucks, or digging in?
Having an integrated customer relationship management (CRM) and accounting system makes this easier (see p. S8). There are a variety of off-the-shelf products that target residential contractors. But a smaller company can use simple spreadsheets or a simple database to automate much of its business. What is important is that you collect the data, that you organize the data in such a way that key trends are apparent, that you look at the data frequently to make sure things stay on track, and that you adjust your activities as needed.
But even if you have the data, how do you know you’re on track? For that, you have to measure yourself against something. You’ll need to set key performance indicators (KPIs, benchmarks that you measure yourself against) and targets against which to compare your actual performance. To do so, you must first deconstruct your business, so you understand how it runs. To get started, it’s often helpful to think in reverse order. Given the size of your business (whether actual or with targeted growth), you determine how much revenue, margin, and profit you need to sustain yourself. This should translate to annual, monthly, weekly, and daily production targets.
Of course, to hit production targets, you first need sales. Remembering that some percentage of sales never make it to production because the client couldn’t get financing or cancelled the order, adjust your sales targets accordingly. Now to get a certain dollar volume of sales, you’ll need X number of sales based on an average of Y dollars per sale. Number of sales and size of sales become two more KPIs to measure yourself against. Going back one more step, you know you need to run a certain number of appointments and close a certain percentage of these appointments. This gives you two more KPIs.
Next, to run appointments, you need leads. And so on. Now the calculation gets more complicated, since you generally want to maintain steady (and steadily increasing) production throughout the year, so you’ll need to build in adjustments if you experience seasonality in your marketplace. You’ll need increased sales during busy months to carry you through the slower months. This balancing act can get complex, but even a simple analysis and structure will help you to understand where you’re at, and help you to decide how to market your services, whether your crews should be working overtime, and whether you should buy new equipment to rush through production or save your current production backlog for several weeks down the road.
While we capture and store our data in a structured query language (SQL) database, we use a series of Excel spreadsheets that read the data in real time, so our dashboards and KPIs always display up-to-the-minute results. The beauty of this is that we can often ask ad hoc questions and tease out information with simple calculations right in our reports. A smaller business can build similar reports right from its spreadsheet or database. The key is to summarize your various reports and metrics into a single view or dashboard, so you can see at a glance whether you are above, below, or on target.
Price to Stay in Business
Too much of the residential contracting industry is a low-bid race to the bottom, hurting both quality and the ability to profit and scale. If you want to stay in business and help more people fix more homes, I encourage you to choose another way. Charge a fair price for your work. And by “fair,” I mean a price the delivers good value to the customer and allows you a profit for the risk you take in a business and to fuel growth in your business. This generally means delivering more than your competitors, and charging more for it, too. Don’t be ashamed to charge more—be proud that you’re providing a better value and results that the customer can rely on. Let’s look at an example.
Which costs you more to install—swapping in a new furnace much like the old one, or ensuring that the duct system is designed properly, that it is balanced and sealed, and that it delivers proper air flow before you accurately size and then install a new high-efficiency furnace? Obviously, the better solution costs more. And unless you’ve got a large trust fund to draw down against, you’ve got to charge more to deliver the better solution. But if you can show customers that they’ll be more comfortable throughout their home, that the leaking ductwork won’t reduce IAQ, and that they’ll save energy and money in the long run, they’ll very often be willing to pay more. Now take it a step further and add in whole-house diagnostics; combustion safety; and comprehensive projects, such as air sealing, insulation, and lighting, on top of that furnace, and clearly you’re talking about wildly different price points. The prices work in the market, if you educate the homeowner and build value. (For more on pricing, see “Pricing for Profit,” p. S50.) So how do you determine a fair price? Is it the typical price: materials plus 10% plus labor? Not unless you don’t have to market, sell, or assume any responsibility for your work. Not unless your tools and equipment don’t wear, and you don’t care whether you make any profit to reinvest and grow your business. Value pricing allows you to charge a fair price that recognizes all your costs, and rewards you with a fair profit (see Figure 1).
You’ll need a good understanding of your costs—all of your costs—so you should start gathering and tracking these now, applying them to individual jobs wherever possible and getting a good handle on your ongoing indirect and overhead costs. You will also need as part of your marketing and sales process to build value for your products and/or services. And this isn’t a recommendation for a naïve cost-based approach to pricing. You need to explore and understand what the market will bear (which is itself in part a function of how well you build value). Remember what I said above under Market Effectively, and do not limit the customer value part of the discussion to energy efficiency.
Here are two important related thoughts. One: If you don’t offer folks more, most folks won’t ask for more. Most of them won’t ever think to ask for more comprehensive and more expensive projects. But many homeowners will be happy to take on these bigger, more expensive projects if you’ve done a good job of explaining the benefits. And two: Sometimes you will be surprised by how much they ask for. Some people will want to go much deeper than you’re used to. If this is what they want, you don’t have to talk them out of it. And you don’t have to talk them out of larger projects that are less cost-effective from an energy perspective. People buy sofas and granite countertops without calculating cost-effectiveness. I bought a hybrid car even though the payback period may be longer than I’ll own the car. As long as you’re up front and honest about the benefits, including the relative cost-effectiveness, feel free to offer the costliest package that people choose. Your customers will get what they want, we’ll all benefit from the energy savings, and you’ll make enough money to live another day and fix another home. (For more on growing your business, see “Growing Your Performance Contracting Revenues,” p. 58, and “Keeping Educated in a Rapidly Changing Environment,” p. 60.)
Home performance contracting is vital to America’s energy future. Permanently fixing the structural and construction-related deficiencies in a home provides the foundation for far more long-term energy savings than simply replacing an old, inefficient air conditioner with a high-efficiency unit of the same size. There’s never been a better opportunity for home performance as a business. If you treat it as a business, you’re likely to succeed, and we’ll all win that way.
Michael Rogers is a senior vice president at GreenHomes America, a nationally expanding home performance company. GHA is a HPwES Century Club Contractor, having performed over 100 energy-efficient installations in the last year.
For more information:
To learn about Home Performance with Energy Star, go to: www.energystar.gov/homeperformance.
For more on GreenHomes America, go to www.greenhomesamerica.com.
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