FINDING YOUR WAY INTO THE RIGHT PRICE WITH HELP FROM ONCALL AIR
Pricing a job properly can be a challenge, especially in the HVAC industry.
To begin with, most HVAC jobs include thousands of dollars of equipment, several accessories and materials, and hours of labor. And in many cases, the customer is also presented with multiple options and add-ons from which to choose from.
An even bigger challenge is that our industry has not adopted an agreed-upon and effective way to set pricing.
That means some HVAC companies base their pricing on market trends, while others base it on gross profit dollars. And many more use margin-based pricing.
It’s likely that your way of pricing falls along one of these categories. Or that you may have your own method of pricing and it’s worked for you so far. In this case, your philosophy on pricing right now may be summed up by the old adage, “if it ain’t broke, don’t fix it.”
Yet whether you own a small, midsized or even large HVAC business, it’s worth your time to reflect on how you’re currently doing your pricing and look at some best practices that’ll prove useful for you.
4 SAMPLE QUOTES TO USE WITH DIFFERENT PRICING MODELS
Before looking at different pricing models, let’s look at a concrete example to better understand our pricing options.
Let’s start by assuming you’re quoting 4 options for a customer, and have labeled them Good, Better, Best and Fantastic.
Your cost on those components, as well as an assumed base labor & material for this type of 3-Ton job, is listed in the table below:
PRICING MODEL 1
Pricing with gross margin percentage (%)
Generally speaking, setting your pricing by gross margin percentage is the standard way a lot of contractors do their pricing (and the default way OnCall Air pricing is set). Let’s go ahead and examine this first model.
Let’s assume you’re targeting a 45% gross margin. The resulting price would look like this:
Pretty simple, right. But you may say: at $1800 profit on the Good system, I’m under my target profit and my price of $4,000 is probably too low for the market.
Meanwhile, a $4,500 profit on the Fantastic system sounds great, but at $10,000 I’m pricing myself out of the market.
Why is this happening? Because the cost of the equipment is driving the margin calculation, so the retail price is adjusting proportionally on the cost of the equipment, not on the cost of your labor and material (which doesn’t change in this example).
Now let’s move on to the next pricing option.
PRICING MODEL 2
Pricing with Gross Profit Dollars ($)
In this second option, let’s assume you’re targeting a consistent $2500 profit for all 3 Ton jobs, regardless of the equipment you’re installing, and see how that goal will affect the pricing and profit compared to Pricing Model 1.
One of the benefits of using this way to price is that you’re ensuring a consistent profit across all tiers.
Another is that your price at the low tier “Good” system is higher, while your price at the top tier is much more competitive.
The advantage of using this second approach is that you can plan your jobs with more clarity. So when you set a price with gross profit dollars you can:
- Plan how many jobs your team can handle in a month
- Determine the required monthly gross profit dollars you will need to cover your overhead and have a decent net profit leftover
- Know the number of jobs needed in order to keep your team at capacity and reach your required gross profit dollar objective for the month (primarily because you’re adding up dollars, not percentages that may vary on your product mix)
PRICING MODEL 3
Pricing with gross margin percentage and gross profit dollars (hybrid approach)
In this third and final way you can price, we combine the two previous models of pricing. This hybrid pricing model lets you define a baseline gross-profit dollar target for a job, and also allows you to realize an additional margin on the tier of equipment you sell.
Let’s assume that instead of 45% gross margin on the full job cost, you decide to use the hybrid approach as follows:
- You’ll target a $2000 base gross profit dollar amount
- You’ll also include a 20% gross margin as a markup on equipment
With these assumptions, the resulting pricing and profit dollars look like this:
The resulting price and profit projections fall in between the two previous models. The low end is not as low, and the high end is not as high. But you’re still able to capture more profit based on the sale of a better system to a customer.
As you can see, each of these 3 ways to price is beneficial. What matters most is in which one you use is what your goals are.
So while it is always good practice to use gross margin percentage as your default way to price, under certain circumstances you can also benefit greatly from utilizing either a profit target or a hybrid profit target and gross margin percentage pricing formula.
If you want the flexibility to set your pricing based on any of these 3 models and make sure your calculations are correct, we recommend you take advantage of OnCall Air’s pricing tool.
Our powerful pricing engine provides you with the unique flexibility to set pricing using any of these pricing models quickly and easily, so you can start maximizing your profit on every job.
Ready to get started?