One of the first things I do when I get the weekly ads in my mailbox is to go through them and look at all of the Heating and Air Conditioning ads. I do like to know what my competition (?) is doing, and I like to keep an eye on industry trends. I also like to follow the advertising sections on Facebook and other social media services for the same reason. Lately I have been noticing a trend in the ads I am seeing, advertising:
- “Free Service Call”
- “Free Diagnosis”
- “$35.00 Air Conditioning Inspection – including Freon check”
- “$55.00 Air Conditioning Tune-Up”
- “Free second opinion if you have quote from another company”
I had thought about scanning and pasting the images for the advertisements in here. Why am I calling attention to this trend? Because it is borderline dishonest and additionally it is cheapening an industry. Sounds like a strong statement, doesn’t it? Let’s delve into this a little deeper. I am going to address the “$35.00 air conditioning inspection – including Freon check” first.
Since you cannot see the advertisement as I do not feel it is fair to “call-out” a company by name, I will explain that this one is being offered by a small company with a single office employee and three technicians in the field. So, my cost assumptions are based on this as well as industry pay standards. The chart below is the basic cost of providing a service call within a 10 distance of the companies offices, or the prior service call.
|Technician Pay (2.0 hrs)||24||$11.00|
|Payroll Tax – Technician (6.5%)||1.56||$9.44|
|Truck Expense (.55/mile – 20miles)||11||($1.56)|
|Insurance (17,000.00 per year)||5||($6.56)|
|Training/Education (10% of net)||3.5||($27.06)|
We begin the analysis of the profit/loss by using an income of $35.00 that will be collected from the customer according to the advertisement. Then we move onto the expenses.
- Technician Pay – We know from industry experience that a good Air Conditioning inspection, including checking the refrigerant (Freon), checking all temperatures, testing electrical, and testing overall operation takes approximately on hour from technician arrival to technician departure. We also have to count travel time into the technician pay. Unless you live in an area where there is no traffic you have to count on 30 minutes of travel time in each direction. So, our technician direct pay is two hours, and lets assume that the technician is making $12.00 an hour, which is well below living wage. This is a total of $24.00 right off of the $35.00 service call, leaving a balance of $11.00.
- Payroll Taxes – All technicians must be hourly employees and regardless if you are employed by a contractor or self-employed you must pay taxes on your income. The company also pays a portion. The companies portion of payroll taxes is 6.5%. So, for that $24.00 that the technician makes on a service call the company pays $1.56 to the federal government, leaving us with a balance of $9.44 net profit.
- Truck/Travel Expense – The truck and travel expense includes things like truck maintenance, gas, tires, and vehicle insurance. As each companies plans are different we will use the magic number of $0.55 per mile. Since our service call is a 20 mile round trip (10 miles each direction) we will use 20 times 0.55 which is $11.00 of travel expense for this visit. This is subtracted from our $9.44 balance and leaves the company with a negative balance of $1.56. But we are not done yet.
- Insurance Costs – We must cover all contractors with General Liability insurance as all employees with Workers Compensation. Additionally most companies carry some sort of health insurance and they pay a small portion of those premiums. Since all companies are a little different with the coverage they carry it is safe to go with an industry average for a small company of $17,000.00 per year of insurance costs. Many times this is quite a bit higher, and a few times it is much less expensive. Now, we divide that by 365 for the number of days in the year and then divide it again to see how much you must recover per service call. We are going to use $5.00 per call must be put aside for insurance. Take that $5.00 and add it to the negative balance of $1.56 and we have a new negative balance of $6.56. Let’s move on.
- Technology Costs – We live in an electronic world. Most companies provide the technicians with a cell phone as well as a wireless hot spot (sometimes the phone serves as both). This also has some data expense. The internet in the office must also be taken care of as well as the costs of laptop, tablets, and web sites. Most companies break these costs up on a per call basis. In our case we are going to use a cost recovery of $5.00 for each service call put to the cost of technology. So, let’s take that $5.00 and add it to our negative call balance of $6.56 for a negative balance of $11.56 for the “$35.00 air conditioning inspection”. Moving forward…..
- Office Personnel/Accounting – All companies need at least one person in the office answering calls, setting appointments, etc. The cost of this person must be split across all service calls and factored into the equation. One dispatcher can handle approximately 3-4 technicians and they must still be paid a living wage with all payroll taxes taken into account. In our case we are going to use a flat cost of $10.00 per service call. This means that if they are handling 3 technicians and each technician runs 4 calls a day they will have $120 available for payroll. The real number should be a little higher, but I am being conservative and we will go with $10.00. So, we take our $10.00 and add it to our negative balance of $11.56 for a new negative balance of $21.56.
- Tool Fund – There are a number of tools that must be available to technicians, these are higher cost tools such as refrigerant recovery equipment, air testing tools, flow hoods, and other tools that the technicians are not expected to own personally. These tools must be replaced occasionally and as technology changes they must be upgraded and added to. A company that does not set aside money for tools is setting themselves up for failure. In our case we are going to take $2.00 for each call and put into the tool fund. Add another $2.00 to our negative balance and carry forward $23.56.
- Professional Development / Training – Training is an important part of any HVAC/R contractors business plan. The contractor themselves are required to complete a certain number of hours of professional development, but the good contractors also make it a point to set aside money to provide professional development and training for their employees. The industry standard is 10% of billing should be put aside for training. In the case of the $35.00 call this is $3.5o which we will add to our balance for a new balance of negative $27.06.
The reality is that most companies spend more than this on a single service call or inspection. The industry standard is that it costs about $50.00 per hour to move a truck out of the parking lot and run service calls and inspections. In order to stay in business you have to have:
- Building leases
- Forms and software
- Replacement truck fund
- Additional office staff
Each of these items has costs associated to it. A business cannot survive if it is not making any money. So, how does the business running the $35.00 Air Conditioning inspection, or the “Free Service Call” survive? Easy, it is all in the fine print (sometimes). Let’s go back and look at the list and add the fine-print next to it:
- “Free Service Call” – When taking any technician recommendations
- “Free Diagnosis” – With acceptance of recommended repairs
- “$35.00 Air Conditioning Inspection – including Freon check”
- “$55.00 Air Conditioning Tune-Up” – When accepting our technicians recommendations
- “Free second opinion if you have quote from another company”
As you can see from the text in red the fine print makes all the difference. This is how the company will double (at a minimum) the cost of the service call. Once the preventative maintenance, or inspection technician, is on site and has your air conditioner open there are a number of relatively small parts that do need to be replaced every four to five years. These are: Capacitors (a minimum of 3 are in most systems), transformer (at least 1 is in the system), relay (at least 1 in most systems), and contactor (minimum 1 in each system). These parts do wear out and get older as time goes on. The cost to the company on each of these components is not all that great. All companies purchase their replacement parts from supply houses. The supply house has a list price and then uses a discount that is negotiated for each contractor. The list below shows the list price for these parts, again this is not what your company pays.
- Contactor – $21.43
- Capacitor 5mfd (indoor blower) – $4.95
- Capacitor Combo (outdoor fan and compressor) – $44.71
- Transformer – $23.82
- Relay – $13.13
There is not a single set formula on how to price the installed cost of these parts. Some companies use a “flat rate” method that includes the part cost and labor. Some companies use a time and material method where you are charged for the part and then for the labor as separate numbers. Some companies use a negotiated discount method, I haven’t figured that one out yet, and some companies allow their technicians to set price based on ease of install, they tell their technician what the minimum cost is and then the technician marks if up from that point. While each of these methods is perfectly acceptable the one thing you have to know is that this is where the company will make up any loss for the discounted service call or inspection. Let’s take that contactor for example.
The flat rate install on the 2-pole contactor that controls the compressor and the outdoor fan is normally flat rated at $160.13. This is based on a book labor time of 3/4 of an hour (which in reality is pretty accurate if the technician spends the time to test everything afterwards). The $160.13 includes the $21.43 cost of the contactor. It includes the markup (really, companies do need to mark up parts), and it includes the overhead and the labor costs. It also includes a profit margin. Because of the number of switching cycles in a season the contactor will eventually start to burn out (burn marks at the points where the on/off function is). This part should last 3-4 years and will need to be replaced.
The flat rate install on a combo capacitor (this is the capacitor that provides and extra boost for starting and running the compressor and outdoor fan motor) is $107.32 again includes labor, markup, and the part. The transformer, nothing will work without a transformer, flat rates at $140.68. This includes the part, labor, markup, and profit.
Again, I want to stress that there is nothing illegal about the $35.00 or free inspections, but don’t you think it is a little unethical to use an advertising of a free inspection so that a company can find a standard item they know is going to need replacement and capture your business and dollars in this method?
The other thing I do not understand is why a company uses an approach that is making them look “cheap.” In my opinion it is not a good thing for a technology minded company to portray themselves as being the “Cheapest” in the area. This is what is called a “bottom feeder” and they are fighting a battle with like-minded companies that is going to result in the “death spiral”. Look at the numbers. A company using this approach cannot afford to pay their technicians properly, cannot afford to hire and keep the best technicians, cannot afford to market, cannot afford to train their technicians, cannot afford the latest in technology. So, the company must continue to find new customers to maintain cash flow. In order to do this they must price their services below those of other companies, and so on. Because eventually you are going to run out of basic parts to replace. Once you loose your most experienced technicians because you can’t pay them properly the company needs to reduce service calls and increase replacing entire systems. The next step in this is that the company uses that $35.00 service call as the method to sell $10,000.00 replacement systems (regardless if the existing system can be repaired or not).
Think about it. Would you like to do business with a company that has the training, the knowledge, and the ethics to do the right thing? Or do you want to do business with the company that believes in capturing the local market using thee $35.00 service call which is more like a bait and switch? I know as a consumer I would want to have someone do the right thing.
At Christopher Molnar, LLC we do NOT offer a $35.00 Air Conditioning Inspection. We do offer an $125.00 preventative maintenance within Polk, Lake, and Osceola Counties. Call us and ask! If we set our prices properly we do not need to try and find things to sell you that you do not need.