Want to Increase Profit Margins? Add Value and New Thinking

There are dozens of HVAC companies in every community. Looking at their homepages, you will see that every single one of them promises emergency service within 24 hours. You’ll see that they offer inspection services for your heating equipment in the early winter and your cooling equipment in the early summer. The prices are comparable. There’s no discernible value differentiation between them.

 

Consumers only see the tip of the iceberg. What I learned when I began working with HVAC companies is what lies beneath the surface—and it’s not pretty.

There are frantic seasonal hiring sprees, especially before the summer rush. There are seasonal layoffs, because they have very few calls in the spring and fall. The margins on these inspection services are razor thin to non-existent, because every company prices for volume, not for profit. Customer service reps are just told to fix problems as quickly as possible and get to the next call.

If service techs find problems during the inspections, they recommend repairs or upgrades. This is a squishy situation because homeowners can be suspicious about whether there is a true need or if the recommendation is just an unneeded upsell.

I’ve seen the same kind of squishiness occur for many professional services (e.g., attorneys, accountants, wealth managers, designers, IT providers and services experts) and many other consumer services where the buyer doesn’t really know enough to understand if there is true need or not.

Finding your Opportunities

If your company wants to grow its bottom line, that is, profits, it needs to increase sales of high value offerings. When I speak of high value, I’m referring to tangible intangibles, such as access, convenience, status and unusual levels of service. If there are raw or processed materials involved, these are of the highest quality. Components may be hand made by experts with years of experience.

Some companies have been known for their high value and limited supply since their founding. Rolls Royce and Rolex come to mind. There are attorneys who’ve achieved legal victories that changed the course of history. There are artists whose vision revolutionized the visual arts.

Just because your company may not be like Rolex and Rolls Royce, doesn’t mean you have to settle for being a commodity. The point of commodities is that there is no differentiation. One product is just like every other one in its category. There is a vast range between the likes of the highest of high end and commodities.

It is within that range where your opportunities lie.

Know Your Buyers

When you’re in an industry where the threat of commoditization is high, the market will drive you to commoditization unless you prevent that. It’s your responsibility to ensure differentiation. Your company needs a clear strategy for differentiation to stand out and increase your profit margins. These 5 tactics have worked for my clients and they can work for your company:

  • Know your buyers. The risk, when you’re fearful of the competition, is that you spend too much time and energy trying to outsmart them. This time and energy must be directed towards getting to know the buyers you already have. It takes an extreme sliver of focus to learn as much as possible about them, and to guard against stopping at the surface.
  • What motivated them to buy from your company? Different motivations require different responses. The buyer who thought your company offered a good deal is less likely to want more value. The buyer who liked your convenience is a better prospect for more value. The buyer who feels a strong sense of trust is an even better candidate for higher value.
  • Ask these buyers about needs that might be vertical or horizontal to the needs you’re currently meeting. The HVAC company asked about other needs, such as plumbing, duct cleaning, and mold abatement. If you’re a tax planning CPA, ask your clients about their need for improved cash flow, or building enough cash on hand to invest for future growth.
  • Work with your best buyers to develop new offerings. In other words, don’t guess! They’ll be happy to have these conversations with you as they anticipate being able to buy them once they are offered.
  • Keep cultivating and nurturing these clients and the new ones you attract. Building high value offerings over the long term requires long term investments in these relationships.

Profit Margins Must Be Built In at the Start

I often see P&Ls that show robust sales (the top line) and puny profits (the bottom line.) The hard, cold truth is that your company has little long-term value if it has little profit year after year.

High volume sales are worthless without substantial profits from that volume.

While this seems a basic Accounting 101 principle, it often gets lost in the focus on the top line. So many owners and executives invest heavily in improving their sales efforts: sales training, SEO to improve online marketing, and major efforts at branding. These are successful when you measure only the topline. When you deduct expenses, both fixed and variable, there’s little left for the bottom line.

The only way to ensure you increase profit margins is to build them in at the beginning. When you’re improving the sales skills of your business development team, make sure they know the exact numbers for both top and bottom lines. This is part of instilling pride of ownership throughout the company and it’s helping them speak about value to those buyers who appreciate value.

Improving profit margins is the result of the optimal pricing model. For products, the price equals profit plus expenses. For services, the worst way to increase profit margins is hourly billing. Instead, determine what value the outcome of your services will deliver to the client, and price according to that value. Every service provider can figure out ways to speed up high quality delivery, increasing their profit margins while making their clients happy to have their value delivered more quickly.

The HVAC company started to focus on how to add value to their services. Through a series of decisions and initiatives, they increased revenue and their bottom line within the first year.

I think every company is entitled to enjoy substantial profit margins and company value. If you’re itching to increase your profit margins, start by applying these tactics today. If you think there’s some mystery to profit margins that you’re not likely to uncover, I would love to hear from you. 703-801-0345.

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