HVAC Business: Properly Pricing One-Day Changeouts for Maximum Profit

YouTube video

Note: This article is based on the transcript of a YouTube video by the HVACmillionaire. The purpose of this article is to provide detailed guidance on pricing one-day changeouts in the HVAC business to ensure maximum profitability.

Introduction

In the HVAC business, pricing is a crucial factor that can significantly impact the success and profitability of your company. One of the most important aspects of pricing is determining the cost of a one-day changeout accurately. It is essential to understand this pricing model to ensure that your HVAC business thrives and makes money consistently.

Building a Price for a System

To start pricing a one-day changeout, you need to consider the cost of the system components. Let’s take a hypothetical example to illustrate this process. Please note that the numbers mentioned here are for demonstration purposes only and not actual pricing.

  1. Furnace cost: $1,500
  2. Evaporator coil cost: $475
  3. Condensing unit cost: $1,800

The total cost of all the equipment for this job is $3,775.

Next, you need to factor in the cost of additional materials required for the installation:

  1. Basic thermostat: $50
  2. Whip pad and disconnect: $106
  3. Sheet metal: $28
  4. Flue material: $85
  5. Drain line material: $12
  6. Torch vacuum nitrogen fees: $35
  7. Filter rack: $60
  8. Gas line material: $45
  9. Miscellaneous: $100
  10. Warranty reserve: A small amount for handling warranty issues
  11. Permit: Cost for obtaining the required permit

The total cost of these materials is $611.

Calculating Labor Costs

To determine the labor cost, let’s assume that two technicians can complete the job in eight hours. The labor rate would be $25 per hour for each technician. Therefore, the labor cost for this job would be $400.

It is crucial to remember that if the job takes longer or requires additional materials, such as a supply run or adding a return to the system, you must account for those costs as well.

Overhead Expenses and Desired Net Profit

For installation, overhead expenses typically amount to 25% of the total cost. In this example, the cost for overhead expenses would be $1,196. Additionally, according to the book “HVAC Spells Wealth” by Ron Smith, a desirable net profit is 25%. Therefore, we will add the desired net profit of $1,196 to the total cost.

Including Sales Commission and Financing Options

If your company pays a commission to the technician or salesperson who sells the job, you need to include that commission in the pricing. For this example, let’s assume a commission rate of 3%.

If you offer financing options, you must also factor in the dealer fee associated with offering financing. Let’s assume the dealer fee is 9% in this case.

Determining the Sales Price using the Divisor Method

To calculate the sales price, we use the divisor method. First, we calculate the gross margin by adding up all the percentages:

  1. Overhead expenses: 25%
  2. Desired net profit: 25%
  3. Sales commission: 3%
  4. Dealer fee: 9%

The total gross margin is 62% (25% + 25% + 3% + 9%).

To find the sales price, we subtract the gross margin from 100 and divide the total cost (labor, materials, and equipment) by the result:

Sales Price = Total Cost / (100 – Gross Margin)

In our example, the total cost is $4,786, and the gross margin is 62%. Therefore:

Sales Price = $4,786 / (100 – 62)

This calculation gives us a sales price of $12,594.74.

Ensuring Profitability

By following this pricing model, you should be able to achieve a net profit of 25% after covering all labor, material, and equipment costs. However, it is essential to keep in mind that unforeseen circumstances, such as failed components or additional work, can impact profitability. In such cases, you may need to adjust your pricing accordingly to ensure you don’t end up working for no profit or even at a loss.

As you gain more experience in estimating and foreseeing potential issues in each job, you can factor in additional costs to avoid any potential loss.

Conclusion

Properly pricing a one-day changeout is crucial for the success of your HVAC business. By accurately calculating the cost of equipment, materials, labor, and overhead expenses, and factoring in desired net profit, sales commission, and financing expenses, you can determine a competitive sales price that ensures profitability. Keep in mind that experience and foresight play critical roles in refining your pricing strategy, so continue learning and growing to maximize the success of your HVAC business.