Understanding HVAC Profit Margins & How to Improve Them

Over the years, and particularly at the time of this writing (September 2023), the topic of HVAC profit margins and how to improve them has been a consistent area of interest and concern for our customers and the HVAC contractors within our network. 

Specifically, contractors often find themselves in the challenging circumstances of:

• Working tirelessly, but getting to the end of the year only to realize they made a fractional 2% or 3% net profit, or worse (and not uncommon) ending the year at a significant loss. 

• Spending the majority of their time completely blind as to how their gross profit margins are performing and how they’re pacing toward profit goals. 

• Wanting to take control of and improve their profit margins, but lacking the right process or tools to do so.

In this post, we provide a clear, three-tiered process for solving these challenges in an HVAC business — based on a recent interview with one of ServiceTitan’s HVAC industry experts, Chris Hunter. The most successful businesses in the industry are using processes like the one laid out below to maintain healthy, profitable companies. 

Before we get into the tiered process, however, let's set the scene with answering some common questions about HVAC profit margins.  

Table of Contents

• How much profit should an HVAC business make?

• What’s an acceptable gross profit margin for an HVAC business?

• A three-tiered process for improving HVAC profit margins

  • Tier 1: Assessing your current revenue and profit margins and setting goals to improve them

    • Key consideration: Where do you get this data?

  • Tier 2: Ongoing tracking of KPIs and pacing toward your profit targets

  • Tier 3: Optimizing for efficiency, implementing best practices, and empowering your team to achieve maximum performance

Want to see how ServiceTitan can help you protect your margins and grow the bottom line for your HVAC business? Schedule a call today. 

How Much Profit Should an HVAC Business Make?

HVAC contractors deserve and should be shooting for 20% net profit in their business. But anywhere between 10% and 20% would be considered a healthy, reasonable net profit margin. 

However, this is by no means the average HVAC business profit margin. Businesses often operate at under 10%, and in many cases net profit margins are as low as 2% to 3%. This is a vulnerable place to be, considering all of the costs and risk associated with running an HVAC company. Not to mention, contractors operating at this level are not being compensated commensurate with their effort and risk.

This is why, from our perspective, HVAC businesses should strive to have 20% profit margin left over after subtracting the cost of goods sold (direct labor costs, equipment costs, materials costs) and operating expenses (overhead expenses, insurance, taxes, etc.) from their revenue.

Whatever your current net profit margin is, following the process below will be a crucial step in the right direction.

What’s an Acceptable Gross Profit Margin for an HVAC Business?

According to our industry expert Bill Powers, HVAC businesses should be shooting for an average gross profit margin of 50% to 55% across their services. Doing so will generally allow them to hit a desirable 17% to 20% net profit margin.

Importantly, gross profit margins are how businesses should measure performance in each of their different departments (HVAC installation, service and repair, maintenance, new construction, etc.), whereas net profit margins are how they should look at performance across their entire business.

A Three-Tiered Process for Improving HVAC Profit Margins

Tier 1: Assessing Your Current Revenue and Profit Margins and Setting Goals to Improve Them

The most successful HVAC contractors that we work with at ServiceTitan, both within our organization as well as the HVAC businesses we serve, have a process in place to assess the current state of their operational and financial KPIs, and set goals to improve them.

Typically, this takes the form of annual planning that involves:

• Reviewing how their business performed during the year prior.

• Setting operational and financial goals for the upcoming year.

Regardless of whether you’re a small business or you’re at the enterprise level — this essential step establishes the foundation with which you can begin improving your profit margins. You need to know where your numbers are and set some goals for where you want them to go.

Annual planning takes different shapes and forms, however, when it comes to setting financial goals, which often involves:

1. Looking at high-level KPIs for the previous year, broken out by each department. For example: sales, gross margin, total completed service calls, sales per job, total crews/HVAC technicians, total calendar days worked, sales per crew/tech, completed jobs per crew/tech per day. 

2. Looking at total revenue per month for each department, and setting a percentage increase goal for the upcoming year. This gives you specific revenue and gross profit targets for each department that you can use to see how you’re pacing toward your goals. 

3. Determining lead requirements to hit your revenue and profit goals. This involves reviewing lead KPIs from the previous year (e.g. average ticket amount, number of sales, close rate, etc.), and reverse engineering how many leads you’ll need to hit your goals.

Once you’ve reviewed your numbers, set your revenue and profit goals, and determined the specific targets you need to achieve in order to hit those goals, you simply track your progress for each department to see how you’re performing and pacing towards your sales, gross profit, and net profit goals.

Key Consideration: Where Do You Get This Data?

Doing this sort of detailed annual review requires capturing and recording this data throughout the year. Depending on what tools you use in your business, this can be more or less demanding and time intensive. 

If you’re primarily using spreadsheets and/or disparate software solutions for different aspects of your business (e.g. a platform for call booking, a platform for estimating and invoicing, a platform for inventory and accounting, etc.), doing the above type of analysis can be a challenging and difficult process of consolidating data from different platforms, doing manual data entry, double checking your data inputs, etc. 

In contrast, for HVAC service businesses using field service software (like ServiceTitan), this process is streamlined. For example, in ServiceTitan, if you want to view high-level KPIs such as total revenue or total sales for the past year, you can pull these metrics up almost instantly by adjusting the date range to the previous 365 days on your main dashboard:

This is one of many reasons why leading HVAC contractors are adopting HVAC software like ServiceTitan, which centralizes all of your operational data into one place and offers robust dashboard and reporting tools. This makes annual reviews and ongoing tracking of KPIs (discussed next) a streamlined experience.

Tier 2: Ongoing Tracking of KPIs and Pacing Toward Your Profit Targets

When it comes to the ongoing tracking of KPIs and pacing toward revenue goals, it’s useful to have daily as well as monthly routines. 

For example, if you’re the business owner, you can benefit from a simple daily report to see how many calls you had for the day, how much revenue came in, and how you’re pacing toward the end of the month. Then, at the end of each month, you should also do a full financial review with your bookkeeper or accountant (and subsequently your leadership team) to get full clarity on how you performed in relation to your goals. This is crucial for making any necessary adjustments throughout the year to hit those year-end goals.

Meanwhile, if you’re a CSR manager, you should be looking at more detailed daily numbers such as call booking rates, number of outbound calls, number of inbound calls, etc. 

Again, the ease of collecting and accessing this data depends on what tools and apps you use. Facilitating the ongoing tracking of KPIs makes field service reporting software absolutely transformative for HVAC businesses. 

With ServiceTitan, owners and managers can customize their own dashboards and reports to monitor all of this data with ease. 

For example, Revenue Trends by month or week can be viewed as bar or line graphs. By hovering over a given month or week, users can instantly see year-over-year revenue comparisons. 

The Company Metrics portion of the dashboard shows sales, revenue, booking, conversion numbers, and more:

• Total sales

• Closed average ticket price

• Completed revenue

• Average revenue per job opportunity

• Revenue from counter sales, and membership and progress billing

• Revenue from adjustment invoices added to jobs

Metrics on the main dashboard also include call-booking rate and total conversion rate, plus:

• Customer satisfaction

• Total cancellations 

• Membership opportunities converted

In addition to these high-level KPIs, the ServiceTitan dashboard provides HVAC business owners and administrators with valuable insights on employee and operational performance.

For example, the Call Metrics section of the dashboard features a chart, arranged as a function of call date, documenting inbound call booking rates. Below the chart, users will find call lead totals and the jobs booked from those leads.

Information about calls that were abandoned or did not result in a booking is no less valuable. And the Call Metrics section also offers a wealth of intelligence on these calls:

• Length

• Timestamp

• Caller phone number

• Number dialed

• Employee who took the call

For further information about past calls — whether they resulted in a booking or not — ServiceTitan offers a Call Playback feature. Here, users can listen to recordings of calls. 

ServiceTitan’s Call Playback functionality is useful for field service technicians who want to verify job details or customer information via the ServiceTitan mobile app, as well as for supervisors, who can use it to confirm that CSRs are providing good customer support and following best practices in interactions with clients.  

In contrast to tracking these metrics in spreadsheets and different apps, ServiceTitan makes it simple to access this data, and therefore empowers business owners, managers, and employees to actually use these tools and follow these best practices of ongoing KPI tracking, which can be absolutely invaluable for improving profit margins. 

Now, once you have completed tiers 1 and 2 — you’ve reviewed your current performance, set goals, and set forth tracking progress toward your goals — the final tier is to optimize for maximum efficiency and implement best practices throughout the rest of your business.

Tier 3: Optimizing for Efficiency, Implementing Best Practices, and Empowering Your Team to Achieve Maximum Performance

Goal setting and tracking sets the foundation that HVAC businesses need to begin improving their profit margins. However, optimizing for efficiency and implementing best practices in your business is how you begin to actually hit and exceed those profit goals. 

We’ve written at length about the key actions that HVAC businesses can take to improve their operations and their bottom line, and how ServiceTitan can help facilitate efficiency and best practice implementation throughout organizations. 

Here are some of our top articles discussing how you can improve your margins:

• How to Price an HVAC Job: HVAC Pricing Guide for Contractors — Incorrect pricing is probably the biggest reason why HVAC businesses often have low profit margins. This guide will help you understand how to price your residential or commercial HVAC services for profitability. It covers flat-rate versus time and materials pricing, three key factors for pricing correctly, and how ServiceTitan streamlines pricebook management.

• How to Design a World-Class HVAC Sales Process — Too often, HVAC companies lack a well-defined sales process that enables their team to convert more of the leads they already have, and which ensures they’re not leaving any money on the table. This post will help you understand how to empower your technicians to increase HVAC system sales (from air conditioning units to heat pumps), as well as HVAC repair services. It includes a step-by-step breakdown of an ideal system-replacement sales call for CSRs and office staff, how to do proper follow-up, and more.

• How to Streamline HVAC Service Agreements (With Free Template) — Offering HVAC maintenance contracts can be highly beneficial for maintaining cash flow during shoulder seasons. However, running a service agreement program has its challenges. This post discusses those challenges and how ServiceTitan can help solve them.

• 16 HVAC Marketing Strategies That Make Companies Stand Out — The ability to generate new customers through marketing is a key asset for HVAC companies that want to grow their business. This post shares best-practice strategies to reach more businesses and homeowners and turn them into customers.

Get a ServiceTitan Demo to See How We Can Help You Optimize and Grow Your HVAC Business 

Using a best-in-class HVAC software like ServiceTitan gives contractors the tools they need to maintain full visibility into their business, and empower their teams with the tools they need to grow. 

In addition to the dashboard and reporting features discussed above, our software offers tools to facilitate the entire HVAC business workflow, including:

• Call booking

• Scheduling

• Dispatching

• Work orders

• Proposals

• Invoices

• Payments

Want to see how ServiceTitan’s HVAC software can streamline operations and grow your business? Schedule a call for a free product tour.