Ahh, the shoulder season. That time of year when comfortable outside temperatures mean fewer calls for HVAC services. Coupled with high inflation and challenging times, the shoulder months can really test an HVAC business’s ability to maintain growth and profitability.
Jawad Olabi, Managing Partner of ServicePro CFO—and a ServiceTitan Certified Accountant—walks through three strategies to unlock success during economically rough times in a recent ServiceTitan webinar. Each strategy, he says, relies on learning how to use your company’s ServiceTitan data to drive business performance.
In this recap, Olabi, whose company provides turnkey accounting services for trade firms on ServiceTitan, demonstrates how data can turn hurdles into opportunities by helping you:
Generate new leads with existing customers
Create pricing strategies for profitability
Manage working capital more effectively
“What is data?” Olabi begins by asking. “It's that unsung hero that underpins all of what we're going to be talking about.”
Should you follow the data to navigate the shoulder months, or follow your own instincts?
“The design intent is that we're aligning those, so they're both representing the same thing,” says Olabi, who has global accounting experience and expertise across the entire range of reporting, budgeting, and risk assessment.
Before diving into the success-unlocking strategies, it’s important to first understand the current economic conditions, or what Olabi calls “the macro backdrop.” The table below shows the trend of U.S. personal savings from 2015 through Q1 of this year, with the blue line delineating savings balances.
“There are two peaks here, which clearly are the stimulus checks that were issued during the COVID lockdowns,” Olabi says. “And you can see that those did add quite a bit of liquidity into the system.
“The unfortunate reality here is that most of that liquidity has dried up, and while Q1 is seeing a slight uplift quarter on quarter, we're still beneath the pre-COVID trend line of savings,” he explains. “Obviously, not the greatest backdrop.”
All of which means, “it's harder for people to spend money in this environment,” he adds. “It's an unavoidable reality.”
On the positive side, Olabi notes there was still nearly $1 billion in U.S. personal savings accounts in the first quarter of this year, so maybe there’s light at the end of the tunnel.
And what’s the biggest factor driving these challenging times? Inflation, of course.
The table below shows sizable uplifts in the consumer pricing index, or inflation levels, during the same COVID period.
“Inflation is historically elevated, but if there's another positive takeaway here, if we could call it that, it's that it appears, for now, to be trending downwards,” Olabi points out.
Another factor affecting consumers’ financial picture is the Federal Reserve’s decision to raise interest rates so dramatically in such a short period of time. The rate climbed from almost 0% in Q1 of 2022, Olabi says, to about 5.5% now.
“Clearly, that's going to have ripple effects,” Olabi says. “I know it's becoming much tougher to finance customers, and this is really the culprit behind that.”
Ultimately, the professional accountant says, the economic outlook isn’t great, but hopefully is not getting worse.
One final factor is the current market composition of companies offering HVAC, plumbing, and electrical services. The table below shows that about 62% of firms have five or fewer employees, 16% of firms have six to 10 employees, and only about 1% have 100 employees or more.
“The big takeaway here is, the market is still primarily comprised of smaller companies,” Olabi says. “While everything may look bad, you're still competing against a lot of smaller players in many markets.”
Rather than worrying about private equity firms gobbling up the market, Olabi thinks the smaller firms with less debt actually gain a competitive advantage.
“While everything may look bad, you're still competing against a lot of smaller players in many markets,” Olabi says. “How can we use our size to outcompete and outperform?”
In your local market or region, competitors may report differing opinions on whether business is strong or slow, and it’s up to you to decide where your service business fits in.
“The reality of it is, it's market specific,” Olabi says. “Some markets are doing good, some markets are not. Understanding that, and working around that, is the key point here.”
To illustrate his point, the graph below shows significant growth in the dark blue states, whereas the light blue states experienced negative or close to zero growth rates between Q4 of 2022 and Q1 of 2023.
What does it all mean?
“Consumers have burned through their stimulus,” Olabi says. “But they're still sitting on $1 billion. Interest rates are elevated, but guidance is flat. So, hopefully, that means we're not going to continue to rise. Inflation is persistent, but trending down. Most firms have less than five headcounts. And economic performance varies by state,” he says.
In the face of those realities, what can we do to improve our outcomes?
Beat your competitors by defining your advantages
How do you take stock of your company’s internal information to build a cohesive strategy to outcompete? Oftentimes, it starts with your Profit & Loss statement, which to many contractors looks like a bunch of jumbled numbers written in a foreign language.
Olabi admits that your P&L is just a bunch of lines and numbers, but it’s possible to simplify and derive value from this important financial information.
“I like to think about starting from first-order principles. What are the groupings of expenditure that I need to manage?” Olabi says.
For instance, you might start a bar chart with groupings for: 1) cost of goods sold; 2) direct labor costs; 3) advertising expenses; 4) overhead costs; and 5) net income.
“In this example, my cost of goods sold is fairly flat, my direct labor is flat, but my advertising cost is where I seem to be having degradation. And so now, I can start saying, ‘Where are the issues in my business and how do I link these back to operating levers?’" Olabi explains.
Breaking down the P&L this way helps you to understand your financial position, know where your costs are out of control, and where to make improvements.
In addition to the P&L, ServiceTitan users can also tap into a vault of valuable operating data to inform their decision-making processes, such as real-time marketing metrics, client profiles, equipment logs, communication trails, and all of that job history.
“The majority of firms in this market lack an efficient field service management solution, like ServiceTitan,” Olabi says. “And those who have it generally under use it. They use it as a dispatch tool, when in reality there's all this other information that should be utilized properly within it to drive strategic development.”
So, how do we use this data to drive positive outcomes? Olabi says companies can harness their digital advantage by focusing on the following three pillars:
New lead generation
Pricing strategies
Working capital management
Generating new leads
“Let's be brutally honest about the reality of our circumstances right now. The phones are not ringing as much as they should or as much as they used to,” Olabi says.
To keep cash flowing during shoulder months, some contractors try to focus on managing or increasing maintenance memberships, but Olabi says memberships are a summer discussion.
“If you don't have the memberships now, that doesn't help resolve the situation we're in,” he says.
The better answer, Olabi says, is to use the data you already own to manage outbounding opportunities with the following five highly targeted strategies:
1. Equipment vintage targeting
Tap into your ServiceTitan customer data to track the location and age of customers’ HVAC equipment, then know when to reach out to those customers for timely service and maintenance.
“You could almost think of it as a membership program, where they didn't pay for it. Go ahead and outbound-call those customers to ask, ‘Hey, is your equipment operating well? Can I come out and do some testing or complimentary service on it?’ Those particular customers are likely at the end of life for that particular equipment, or getting close to it. So those are really unique opportunities,” Olabi says.
2. Follow up and revisit
How many unsold estimates do you have collecting dust in your ServiceTitan dashboard? Customers may not have accepted the estimate initially due to lack of financing, but their financial picture may have changed or you may be able to offer an alternative financing option.
“It's time to go back to those old estimates and see if we can get a second chance to sell,” Olabi says.
3. Referral and proximity marketing
Before the advent of digital marketing, HVAC contractors often used referral and proximity marketing by servicing one customer in a neighborhood, then knocking on their neighbors’ doors to share the great customer experience.
“The old-school way was to go and knock, but there are a lot more skill mechanisms to do this now,” Olabi says, such as sending direct mailers based on proximity, or even cold calling.
4. MLS movement merge
The MLS, or multiple listing service, is what Realtors use when customers buy or sell a house. If you can link your HVAC customers’ details to the MLS, you can know when to market your HVAC services to a new owner when the home sells.
“It's a perfect time to reach out to that new owner and say, ‘Hey, you're just moving in. I'm happy to do a service event for you. Last time we came out was yada yada,’ then rebuild that connection,” Olabi explains.
5. Subdivision age targeting
In many housing markets, Olabi says it’s easy to identify subdivisions that were built in the last 10 to 15 years, which means their HVAC equipment is prime for service and/or replacement. Simply target that specific market, then generate new leads through digital marketing efforts, cold calling, or sending direct mail flyers.
“It's a really effective strategy to pick up highly likely customer leads,” he says.
Optimizing pricing strategies for profitability
“This is not a discussion of increasing pricing,” Olabi says. “Today, we're trying to figure out what the market can bear, not how much we want to sell it for, and that's the real balancing act in the shoulder months.”
The lever to pull here is updating your pricebook regularly, he adds.
“It's key to have a well-constructed pricebook, not just so you have pricing strategies, but the bigger thing for me is inflation management,” Olabi says. “You need to be able to input the costs of all your elements on a regular cadence, weekly or monthly as your material equipment prices go up, so that can roll back into your pricing, and you're not always fighting against that inflation eating into margin and reacting postmortem.”
“I highly recommend looking at Pricebook Pro as a starting point,” Olabi says.
With Pricing Builder, or Dynamic Pricing, you can set pricing for flat-rate services based on multiple factors such as after-hours jobs, add-ons, membership discounts, and more. Dynamic Pricing uses industry best practices to calculate prices so you can optimize margins across multiple trades for every situation.
“It's something I highly recommend everybody take advantage of, because whether you're in a shoulder period or not, if somebody calls at 11 p.m. and needs AC work, if you're working nights, that guy's going to pay full price, and we need to make sure we monetize it,” Olabi explains.
When it comes to tracking discounts, it’s better to closely manage that process to know exactly what you’re giving away.
“People think, ‘I gave a 5% discount, that's a 5% reduction in my pricing.’ That's not at all how it works,” Olabi says. “If I imagine a firm with a 20% net income margin, and if you give a 5% price concession, that's a 25% reduction in profit. It doesn't scale in the simplistic way that you would think.
“So, it becomes crucial that we actually start monitoring what those discounts are, because discounts are not like revenue, discounts are money taken out of my pocket,” he adds. “There's no incremental cost. We need to be a lot more sure that we have a proper process to issue discounts and a way to document postmortem how much we gave.”
Finally, what about the idea of gross margin percentage versus gross margin dollars?
“This goes back to the accounting thing. What is the gross margin percentage? Does that include my trucks? Does that include commissions? So, it's already based on this fundamentally flawed premise,” Olabi says. “And as much as I'm all about optimizing pricing, I also realize that in these particular periods, the bigger concern is recovering overhead costs.”
This is where smaller firms with less overhead than the private equity firms who take on a bunch of debt gain the advantage. First, optimize your pricing strategy to cover overhead costs, then optimize to increase profitability.
“Thinking about this in terms of variable versus fixed cost–instead of thinking about this in a rigid way of, ‘I need this percentage,’ or ‘I'm not interested, ’--really gives a lot of flexibility. And that flexibility is only available to the smaller players in the market. It takes work to understand, but it's also an advantage that needs to be leveraged,” Olabi says.
Optimizing operations with working capital management
Another byproduct of the COVID era, Olabi says, resulted in many contractors not getting the equipment they needed to do certain jobs because of supply chain issues, or stocking up on so much equipment that they needed an inventory management process to oversee it.
“Nowadays, that stock management issue is no longer pervasive in the market. Supply chains are a little bit more normalized, you can get stuff as needed, but we've continued to be persistent in saying we want to manage all this inventory,” Olabi says. “The unfortunate reality is, many of the firms in the space are not necessarily well-equipped to run an operating business and also run an inventory-management business.
“We need to rethink whether we should be in the business of inventory management,” he adds.
With ServiceTitan’s inventory management features, you can define minimum and maximum inventory levels and automate optimal replenishment with just a few clicks. You can also leverage the superior purchase order (PO) management within the tool.
“We need to issue POs, not only to have that approval workflow in place, but also so we can link that cost back to our jobs. This helps improve our job profitability reporting so we can understand which and when, and we can start segmenting that gross margin by product instead of only looking at it at the aggregate level,” Olabi says.
When it comes to vendor management during shoulder seasons, the sale price for products and equipment should be a secondary consideration. What’s more important is to grasp the impact of vendor terms on your cash conversion cycle.
“So many of our vendors are cash-on-delivery or based on very reduced payment terms. It's time for us to think about renegotiating that and managing our cash outflows, so we're not optimizing simply for the sales price,” Olabi advises. “In this environment, cash is king.”
Olabi summarizes shoulder-season strategies with three final points:
Leverage your data—Extract insights from your existing data to drive future performance.
View accounting as a business partner—Numbers from your data can be used for more than just a backend support function.
Embrace the future—”It is what it is. We've got to work through it,” Olabi says.
