In this age of economic wariness, consumers are shopping for deals.They'll spend money, sure, but they want the most bang for their buck and they want to be able to finance big ticket items like furnaces, air conditioning systems, and the like. Can you do this without hurting your cash flow?
Yes, we’re in the throes of summer and you barely have time to take care of customers much less implement changes in financing. But now is the best time to maximize profits by selling more accessories while replacing those old air conditioners. We like to call it bundling.
Think about how we boomers used to buy a new car or truck. We had a lot of decisions to make. Could we afford the automatic transmission, air conditioning, the best speakers, or the leather seats? Today, cars come bundled with accessories. They come with the bluetooth connection, the cruise control, the heated back window, air conditioning.
Why the change? Car manufacturers realized they could make more money per car simply by making it easier for consumers to buy the upgrades we all want anyway. And financing is expected by consumers. After all, if the car is financed, all these extra upgrades are only “pennies” per day added to the monthly payment.
In addition, post-recession consumers have been programmed to expect a “deal” — a discount, special financing, two-for-one, or added accessory at no cost. They want a deal to ensure they’re getting, in their opinion, the best value.
Car manufacturers were also the first ones to drag all retailers into the 0% same-as-cash promotions. Instead of embracing this brilliant marketing move, we often hear contractors complain about the cost of offering financing and financing promotions.
So how do you recover the cost of both offering financing promotions and credit card fees when some cost 6 to 8% of the total amount financed? The answer: carefully.
Financing promotions are typically recovered the wrong way:
For example, let’s say your supplier offers “no-interest” financing on high efficiency, premium equipment during the spring. Assume the cost of the “no-interest” promotion for a $10,000 installation is $1,000 — half of which is paid by you. Knowing that the added cost is $500, you add $500 to the price for the job, making the new price $10,500. No problem — cost covered if the consumer buys.
Think about the logic here: In the spring, when a $10,000 installation is truly a relief for slow sales, you offer a price to the customer that’s $500 higher than the same job would be in the middle of July, when the company has more work than it can get to. Now, you are saying, “But I raise my profit margin in July so I would charge more for that July job, too.” Good, you should. That’s what retailers do. However, adding the cost of a financing promotion directly to the specific job can put you at a competitive disadvantage.
Financing promotions and the processing fees for credit cards recovered the best way:
These costs should be recovered exactly like every other overhead or operating expense your company incurs. A portion of all consumer financing costs should be added to the cost of each and every service call and installation performed — as are all other overhead costs.
When you determine a gross margin for service and installation pricing, a portion of that gross margin is to offset the company’s overhead, and a portion of the gross margin is for profit. After the direct costs of a service call or installation (equipment, parts, material, labor) are paid, the difference in the selling price and these direct costs is gross margin.
Imagine putting those gross margin dollars into a large piggy bank. When bills come due — such as payroll checks, cell phone bills, vehicle fuel, financing promotion fees — some portion of that money is removed from the piggy bank to pay those bills. The dollars that remain in the piggy bank at the end of the year, after all operating expenses are paid, become profits.
We often hear the argument that the cost of financing is different than other overhead expenses because not every customer uses financing. We don’t understand the logic. Not every customer sees your Yellow Pages ad or goes to your website, yet every customer pays some portion of those expenses in the price they pay. Some customers call your dispatcher once a year and some call four times per day for a week. And yet the customer who only calls once pays the same amount of that dispatcher’s salary in your pricing as the one who calls four times.
The Bottom Line:
Building financing promotional costs and credit card processing fees into your overhead expense and recovering them in the gross margin dollars accumulated from all customers rarely raises overhead expenses by more than ½% and more than likely by ¼%. Translated, this means by raising your price by ¼% on every installation and service call, the cost of a financing promotion and credit card fees is covered. This is the best way to recover the cost of financing.
In my next column we’ll discuss the changes in the law on how credit card processing fees can be recovered from consumers.
Vicki LaPlant has worked with HVAC contractors for the past 30 years as a trainer/consultant. She helps people work better together for greater success. Vicki is a longtime Contracting Business.com editorial advisory board member and can be reached by e-mail at firstname.lastname@example.org, or by phone at 903/786-6262.