Your service pricing as an HVAC contractor has the potential to make or break your venture into the industry.
If you set your prices too high, you’re practically handing your client base to your low-cost competitors. If you place your prices too low, you’re probably spending more on materials than you’re profiting by the end of a job.
The goal is to find a reasonable middle ground between pricing and quality of work.
A few quick questions: Do you generally know how much you should charge clients for the services you provide? Do you know the prices you should set to guarantee a profit on your end?
If you answered “no” to either of these two questions, it’s a good idea to take a step back and reflect on how you run your HVAC business.
To help you do that, we’re going to dive into the HVAC pricing formulas that Marcus G. Metoyer Jr. from sitepod.com recommends to ensure fair profits for professionals within the HVAC industry.
Let’s review the basics of HVAC pricing and how each method plays a role in your financial and local success as a business.
The Basics of Pricing
When running an HVAC business, you always have to keep in mind the two types of costs: Direct and overhead.
A direct cost is anything that goes into performing a specific HVAC job as intended. That would include everything from permits and labor to ductwork and general HVAC equipment.
On the other hand, an overhead cost is one that keeps your business up and running from day-to-day. Your overhead costs will include uniforms, salary, vehicle expenses, employee training, and trash removal.
Without any insight into HVAC pricing, these two terms likely mean nothing to you.
But according to Metomoyer, your actual profit will result from subtracting your generated sales from the job itself.
This calculation brings you to your “gross profits.”
After considering the deductions from taxes and overhead costs, these gross profits then bring you to your “net profits.”
As an HVAC contractor, it’s your job to understand how these costs work in the grand scheme of things. The worst thing you can do in the HVAC industry is assume that, since you’re a small-name contractor, you can set your prices absurdly low and still make a profit, as compared to your major franchise opponents.
Take a small step back and take the time to calculate your costs.
One simple way to figure out what to charge is by multiplying your overhead by 100 and dividing the number you get by the dollar-value of sales you make.
You can also use any of the following three methods:
Single Divisor Method
There’s one similarity between all three pricing methods we’re going to review: Your set prices need to cover both direct and overhead costs for you to make a profit.
There’s also a risk of setting a price equal to these two types of costs, leading you to break-even and neither profit nor report losses.
This first method is known as the “single divisor method.” It leans on the idea that all HVAC services you offer require an equal amount of tools and labor.
This divisor is 1.00—with equal parts percent overhead and net yield before taxes.
Follow up by using the divisor to calculate your pricing. Your sales price can be calculated by dividing the specific job’s expenditures by the divisor.
Turning Divisors into Multipliers
You can also set your HVAC prices by turning divisors into multipliers instead. In more simple terms, your selling price multiplier is 1.00 divided by the divisor (which is also 1).
What makes this method unique is that you’ll multiply the selling price multiplier by the job’s direct costs.
Though the mathematics behind this calculation is slightly different from the first method, you’ll get the same selling price. The reason for this is that both calculations rely on the same assumptions: That labor and tool costs are equivalent (a value of 1.00).
Dual Overhead Method
The final of the three HVAC pricing methods is known as the dual overhead method, and it’s quite different from the first two.
This method relies on the idea that the costs of labor and tools like we saw in the first two methods are nowhere near equivalent—labor is far more costly in nearly every situation, meaning it wouldn’t make sense to account for them equally when calculating costs.
After all, it’s far more expensive for an HVAC contractor to cover health insurance, worker compensation, training, and uniforms than it is to recover the cost of tools and materials.
To calculate your service prices with this method, you first need to find the material overhead multiplier, also known as MOM. This equation is:
((Labor costs divided by the material costs) x (overhead costs / (material + labor)) + 1
Next, calculate the labor overhead multiplier, also known as LOM, with the following equation:
((Material costs divided by the labor costs) x (overhead costs / (material + labor)) + 1
Then, you need to calculate for the break-even selling price with this equation to find out the minimum price you must set to avoid losses:
(MOM x equipment and material) + (LOM x labor)
Your fourth and final step will help you determine the actual selling price to ensure your desired profit. You can do that with this equation:
Break-even value x profit multiplier
You can find this value in your profit multiplier table.
When you set prices for your HVAC services without any calculations or research, it can go one of two ways:
- You set prices so low that you’re losing 10% or more on each service you provide.
- Your prices are so high that your competitors are the only option for those on a budget.
Either way, you’re willingly claiming the “short end” of the stick.
You’re unintentionally blacklisting clients that would likely appreciate your services, or you’re going to claim a loss for your business by the end of the year.
If you genuinely want to implement a pricing strategy correctly from day one, you may want to reach out to an attorney or a financial advisor. One of these professionals can help you figure out the “going rate” for your service in your local area where both you and your clients win.
You get a profit, and your clients get the services they expect!