To end the week, I thought I’d tackle one of the tougher topics—the value of an HVAC lead and sale.
The Mother of All HVAC Marketing Mistakes
In the world of big business, data and analytics are hot topics right now. In the September 2014 issue of Harvard Business Review, author Laura Alber examined how Williams-Sonoma’s “secret sauce” involves taking data to a whole new level and embracing and infusing analytics into all business decisions—big and small.]
While big businesses are benefiting (enormously) from analytics, small, local businesses haven’t been nearly as quick to adopt data-driven thinking. In my experience, most small-medium size HVAC companies don’t accurately track their advertising and marketing, let alone utilize their accounting and customer data to make decisions.
Many don’t even have their income statements set up correctly—not separating various lines of business into separate revenue categories or placing things that should be listed as COGS or Cost of Sales as Expenses, etc. That’s part of what we do at Blue Corona. We help HVAC contractors collect the right data about their business and their advertising and marketing and organize it so that it’s actionable.
Some HVAC contractors think that the value of an SEO lead is the price per lead offered by the cheapest pay per lead company. Given the average lead quality offered by many pay per lead companies, and the number of instances where one lead is sold to multiple HVAC contractors (leading to a much lower lead-to-sale conversion rate and an astronomically high cost per sale number), this is a very limiting way to value leads.
To accurately understand and truly appreciate the value of an HVAC lead, you have to dig deeper. You have to figure out the value of a sale, which is based on the average revenue per sale and the average gross margin for that line of business. You also have to figure out your lead-to-sale conversion rate.
Determining the Value of an HVAC Sale
This question—what would you pay for one new sale?—is one of the most important HVAC marketing questions. Actually, I take that back. I think it’s one of the most important business questions—period. Most HVAC contractors have never even been asked this question—not by their accountant, marketing firm, business coach, or peer—let alone tried to answer it. Unfortunately, without an accurate answer to this question, it’s impossible to understand the real value of an HVAC lead. You also can’t maximize your advertising and marketing performance.
Imagine for a moment, that you’re running a residential HVAC company that focuses on replacement work (if you actually are, this should be easy!). If there was a store that you could walk into and buy as many new HVAC swap-out jobs as you wanted, what would you be willing to pay for each one? How many would you buy? Most HVAC business owners have never thought about things this way, but this is exactly the way you should be thinking if you want to take your advertising and marketing results to the next level.
The answer most HVAC contractors offer is something like, “as little as possible” or “$50.” Of course you’d like to pay as little as possible. Like most business questions and simulations, the actual answer is less important than the thinking required to get there. The aforementioned answers are the result of zero critical thinking. If you’re serious about growing your HVAC company, don’t go there.
A Framework for Answering the Question
Coming up with a good answer for this question requires fighting the natural tendency to do a “full cost analysis” and, instead, looking at things only on the margin. If you’re running a residential HVAC company, you’re profitable, and you have the capacity to take on more work, why would you even consider any of your indirect costs (expenses on your income statement) when deciding how much you’d pay to acquire a new job? You shouldn’t. Instead, you should base your answer only on the direct costs associated with doing that one job.
Let’s say your average furnace swap-out job generates $6,000 in revenue, and your margin on an average job like this is 37%. What would you be willing to pay to buy jobs like this? If I were running a profitable, residential HVAC company and had the capacity to take on more work, I’d easily pay $2,000. If I had the option, I’d buy as many of these jobs as my current capacity would allow.
When I offer my answer, some HVAC contractors say, “Give up nearly all the gross margin associated with a job?! You’re nuts!” If you’re serious about growth, you need to think differently than other contractors in your shoes. Under the circumstances listed above, I’d absolutely give up the gross margin on a single job in order to win the job. If you think about all the benefits that come from doing that type of job for a new customer, and you have any level of business and financial sophistication, you would too.
Getting to the Value of an HVAC Lead
Once you’ve determined what you’re willing to pay for various types of HVAC sales, it’s not hard to determine the value of a lead. All you need to know are a few key metrics like your lead-to-sale conversion rate (by marketing channel or source). For example, if you’d pay $2,000 for a furnace replacement job and you know that 10% of the furnace replacement leads you receive from Google Pay Per Click turn into jobs, simple math suggests that you should be willing to pay $200 for each of those leads.
The key is to make sure that you are accurately tracking each advertising and marketing source to see which leads are coming from where (or you’ve got Blue Corona doing it for you).
Better Data Equals Better Decisions
Why do you need to know any of this stuff? If you’re running a very small HVAC company and you’re content where you are (size wise), it may not matter. A lot of small contractors can pay the bills with referrals and word of mouth marketing alone. However, once you get an extra truck or two, you need to start thinking about putting a solid marketing system in place.
Part of what a marketing system does is generate leads for your sales guys. The value of being able to generate leads on a consistent, and predicatable basis can’t be overstated. Outsourcing lead generation (buying leads from a third party like Angie’s List or HomeAdvisor) is very risky. Your lead generation system is the economic engine that drives your business growth. In my opinion, it’s okay to have a third party (an online marketing firm) responsible for building and maintaining your lead generation system, but you want to own it (as much as it can be owned).
There’s no way to build a great lead generation system unless you know your numbers. You need to know:
The lifetime value of a customer
The value of a sale (based on the reveue, gross margin, and your capacity)
Your visit-to-lead conversion rate
Your lead-to-sale conversion rate
So few HVAC contractors accurately track these numbers that having them gives you an enormous marketing advantage. If you’d like help getting them or putting them into a format that makes them actionable, submit your website address in the box below. One of our analysts will review your site, offer you tips to improve your site’s organic ranking, and offer advice on getting the data you need to make this year your best year yet!
About The Author: Ben Landers is the President and CEO of Blue Corona, a data-driven, inbound internet marketing company. Submit an inquiry to book Ben to speak at your next conference or event.
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