The vast majority of residential HVAC equipment sales, either add-on-replacement or residential new construction, includes basic efficiency products. In good times most contractors can make a living selling these products. But the contractors who are highly successful, even in challenging economic times, who create true wealth for themselves, understand what “incremental profit” means and manage their business to capitalize on this opportunity.
This concept is a strategic way of at looking at the bottom line impact of up-selling products and services beyond the basic equipment sale.
Incremental profit is the additional net profit generated when any upgrade or add-on product is added to the sale when there is little or no added overhead or labor costs. For example, if you send out 2 installers for a full day to install a basic furnace and/or air conditioner you will make a certain amount of gross profit. When you add a high-efficiency air filter to the job and the installers get it done in the same day there isn’t any additional labor cost or overhead needed to produce that air filter revenue. As a result, all of the “incremental gross profit” from the air filter sale can be considered as “incremental net profit”.
Basic Furnace and Air Conditioner Example:
Job Selling Price = $5,000
Gross Profit Margin = 45%
Gross Profit Dollars = $2,250
Net Profit Margin = 15%
Net Profit Dollars = $750
2 installers for one day
Add a High-Efficiency Air Filter installed in the same day
Air Filter Selling Price = $1,000
Gross Profit Margin = 45%
Incremental Gross Profit Dollars = $450
Incremental Net Profit Dollars = $450!
Total Net Profit = $750 + $450 = $1,200 = 20% Net Profit on the total job!