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In a conversation with a contractor from Michigan, who I’ll refer to as Joe (not his real name), I learned that he was installing water heaters for a big box retailer. When contractors tell me that they replace water heaters or any item for that matter for big box retailers, my skin crawls since. In my opinion, this practice is detrimental to the contractors’ business.
He told me the cost he incurred for one tech hour of labor and overhead was $214. This amount falls within the range of $100 to $250 per tech hour, dependent upon their location in the U.S., that I claim all contractors incur to place one qualified service tech in a properly equipped service vehicle if they sell all their available tech hours all the time.
Joe and I discussed a 40-gallon water heater replacement. He said he made no money on the water heater because the big box retailer would not allow it. He claims the water heater is sold by the big box retailer for $288. His ancillary material cost for the items necessary to replace the water heater according to him was $30. He said it took only two tech hours on average to replace the water heater, inclusive of travel time. I think that it takes him three hours if the water heater is delivered to the consumer by the big box retailer, and, four hours if he has to pick the heater up and deliver it to the consumer. Travel time to the consumer is additional to those times.
He informed me that for a 40-gallon capacity natural gas water heater, the big box retailer paid him $430 for the installation to cover his charges and the ancillary material cost — not the water heater.
Just based on the information I have provided, it’s easy to see that in this case it certainly was detrimental to his business. Based on his stated hourly labor/overhead cost of $214, even if I were to believe he performed this task in two hours all the time (and I certainly don’t), his labor/overhead cost would be $428. Add to that $428 the $30 he claims his ancillary material cost (I don’t believe the $30 either. I think it’s higher on average). His cost to perform each task would be $458 so that he could collect $430. That’s a $28 deficit every time he performs this service.
That’s certainly detrimental to his business. But, it doesn’t end there. He told me he does over 1,700 water heaters a year for this big box retailer. At 1,700 water heaters per year, he spends $778,600 ($458 x 1700 heaters) to bring in $731,000 ($430 x 1700 heaters). He loses $47,600 ($28 x 1700). That’s really detrimental!
He also annually sells 550 water heater replacements directly to consumers. But, in those instances he charges $1,700.00 for each water heater. 1,700 and 550 equals 2250 water heaters and the associated installation costs per year. I’m sure not all his water heater installations are 40 gal. nat. gas, but, using the 40-gallon water heater as a barometer, he brings in to his business $1,666,000 (1700 water heaters x $430 = $731,000 / 550 water heaters x $1,700 = $935,000 / $731,000 + $935,000 = $1,666.000).
According to his hourly labor/overhead cost (that’s the cost to him) of $214 per tech hour; his claim of doing each task in two hours; and his ancillary material cost of $30.00 per heater, his cost to perform those 2250 installations is $1,188,900 (2250 heaters x 2 hrs. = 4500 hrs. / 4500 hrs. x $214 = $963,000 / 2250 heaters x $30 = $67,500 / 550 heaters at $288 = $158,400).
On the face of it, he makes a profit of $477,100. You might think that’s not bad. But, let’s look at how much money he made just selling his 550 water heaters directly to the consumer. His direct to consumer heater sales brought in to his business $935,000 (550 heaters x $1,700) at a cost to him of $235,400 (550 heaters x $214) for labor/overhead. Add the cost of the heaters $158,400 (550 heaters x $288 = $158,400) and the $16,500 (550 heaters x $30) cost of ancillary material, his cost to perform those installations is $410,300 according to his numbers (I think it really costs him more). The 550 heaters would have brought in to his business $524,700 ($935,000 - $410,300) of profit above his acclaimed cost. But, because he lost $47,600 installing water heaters for the big box retailer, his water heater installations only brought in $477,100 ($524,000 - $47,600) of profit. There’s the proof of that detriment, and he still has all the risks associated with 2250 water heater installations.
But, it doesn’t end there. By installing water heaters for big box retailers, he is cutting into and depriving his business of the opportunity to sell those 1700 water heaters, or at least some of them, through his company rather than through the big box retailer. And, those water heaters will not have to be replaced for at least seven years. Therefore, he further decreases his business opportunities.
As I have stated, I think he really takes more than two hours on average for these installations, and, that the ancillary material cost is more than $30. As to the cost of the heaters I’ll take his claim of $288 as credible since heater prices fluctuate dependent upon where they are purchased. Using his numbers, Figure 1 shows in increments of 100 heaters how much profit would be brought into his business if he sold them direct to consumers for $1,700 instead of installing water heaters for the big box retailer.
I’m sure some of you are thinking that if he doesn’t install for the big box retailer someone else will. And, that’s exactly my point — no contractor should install for the big box retailer at prices that do not allow them to recover their true cost of operation and earn the reward they deserve for the delivery of excellence to consumers. Each of you would have to apply your factors to see the detriment to your business by installing for big box retailers.
Don’t fool yourself. Big box retailers are not your friends or benefactors. Since both you and they sell water heaters, they are your competition. If you were attacked by an enemy, you wouldn’t supply the enemy with weapons and ammunition. You would never shoot at the enemy, and then, run to the enemy and shoot back at your own people (business). Yet, that is exactly what contractors do when they install for big box retailers at prices that do not allow them to recover their cost and earn the reward they deserve while exacerbating their business problems by depriving themselves of selling the water heaters directly to consumers. It’s called shooting yourself in the foot.
Before deciding to install water heaters for the big box retailer or anyone in competition with your business, keep in mind: the time and training you had to go through to attain the knowledge needed to become a PHC contractor, the true cost you incur to run your business, and, the risk associated with the installation of water heaters — such as people scolding themselves with extremely hot water, carbon monoxide poisoning, leaking heaters and the potential for a water heater explosion. Then ask yourself if it is worth installing a water heater for another entity and not earn the reward you deserve for the excellence you deliver and the risks you take in the delivery.
If you have an opinion on this article, any business matter, or just want to talk to me about the ways my Contractor Profit Advantage programs can help you improve your business results, give me a call.