The most important element of a profitable solar company is maximizing what I am referring to as “the sales equation”. In this article, I want to share specifically what the sales equation is, and what questions you can ask to begin to understand how well your company is doing. Sales is the front line of the solar industry. While your business needs the technical expertise to design and install a solar system, those skills alone will not insure your business is successful.
While consulting with a new solar company, figuring out the best way to structure the new company to maximize profits, and speaking with Keith Cronin who sold solar company to SunEdison, I’ve learned that there is one single question key to a successful solar company. If you’re running a small businesses that is run on cash and does not have outside investment, super efficient marketing and sales and an overlap with operations is what will set your business apart.
This may sounds simple, but it’s not. Most small construction companies have net profit margins of around 5%. In the solar or geothermal industries, you should be able to bump this up to at least 10%. Accordingly, your gross margins should be around 20%.
In order to do this, this is the equation you need to maximize.
A profitable solar or geothermal sales engine = high gross margin on project * closes the fastest / marketing dollar spent.
Why this equation?
The equation is showing that the best companies will get the most amount of profit and cash in the fastest amount of time possible. By it’s nature, it includes how you structure the company, your ability to cost jobs correctly, your effectiveness at client relations, and how effective your marketing is.
Let’s review what you should be looking for under each variable.
High Gross Margin. On both solar and geothermal projects the gross margin should be at least 20%.
- Are you costing your jobs correctly? According to Keith, the largest challenge for a solar company is correct costing. The main issue? Costing overhead correctly. Without costing a job correctly you’ll never be able to ensure you’re getting a proper margin.
- Do you know what drives the cost of each job and what jobs will be more expensive to complete then others?
- Is your crew trained correctly? A well trained crew of 4 people can install a 10kW residential system in two days.
Closes jobs the fastest. This is a pure marketing challenge.
- Do some of your customers close faster then others? If yes, which ones? Can you figure out why they close faster?
- Determine which customers close faster and incorporate this into your qualification process. Then, you have your sales people spending more time on the customers that will be likely to close more quickly.
Marketing Dollars Spent: This is all about client relations. Ideally you want to spend nothing on a new lead because it’s a referral.
- Where do leads come from? Where do leads that CLOSE come from? Many companies track where there leads are coming from but what you need to track is where the leads are coming from, of the clients that CLOSE. This will allow you to spend marketing dollars in the most profitable places.
- What percentage of your business comes from referral? How can you improve this number? If 90% of your business already comes from referral, you’re doing great! If you don’t how much does, you need to figure it out. This is the magic number for all construction businesses and especially renewable energy. Everyone talks, especially about cool new technologies. Thus, a sustainable business will be generating most of their new business from referrals.
If you are starting a brand new company or run an existing solar company and have none of these metrics, start by answering the following questions for each job:
High Gross Margin
- What was the gross margin for this job?
- Was is costed correctly? If not, why not? What needs to be changed on future jobs?
- How many man hours did the job take? Could you have improved this?
Job Closes Quickly
- How long did it take the lead to close? (From when they first call your company until the down payment is received)
- Where did this lead come from?
- If it was less then a month (i.e. it closed quickly) how can you get more leads like this?
Marketing Dollars Spent
- Where did the lead come from?
- How much do you spend on this marketing channel?