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In the last post, we discussed “the sales equation” that every solar company should maximize. As a reminder, here is the equation (Note, for this article the questions are applicable to both solar and geothermal companies):
“The Sales Equation” = High Gross Margin * Project Closes Quickly / Marketing Dollars Spent
There are 3 variables to the equation, two of them have to do with your marketing activities. Specifically, selecting the right customers. You can influence how fast projects close and spending the least marketing dollars by selecting the correct customers. Yes, you heard correctly, all customers are not created equal. Money is not money. High gross margins on a project and marketing dollars spent on a lead have a large overlap. The jobs with the highest margin are likely the ones that are managed the best from an operations perspective. Well run jobs are also the ones that tends to lead to the most referrals, and these are the cheapest leads.
In a future post we will discuss strategies on the best ways to create referral business from a project. For now, back to selecting the right customers. You need to find leads that are the cheapest, and that will close the fastest. These are highly qualified leads.
What does a highly qualified lead look like? These will apply to both solar and geothermal projects. They can take many forms, but it’s likely they’ll meet many of the following criteria:
In the past, we’ve written a few articles about what exactly the IGSHPA accreditation is, if it’s worthwhile, and when contractors should get it.
The International Ground Source Heat Pump Association (IGSHPA) now has a separate program for drillers, called “Vertical Loop Installer Accreditation.” This accreditation is similar to the traditional IGSHPA Installer Accreditation but specifically focuses […]
There’s an interesting split in the residential and light commercial clean energy space lately. As consumer demand is surging and some “old” solar pv players are moving to bigger projects (Nexamp no longer does residential and is installing 4.5 MW in Western, MA, Borrego sold their residential business, etc) there is room opening up for smaller, new companies.
I’ve personally noticed a major divide between the types of organizations expanding into the industry to meet the demand. There tends to be two major camps. First, the entrepreneur. The entrepreneur sees the huge industry growth and is starting a new company to take advantage the growth. The entrepreneur will tend to focus on a specific technology; solar pv, solar thermal, geothermal or energy efficiency. The second is the general contractor or construction professional who plans to expand his current business into a new technology. He does this for a few reasons. He has existing customers asking him about these new technology and he already knows 80% of what he needs to know to install these systems.
Each of these groups looks at the industry in a different way. Each has its pros and cons.
The Entrepreneur or “Pure Play”
I call it a pure play as the whole business is typically hinged solely on the sales of projects in a specific technology.
The pure play company tends to see “understanding business”. That is, the connection and optimization of marketing, sales, engineering, and installation activities as a skill in it’s own right, and they believe the reason they’ll success with the new company.
The General Contractor
The general contractor tends to already own an existing business focused on the building industry. This tends to be general contracting or a as a sub-contractor; roofer, plumber, electrician, etc. The general contractor tends to want to continue their existing business while taking their existing trade knowledge into a new field. The general contractor is already well versed in all of the aspects needed to complete a project; design, installation, project management and customer manager and this is why they feel they will be successful in a new industry.
What are the pros and cons of each?
I don’t personally feel either is better suited to take advantage of the opportunity in the huge growth of renewable energy, though I do think they will find themselves in different places in the market and supply chain, simply because of how each group values marketing, sales, and the installation side of the business.
In the last few posts I’ve written about the process of expanding an existing construction company into renewable energy business and the single thing our marketing planwill focus on. If you’re new to the solar industry, go to the Solar 101 Reading list. It has free tools and articles on solar design and installation, sales and marketing, policy, finance and best practices.
The main metric I’m using is “profit per time invested”. I’m not as interested in increasing top line growth rather then profitability, especially as we get stared. My goal is to reach a profitability of 20% pre-tax. This seems very “doable” given the general construction industry has a profit margin of around 10%. How does this number impact the scale of the business? I can live well with a business that sells $500k a year in revenue providing me with $100k in profit. That is not a lot. This is a little under $48k revenue per month. That is 2 solar pv or geothermal jobs per month, equally 24 jobs a year. Or 4 to 5 solar thermal jobs per month or a combination of solar pv, geothermal and solar thermal. Very “doable”, especially if you look at the number of jobs that companies are doing and the small profit they’re making. From a marketing perspective, the key will be to understand what really is the cause of these jobs so that we can make sure the revenue will be stable and predictable. Most companies take jobs as they come and think its because of something they’ve done. When revenue decline they’re end up in the dark.
Many people like to think big, going after larger and larger projects and getting into commercial work. Often times, they do this by suffering through slimmer and slimmer margins while having to deal with more and more headaches. I’m into thinking big, but by big, I think of net profit. Basically, I’d like to focus more on efficiency then growth of absolutely numbers. A company making 20% margin on $500k in revenue makes the same money as a company with a 5% margin and $2 MILLION in revenue. I’d argue it’s easier to increase efficiency then to grow revenue because you have more control over your own operations then the decisions of clients.
I’m a huge believe in the “crawl –> walk –> run” philosophy of business development and that’s why I spent the last two posts discussing my entire marketing strategy, the goals and metrics of each business task. Now I’m going to outline the operational strategy.
In order to run a super efficient service based business (all construction companies are service based) there are two critical components that need to be optimized. First, your marketing and sales and second the design and installation. On the marketing and sales side this mean decreasing the number of leads you’re getting but making sure that more of them close. Again, you’re goal should to be getting 5 to 10 leads month and have a 50% close rate, rather then sifting through and doing site visits on 50 leads, only to have 3% close. Remember this, dealing with leads takes time and is expensive.
Enough about marketing, for this article let’s focus on operation of running the business.
Many people have been looking for a connection between clean energy and technology for some time now and there aren’t many, other then the goal of “world-changing” technology. However, I believe I’ve found a similarity that can be used to increase operational profitability of small clean energy companies. In tech startups, there tends to be two teams of people. One group is focused on the customer and the other on developing the product. Here’s the reason for this. In most new tech companies, not only does the team not know exactly what the product will be, but they don’t know who the exact customer will be either. So, the customer development team is always performing tests with the product to determine who the customer is and what they will pay for the product. While the product development team is tweaking the product to see if a certain customer will pay for it. I’m not a tech guy, so I might have missed a few things. But to my understand these are called Lean Startup principles.
We can apply a similar model to the sales/marketing and operations activities within a small clean energy company. NOT that the sales/marketing team don’t know who the customer is and the operations team doesn’t know what the product should be. In clean energy both of these variables are known. The logic applies to how the teams are organized so that it a has a huge impact on their effectiveness and the profitability of the company. To display this, let’s review how the “traditional” organization structure of most construction companies is focused.
Many geothermal and general contractors pay a subcontractor to perform Manual J calculations when its required. Accurate heating and cooling loads are absolutely critical to properly designing a geothermal system (See 4 Steps to Designing a Geothermal System) and according to Ryan Carda creator of Loop Links, its the number one more common mistake that geothermal designers make in the design process. If you’re new to geothermal, download the geothermal survival kit to get a better understanding of how the technology works.
In many states, it is now a requirement to perform a manual J calculation to pull a permit for any HVAC job. If you are a general contractor or geothermal installer it will pay to do your own Manual J calculations because so much of the job depends upon accurate loads. Continue reading to learn the 11 tips to creating the best Manual J calculations for your job.