Latest / Scaling Up with Fexingo: How Small Businesses Become Mid-Market Companies / How a Niche HVAC Firm Scaled Past 25 Million by Fixing Service Contracts
Transcript
- Lucas: So there's this HVAC company in Columbus, Ohio, that hit about eight million in revenue doing what everyone else does—chasing big installation jobs. And then they just stopped. Not stopped the business, but stopped competing for new installs altogether. Luna: Wait, they stopped taking installation work? That's like the bread and butter for most HVAC firms. How do you even do that? Lucas: That's exactly what their own sales team said when the founder floated it. But he'd watched the same pattern play out for years: every bid turned into a race to the bottom, margins squeezed to single digits, and the customer vanished the moment the warranty expired. So he made a bet—shift the entire model to preventive maintenance contracts. Luna: Okay, but that's a huge pivot. What made him think it would work? Lucas: He looked at his own numbers. The install side was fifty-five percent of revenue but only twenty percent of profit. The service side, which was mostly reactive repairs, was forty-five percent of revenue and eighty percent of profit. And the customers under contract churned at less than ten percent a year. He realized the real asset wasn't the new units—it was the ongoing relationship. Luna: So he went all-in on subscriptions, basically. What did the new model actually look like? Lucas: They designed two tiers. A basic plan, around two hundred dollars a year, covered a seasonal tune-up and priority scheduling. And a premium plan, about six hundred, added a guaranteed four-hour response window and waived overtime labor on emergency calls. The key was they bundled it with a modest discount on any replacement parts. It gave the customer a reason to keep them on speed dial. Luna: That sounds sensible, but I'm guessing the sales team didn't love it. Their commissions must have taken a hit initially. Lucas: Right, and that's where most pivots die. The founder had to rewire the comp plan. He moved them from a percentage of gross margin on each job to a mix of base salary plus a bonus tied to contract renewals and customer lifetime value. The first quarter, three of his five techs quit. But he held the line and started hiring for a different profile—people who liked building relationships over closing one-off deals. Luna: That's a gutsy move, especially when you're still eight million and the big players are circling. How did they survive the transition? Lucas: They kept a small install crew for existing contract customers only. If you had a maintenance plan and your unit died, they'd replace it at a fair price. But they stopped marketing to new installs entirely. For about eighteen months, revenue flatlined. The founder told me he lost sleep nearly every night, but renewal rates were climbing, and the recurring revenue started to compound. Luna: And that's the magic of the model—every renewal gets easier because the customer already knows you. What happened on the financial side? Lucas: By 2025, they crossed twenty-five million in annual revenue. And here's the number that matters: gross margin went from about twenty-eight percent to nearly forty-five. The service contracts carried a seventy percent margin once the techs were efficient. They also added a commercial line, which now makes up a third of revenue and has even stickier contracts—three-year terms with built-in escalators. Luna: So the commercial side was a natural extension, not a distraction. Did they change their hiring or training to support that? Lucas: Yeah, they started hiring fewer, better techs and invested heavily in training. Each tech now handles about twenty-five percent more accounts because the preventive visits are predictable and don't require constant firefighting. They also introduced a customer portal where clients can book, see service history, and get a text when a tech is en route. Retention went up again, just from that transparency. Luna: I love that—using the data you already have to make the customer feel in control. What was the biggest internal hurdle besides the sales comp? Lucas: The service techs themselves. They were used to being heroes on emergency calls. The new model felt boring—turning up for a scheduled tune-up, checking filters, tightening a belt. But the founder reframed it: you're now the person who prevents the 2 a.m. call. That actually appealed to a lot of them once they saw the stable hours and the profit-sharing tied to renewal rates. Luna: So the culture shifted from chasing adrenaline to building trust. How does that play out in the numbers today? Lucas: They've got about nine thousand residential contracts and three hundred commercial accounts. The renewal rate on residential sits at eighty-seven percent, and commercial is above ninety-five. Customer acquisition cost is a fraction of what it used to be because referrals now drive over half their new business. One happy contract customer tells their neighbors, and those neighbors want the same peace of mind. Luna: That's the flywheel effect. But I'm curious—what would you say to a business owner listening who thinks 'my industry can't do subscriptions'? Lucas: The founder's answer is that virtually any service with recurring need can be packaged. Even a one-time event business like a wedding photographer could offer an annual 'memory plan' that includes a family session and digital archive. The trick is finding the recurring pain point and making the contract so convenient that leaving feels like a hassle. Luna: And that's really the heart of it—you're not selling a product, you're selling certainty. Before we wrap, I know you've been working on a book about this exact shift. How's that going? Lucas: It's coming along, but honestly, the research keeps getting richer every time we talk to someone like this. And that's one of the reasons we keep this show going—every episode gives us a new lens. Luna: Yeah, and it's a two-way street. We learn as much as the listeners do. And if today's episode moved your thinking forward, even a little, you can support the show at buy me a coffee dot com slash fexingo. Lucas: Exactly. It's the smallest ask—the price of a coffee—and it keeps this feed ad-free. No pressure, just gratitude if you do. Luna: Alright, back to the big picture. So what's the one lesson you'd want a listener to take away from this HVAC story? Lucas: That the most valuable revenue is the revenue you've already earned once. A contract turns a transaction into a relationship, and relationships are where the margin lives. Eight million to twenty-five million didn't come from selling more units—it came from selling the same customers peace of mind, year after year. Luna: And it's a lesson that applies well beyond HVAC. Thanks for being here, Lucas. That's a wrap for today's Scaling Up.