Selling with Rebates: The Simple Payback

  The easiest way to show a homeowner how their investment in high-efficient equipment will help their wallet is to use the "Simple Payback" Calculation.  This 'tried and true' sales tactic will quickly explain how many years before the additional investment to upgrade is paid off.  Of course, there are many features that a high-efficient system provides, like superior levels of comfort, wether it be climate control or just condenser noise just outside their children's bedroom.  These factors can be hard to quantify for most homeowners, and for replacement systems you will likely find they are not weighted as high as the almighty dollar.  So, although costs can vary drastically from Manufacturer to Manufacturer, or even Contractor to Contractor, try inserting your prices, rebates, etc. into the equation next time you recommend an upgrade.

As you can see, there are a few pieces of information needed to calculate the Simple Payback (in Years) for an upgrade in efficiency.  First, you will need to know the total cost (equipment/materials + Labor) of the installation of the base model equipment.  

 

In this example, we will say the replacement 13 SEER system will cost $5k.  Then, you will need to calculate the total cost of the 16 SEER/13 EER installation.  For example purposes, we will say the investment will cost the homeowner an additional $1,300, total $6,300.  The operating costs of the high-efficient system will save the homeowner a conservative estimate of $50 per year, based on the few run hours in MA & RI.  If you were to not include rebates and tax incentives, or the hard to quantify comfort, the system's simple payback would be an astonishing 26 years, well beyond the life expectancy of the system - maybe two systems!

If you were to introduce available local utility rebates, including the MA & RI Cool Smart Quality Installation Verification (QIV) ince..., this system would qualify for $650 paid to the homeowner!  This would be in addition to the $300 25C tax credit, extended through 2013.  By reducing the initial investment from $1,300 to $350, then taking into account the annual energy savings, this system would now have a simple payback of only 7 years!  Did I mention the system that qualifies for the rebate will likely qualify for a 0% Loan, for a period of up to 7 years!  Yes, you read that correctly!  Plus Mr. Or Mrs. Homeowner, you will be more comfortable with a much quieter system that will be installed with the highest of quality!  Where do I sign?

Excess Air

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Comment by Robert (Bob) Bacon on May 29, 2013 at 12:32pm

One comment about economic incentives and one about "simple payback" and “savings:”

Economic Incentives: From a sales perspective, rebates and similar economic incentives have proven to be quite effective; but, in reality, these tactics are psychological devices that work because they are transferring some of the real costs of these technologies or improvements into tax-funded subsidies. This method of deception is not unlike the concept of "externalities" where, for example, the real environmental and human health costs of petroleum use are excluded from the "consumer price" of the product. Similarly 'hidden' in plain sight are the costs to the consumer of financing foreign countries and foreign wars with tax dollars to protect foreign sources of petroleum upon which we have become dependent because of artificially low prices. Indeed, externalities of all types have proven to be "tried and true sales tactics"; but deceptions such as these are continuing to lead our nation and our planet to the brink of destruction.

Simple Payback: Simple payback numbers may be useful if they are understood as and presented as hypothetical constructs for the purpose of comparing one option or improvement measure to another. Even so, as several writers have already commented, one has to be very careful to qualify the many assumptions involved and to identify the many uncontrollable factors that are unavoidable in these calculations. For example: if the winter after the improvement is colder; or if the price of fuel goes up; or, if the occupancy and use patterns of the buildings change, these uncontrollable variables may result in no dollar savings at all; and it's not uncommon that, due to these factors, some customers may have even higher utility bill the year after their investment in greater efficiency. When this happens it is much to the dismay of the customer who was sold on 'savings' by a 'quick and dirty" simple payback number.

Savings: I believe that, in fairness to the customer and to guard against the inevitable disappointments of unmet savings expectations, energy professionals should routinely characterize the goal of efficiency improvements as being "cost avoidance" rather than "savings." In my opinion, if one is interested in building a portfolio of satisfied customers, and/or is interested in nurturing a more conscientious and knowledgeable public, one cannot overstate the importance of this subtle re-characterization of what we should expect as the result of achieving greater energy efficiency.

Comment by tedkidd on May 28, 2013 at 5:32pm

So DIY without pay, the program doesn't do this work for you.  Seems you are benefitting from building intuition based upon actual results though, which I imagine is going to be unique to a population of you (know anyone else keeping track?) 

What modeling software?  

You might want to talk to Andy Frank about your data.  I think he'd be interested in it.  

andy.frank@sealedhomes.com 

People aren't highly motivated just for savings, but they DO want to get what they paid for.  They DO want what they are promised.  

And who doesn't like getting $100 worth of stuff for $50?  I don't think savings alone are a motivator, but leveraging the cost down with energy savings is very appealing to people, if they can trust the promise.  Seems for the most part they can't.  I believe this is primarily what you get when there is no results tracking and no accountability for accuracy.  

When people are confident that results WILL track to promise they'll allow you to add the savings to their improvement budget.  This allows for a nicer, more comprehensive job, which in turn increases the likelihood of immediately noticeable result and accurate savings realization.  

What we DON'T want to do is take food off of peoples tables or have their automobiles repossessed.  We can't take someone who can afford $50 a month and sell them a $100 a month project, then have only $10 in savings show up.  When you dig into the numbers that's what these programs seem to be doing across the country, and if Home Performance is going to ever take off, that needs to stop.  Trust and truth need to become part of this or it'll never get legs.  

Comment by Craig Bird on May 28, 2013 at 5:06pm

The program is utility based in Tucson, AZ. I keep internal spreadsheet on leakage reductions from each job sheet and include construction information (year/wall/roof construction). Financial savings are currently estimated via computer model, however once I have enough real savings estimates built into my database, I hope to utilize that data and even be able to provide savings estimates based on year/construction type.

Customer followup is a one year out follow up on actual savings. The incentive program is too new for me to have a large enough data set to customize savings. The model savings estimates are mostly in line with customer followup numbers I have done so far. I am going off a low sample amount right now, so I am hoping the trend continues.  I am looking at my database almost as a research project that will accurately predict savings for our housing stock. I think this is very market specific based on climate and local building practices, but I hope to draw some larger conclusions.

I think the key to larger savings on heating/cooling are in comprehensive fixes - You can't just do one measure and expect to save 20-30%. When you combine what I call the big 3 for older homes, you can breach those big savings estimates. Installing insulation over open wall cavities/misaligned batts or a new shiny box on a leaky duct system - and you get what I meet every day - customers saying "I installed ______ and it did nothing."

I still have a long way to go with my savings data, but since the rebates kicked in I have a huge sample installed to work from that I will be checking with after the big AC season this summer. To tell you the truth, I think the database will be a huge selling tool, but I don't think savings is as large of a motivator as people make it out to be. Many of my customers never ask what they will save. I don't provide a report with those estimates for every customer. I want real data, because I want to know and I want to have accurate estimates for those customers that it is important to. Many customers want to do deep energy retrofits, because it is the "right way" to fix a house. I have an information based sales approach and when you can explain the building science in a way that makes sense, people want to fix it the proper way - not band-aid it. I am sure this differs for those selling boxes - since it is more competition and commodity driven - which pushes it more towards bottom line discussions.

Comment by tedkidd on May 28, 2013 at 4:09pm

Craig, 

incentives in our market often cover 50-70% of the cost of the costs of improvements for Air Sealing, Duct Sealing, and Insulation.

... they are almost always getting free steak after 3-10 years(and yes, this does include tracking real savings through customer follow up in subsequent years).

That is very interesting!!  It provides feedback and accuracy tuning, accountability, and tangible incentive for excellence and honesty.  

What information can you provide about your program?  Information on projected and actual air leakage reduction numbers, how financial savings calculations are arrived at, how results are tracked, and/or how customer follow up is managed and transparency of results?  We need more of this. 

Comment by Craig Bird on May 28, 2013 at 10:41am

Good luck with that.  This assumes improvements pay for themselves in energy savings alone, which is nearly always incorrect, and even when you do find them tends to drive improvement design from comprehensive recommendations to prescriptive cherry picking items that show the "best payback".   Often this is akin to buying a car with 3 wheels because you can't "cost justify" that fourth wheel.

Depends on your market and your incentives. The incentives in our market often cover 50-70% of the cost of the costs of improvements for Air Sealing, Duct Sealing, and Insulation. When figuring simple payback on all but the newest homes (post 80's), they are almost always getting free steak after 3-10 years(and yes, this does include tracking real savings through customer follow up in subsequent years). This is if your work scope involves the low hanging fruit of the above mentioned measures. I agree that if your just selling boxes, sometimes you NEED a comfort issue in order to overcome otherwise unimpressive savings, and some people selling boxes are selling sizzle with no steak.

So I think simple payback is great if you have low hanging fruit, but you need to be able to provide a variety of metrics based on what addresses the customers concerns. If you sell with these metrics on shaky savings assumptions for those savings based customers - shame on you. I tell people "Your home has all the low hanging fruit covered, and if you want your home to be as efficient and comfortable as possible you must go higher up the tree and the payback is in x,y,z benefits(non-monetary)"

Comment by tedkidd on May 28, 2013 at 8:30am

Good luck with that.  This assumes improvements pay for themselves in energy savings alone, which is nearly always incorrect, and even when you do find them tends to drive improvement design from comprehensive recommendations to prescriptive cherry picking items that show the "best payback".   Often this is akin to buying a car with 3 wheels because you can't "cost justify" that fourth wheel.  

And then after the work is done, good luck counting on this prescriptive improvement approach realizing on saving projections.  You'll be lucky to see 50¢ on the dollar.  Often it's that "no payback" improvement that is necessary to solve comfort problems, gain customer satisfaction, and make the total solution work.  

Also, energy savings is a fraction of energy spend, right?  7x the savings opportunity, for most, means a pretty small job.  Do you really want to sell such small jobs, or spend so much effort looking for the rare home run?  This is math, not magic.  

Have you ever tracked your savings promises, or is this purely a suggestion of how to sell sizzle without worrying about if there is any steak?  I think a much better approach (one that will help you avoid appearing  to be a slimey salesperson promising everything you sell is "free") is to use what I call the "Net Cost" approach.  

This approach assumes people have you in their home to solve a problem, and are willing to PAY to have their problems solved.  If it's a comfort problem there are two paths, throw more energy at it, or cure the cause and save energy.  The first path is pure waste, money down the drain.  The second path allows you to leverage your improvement dollars.  

It requires discussing improvement budget, then gauging their willingness to leverage energy savings to build an improvement design with greater likelihood of success.  

IE:  "Mr Smith, if $50 is a comfortable budget, if I'm able to save, say, $30 in energy can I apply that to the budget?  Does it sound good to spend $50 and leverage that into $80 worth of improvements?"

This approach avoids setting unreasonable expectations that put you in the "overpromise and underdeliver" box.  What you've done today may haunt you tomorrow if you are not careful.   Results transparency is becoming more important and as technology advances it will become ever easier to see.  

There are a lot of people out there who want to repair and improve their homes.  Very few of those homes are so crappy that the improvements will be free (here's a rough calculator for determining opportunity).  If promising "free" is what it takes for you to sell you might want to explore your career options.  

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