How to Overcome the Myth of Simple Payback Period

Myth_SPP

There are a handful of common myths and objections that we efficiency sales professionals tend to hear time and time again. Today, we’ll focus on the follow statement, and how to overcome it:

“We only approve projects that have a simple payback of less than two years.”

How to respond: First of all, simple payback period is not the ideal metric to use in most situations. If your prospect insists on using it, however, the least you could do is make sure you emphasize the other savings and benefits of the project that are non-energy-related, such as lowered maintenance, increased productivity, higher tenant retention, etc. When I say “emphasize,” what I really mean is thoughtfully quantify and monetize those non-utility-cost financial benefits, so that they are more than just glittering generalities as the prospect evaluates their potential effect on his/her return.

As you consider this challenge to move beyond the most obvious utility cost savings, incentives and rebates, remember that energy efficiency projects can deliver three distinct kinds of benefits, and you have to address each one. 

  • The first is obviously the utility-cost financial benefits mentioned above.
  • The second is the non-utility-cost financial benefits.
  • The third is non-financial benefits, such as ENERGY STAR building labels, LEED certification, and all the other things that make you feel good but do not necessarily equate directly to increased financial returns. 

On this last point, please remember that in some cases, what you thought was a strictly non-financial benefit may actually support non-utility-cost financial benefits. As just one example, there are more than a half-dozen studies that show a statistically significant correlation between having an ENERGY STAR label on a commercial building and the following very real “non-utility-cost financial benefits”:  higher base rent per square foot, lower vacancy, and higher sales price per square foot.  Each of those benefits can help drive a building’s net operating income and appraised value higher.

Most mere mortals in this industry can focus on the utility-cost financial benefits effectively, but they fail to incorporate the other two buckets of benefits. Why would you ever let a customer determine the simple payback period of a project by just taking the first cost and dividing it by the utility-cost financial benefits? What if one of the other two buckets is five or even ten times more impressive than the utility-cost financial benefits?

I tell people, “Listen, if you want to use a broken yardstick like simple payback period, at least be fair and put all the benefits that can be quantified and monetized in the denominator of that simple payback period calculation.”

Do that one simple thing (i.e., insist that the prospect incorporate benefits beyond utility-cost financial benefits), and you may very well turn a payback of several years into six months or even less.

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By info@eefg.com (Mark Jewell, CEO of EEFG, Inc. | www.SellingEnergy.com) | | financials |
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