By guest author Mark Jewel

Mark Jewell is the Wall Street Journal best-selling author of Selling Energy: Inspiring Ideas That Get More Projects Approved! This content is excerpted from Jewell Insights, Mark Jewell’s daily blog on ideas and inspiration for advancing efficiency. Sign up at SellingEnergy.com.

Many of the metrics by which prospects evaluate energy projects fail to take into consideration the complexity of the investment at hand. One of the “rules of thumb” that is commonly used by decision-makers is the “maximum two-year simple payback” rule. For whatever reason, people have gotten it in their head that an investment that takes more than two years to pay for itself is a waste of time.

When I started in business in 1980 in California, prime was at 18.75 percent. In fact, in 1981 prime went to 21 percent. I distinctly remember walking into a federally insured Savings and Loan in Brentwood, Los Angeles and getting a six-month CD for more than 16 percent (and I was still shopping for a better rate). Interest rates were crazy back then. Fast-forward 30 years to 2010, and prime is at 3.25 percent. I went to a local bank recently, asked them for a six-month CD, and the percentage was ridiculous. It was closer to 0.6%.

So, why in the world would you be clinging to a mandatory 50 percent return on investment per year (which is essentially what two-year payback means) in both 1980 and 2010? It makes no sense at all because the backdrop of alternative investment vehicles is totally different in those two time periods.

If someone says that they’re wed to this idea of 50 percent return on investment (which is essentially the reciprocal of Simple Payback Period), you might ask a couple of simple questions (pun intended):

• In what other area of your core business are you currently enjoying 50 percent return per year?
• What risk do you have to exercise to get that return?

You might also say something like, “It’s interesting. I’ve done a little research on your industry, and the average return on equity or assets is X or Y…nowhere near 50 percent. I’m wondering why, when it comes to energy efficiency projects, your management thinks it’s appropriate to require 50 percent returns. If they didn’t invest in that energy project, they might invest it back in the core business and get maybe 12 percent.”