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The Hidden Cost of Free Home Energy Audits

November 23, 2013 | Posted by Mitt Jones
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For many of us the power of free can be hard to resist. Especially if you’ve been saving for your home energy project, choosing a company that advertises free home energy audits may seem a smart way to start. In practice, you may end up paying much more for your home energy audit with a company that offers them free.

Free_tag.jpgThe problem with free home energy audits is that somebody has to bear the cost.

For a company that relies on giving away full home energy audits, the customers who move forward with a project often pay the full cost not only of their own audit but also of the people who took the free information and ran. And with contractors and programs that provide free home energy audits, most customers don’t move forward with work.

The High Cost of Free

Plugging in a few sample costs illustrates just how expensive free home energy audits can be.

The cost to a home performance company of conducting a thorough energy audit is significant—often $300 to $500, not including overhead or profit. Let’s say $300 to be conservative. (This represents the labor cost for a two-person audit team to measure and inspect the house, perform diagnostic tests, and perform combustion safety testing. Add an hour or two for driving time and a few more hours back at the office for inputting data and creating a custom home performance report.)

The number of customers who decide to move forward with work can certainly vary from company to company, but  contractors and programs have generally found that a lower percentage of customers move forward when the audit is free.

Let’s assume a close rate of 25 percent for companies that give away audits (and that's optimistic). That means that for each customer who goes on to hire that contractor to perform work, three customers don’t. The customers who hire the contractor to perform work effectively pay $1,200 for a $300 audit, because the contractor must make up the cost of the four free audits with each job it sells.

In reality the hidden fee may not be as high. As of this writing, Energy Trust of Oregon provides a $75 cash-back incentive for home energy audits that include an Energy Performance Score (EPS). Let’s assume that the contractor advertising free audits is asking for $75 up front and then helping the customer get the $75 incentive, for a net cost of zero. In that case, customers who move forward with work may end up paying $900 for a $300 audit.

Cheaper Than Free

Now let’s see what happens when everyone who gets an audit pays a fair amount. With no incentive, you pay $300 for a $300 audit. After a $75 cash-back incentive, you pay $225 for a $300 audit, whether or not you decide to move forward with work.

Using the costs and $75 incentive mentioned above, the comparative cost of audits to customers who move forward with work looks like this:

With a free audit, the customer pays $900
With a $300 audit, the customer pays $225

It Gets Even Better

The price disparity grows even bigger when you consider other costs, because companies that charge for home energy audits generally have higher close rates.

One commonly accepted close rate for companies that charge for home energy audits is 50 percent, about twice the accepted rate with free audits.

Continuing with our earlier examples, let’s say it costs each company $120 to put together a sales proposal and follow up with each customer over a period of a few months. A company that provides free audits with a close rate of 25 percent must build $480 into the cost of each energy project to cover that cost. A company that charges for audits with a close rate of 50 percent need build in a cost of only $240. 

Adding these sales costs to our earlier audit costs, we can update our comparative figures:

With a free audit, the customer pays $1,380 ($900 plus $480)
With a $300 audit, the customer pays $465 ($225 plus $240)

Other Factors

Of course many factors go into each company’s pricing, and the costs we show here are just examples.

Some companies will say that they can lower their marketing cost per customer by advertising free audits, and that’s true. Then again, they also typically need to reach at least twice as many customers to sell the same amount of work.

Other companies may claim that advertising free audits gives them high enough volume that they can lower their costs, but the evidence of lower costs may be difficult to find.

In short, it’s hard to get past the conclusion that when it comes to home energy audits, free audits often cost much more.

Exceptions

The bad news about free audits won’t necessarily apply if you’re participating in a program that helps offset the cost to home performance companies of providing those free audits. Some programs help lower the cost of reaching homeowners who are interested in improving the energy efficiency of their homes.

We should also underscore that by home energy audit, we mean a comprehensive audit that includes diagnostic testing, a thorough site energy inspection, and a home performance report that communicates findings and recommendations. The costs for a free introductory site visit that lacks these components would be much lower.

Our Take

We believe it’s much more fair to charge all customers a reasonable price for home energy audits than to ask the most motivated customers to foot the bill for others. We believe that charging a fair market value for home energy audits is good for customers, good for home performance companies, and good for the home energy services market in general.

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