REPLACEMENT CONTRACTOR online recently published an interview with Washington state assistant attorney general Jack Zurlini Jr. Mr. Zurlini has filed, so far, eight civil suits against home improvement companies, charging deceptive sales and marketing practices. We recently interviewed Dave Yoho of Dave Yoho Associates, a consultant with more than 60 years experience in the home improvement industry and the author of Why Buy Replacement Windows?, about the suits, their resolution, and the implications for home improvement companies.
Dave Yoho Associates hosts a teleseminar on this and other topics on December 16. To register see http://www.daveyoho.com/teleseminar. Or go to his company's website: www.daveyoho.com. Reach him at email@example.com.
Replacement Contractor: You've been in the home improvement industry a long time. Are these types of investigations and suits new?
Dave Yoho: In their format they're new. But they go back. There were suits instituted in the '50s and '60s that involved Sears, Roebuck [& Co.] that were based on how you could advertise a sale or how long you could advertise the same sale. This series of lawsuits in Washington [state] is the first I've seen since then that have really put a target on this industry.
RC: Are these charges valid or not?
DH: I can't speak for all of them. In the first case, at least, I read the charges and it seemed that there was some justification.
RC: You're speaking of Evans Glass, in Seattle, which is now out of business?
DY: Correct. They were giving poor customer service, misrepresenting information, and misleading their prospects. I think what happened then was that the attorney general began to examine the practices of other home improvement companies.
Selling Energy Efficiency Fair and Square
RC: The charges in the eight civil suits filed so far range over a variety of practices involving rescission, mold, claims that subcontractors are employees when they're not, etc. But all have these two practices in common: exaggerated or unsubstantiated claims of energy savings and use of what's called "false-reference pricing" to set the stage for radical price drops that create urgency and an impulsive first-night sale. Let's start with energy savings. Clearly, depending on the product, new windows and doors contribute to the energy efficiency of a house. But how does a home improvement salesperson talk about that with homeowners in either his company's advertising or his sales pitch without running afoul of the law? What claims are permitted and which could be considered deceptive?
DY: Let me go back to how they were advertising it. One company, for instance, was advertising "savings up to 40%." If you're marketing a window and you're claiming that it can save up to 40%, what does that pertain to? Forty percent of what? The other thing is that the only window that the Department of Energy certifies through Energy Star as saving 40% is an R-5 window. And many of the windows sold are not R-5, but they're saying, "savings up to 40%."
Now there is a common practice out there and that practice is wrong: And that's where the salesperson implies or suggests that new windows can save 40% on a homeowner's utility bills. That's not the way it works.
The way it works is that you take that portion of the bill that relates to heating, ventilating, and air conditioning and use that as your base factor. Windows don't have anything to do with the electricity consumed by lights or a hot water heater. What the [Washington state attorney general] was talking about was companies giving homeowners misinformation on paybacks. I have no way of knowing what they did in the home, but that's what [the attorney general] is saying.
The fact is, old windows create heat loss or, in warm climates, heat gain. They represent 15% to 18% of your wall area. And no matter how well your house is insulated, that's where your heat is going to come and go. So the window company needs to be precise here rather than sloppy with that data. Don't play lightly on that and allow salespeople to use their imaginations.
RC: So is any type of energy savings claim valid from a legal standpoint?
DY: There's a lot of material out there — including government material — that describes the kind of savings that can result when new energy-efficient windows are installed and under what circumstances and conditions. Windows can account for anywhere from 10% to 25% of heat loss, more if the original windows are loose-fitting or if it's a loose frame.
RC: If my company wants to make that claim, what type of documentation or proof of the product's effectiveness do I need to have on file?
DY: There are two booklets from the Department of Energy. A product with an Energy Star seal on it will state the potential savings. Claims of energy savings through window replacement are obviously valid or the federal government wouldn't have been offering people tax credits for the last two years to buy those products.
RC: If I were selling that kind of window, how would I integrate the information into my sales presentation?
DY: Let's say that the homeowner's total utility consumption is $500 a month. Say heating (or air conditioning) represents 35% of that. That's $175. In a year, that's $2,100. That's the part the salesperson should be dealing with. If you have this data from the Department of Energy that says you could save 35% on your heating bill by installing these particular windows, then, in a year's time, that would equal $735. Project that over 10 years and you're saving $7,350. And there are ancillary savings. For instance, if those windows are vinyl and they replace wood, the homeowner is now free of the need to paint them every five years, which is roughly $75 a window. So you're saving an additional $15 per window per year there.
Irresistible Price Drops
RC: Let's talk about price drops, i.e., lowering the price as much as 40% through discounting to create the sense of irresistible opportunity for the homeowner. Why do you think the attorney general finds this so deceptive?
DY: He doesn't understand marketing or the emotional connotation of the buy/sell relationship. He understands law not psychology. He says: I want to take the emotionalism out of selling these products.
Well, there is no such thing as a cold, rational buyer purchasing this type of product purely on merit. Some people want a Cadillac, some want a Lincoln. Color, style, accessories ... it's about how that product makes the [consumer] feel.
A vinyl window in this industry, totaling 90 united inches, could range in price, at retail, from $350 to $950 or more. What does that imply? That there are different products offered at different prices. And in each case we have to take into consideration what the retailer's cost is to bring the product to market. What the attorney general wants to know is how do you establish your retail price and how many jobs do you sell at this price. That's where he's utilizing prior Federal Trade Commission guidelines.
RC: What percentage of home improvement companies sell with multiple discounts?
DY: Just a guess, but the majority of companies sell that way. This originated years ago when a roofing job might cost $500 and a siding job maybe $2,000. Contractors selling their work would offer a 10% incentive for immediate purchase. Fifty dollars, or $200, was credible. Today's big drops aren't credible. If you go from $18,000 to $16,000 to $14,000 to $13,000, someone's going to say: Hey, there was an extra $5,000 in there! And Mr. Zurlini is going to ask: How many jobs do you actually sell at $18,000?
Two of the companies [that the Washington attorney general filed suits against] tell me that their lawyers told them drops like that aren't illegal because they do it in the automotive business. Well, it's not illegal, but it doesn't defend well in court. The price of jobs can vary for many reasons, but if you don't have a base price and sell jobs at that price occasionally, you're going to run into trouble in front of a jury.
RC: Why has this become an industry standard?
DY: People feel that if everybody is doing it, they have to do it, too. If the other guy is giving away 40%, I've got to give 45%. If the other guy says his windows save 32% on energy bills, I have to say 40%.
The Price You Present
RC: What alternative is there to selling that way?
DY: You have to do a better job of explaining the value of the product and how it's installed. Start with a price list. Add up all the items to figure out what the job is going to cost you. When you're done with labor and materials, factor in some percentage for anything that could go wrong. Calculate what a 10% net profit would be on that list. Add, say, 12% for promotional costs, including not just advertising and marketing but the cost of supplier promotions. That's the price you present.
You move toward that price in your sales call by building the value of the product and gaining homeowner agreement throughout. It isn't the price that establishes value. In any situation where a person doesn't see a finished product — a kitchen, sunroom, basement, new windows — they're seeing a model of a finished product. I need to be able to make them see that product in a value-oriented situation. If the value consideration is there, why have an inflated price? Say you get to the end of the presentation and quote a price. And the people say, "That's a lot of money." There could be 20 reasons why they're making that statement. If they say it's too much, you often have to go back and re-sell the value of the product.
RC: So where does discounting become appropriate?
DY: If a prospect expects or requests a discount, you can explain that there are three ways the price could be slightly reduced. You can reduce the quality of the product, the professionalism of the installer, or you can reduce the price by saving the company the cost of a second trip by the salesperson. Say that latter savings comes to 8.2% of the sale price. I believe that's defensible if I have a system and a method. It's also credible.
RC: Is it possible not to discount a job at all and have any hope of swaying the homeowner to buy it?
DY: Usually not. You have to have a form of advertising that creates the desire. Say a sale that begins and ends on a given day. That motivates them to call you. That sale is a discount. The second part of this is that you probably need a minor incentive to get them to make up their minds to buy tonight.
RC: Say I'm selling against competitors who are using deep-drop discounts? If I'm dropping my price by 8% — including 1.5% for clients paying cash — how do I rationalize that against a competitor who goes from $14,000 to $8,500?
DY: In the early part of your presentation, the salesperson is going to be talking about his company and its policies in relation to the way homeowners buy. Point out, then, that there are all kinds of prices out there and that some people use inflated prices to give big discounts but that's not the way your company is structured: "We think this is a well-engineered product and the best product for your home, and we will give you the best price. We will give a price with the promotional discount, a discount for saving us the trouble of coming back at a later point, and that's for a premium quality product installed in the way I described."
RC: Will there be increased scrutiny and similar types of actions in other places besides Washington state?
DY: Yes, in fact we are seeing it happening already. The attorneys general in the various states belong to an association and they report to that association about what they're doing. And then there are possibilities — very real, I think — of class action suits.
Cleaning up Your Act
RC: What steps should a home improvement company take to prevent this type of investigation and lawsuit?
DY: The first thing I think you have to change is the way you acquire these leads. Understand that once that advertising is out there, it's out there for anyone to see. The people who can make you vulnerable are your customers, the ones who may be unhappy with you, or the people who work for you who are unhappy with you.
The first thing to ask yourself is: Is what I'm claiming [in my marketing and selling] fair?
I understand that you have to be aggressive and creative, but is it fair? What are the canvassers saying at the door? Your canvassers need to be scripted not so they say the same thing but so they don't say the wrong thing. Somebody has to cross-check that. They have to be under supervision and control. Your appointment confirmers need to be scripted so they're saying the same thing. And when your salespeople go into the house, they need to be controlled.
RC: Is the Washington state attorney general on a witch hunt?
DY: I think there is an overzealousness. He's not interested in the customers who are satisfied; he's only interested in the customers who aren't satisfied. And he has targeted companies in a way that reminds me of racial profiling. All these companies advertise the same way, canvass, close on the first call. If you do that, you're investigated. Some of these companies never set out to violate the law. But the attorney general is in the power position. His office has unlimited resources and will come after companies that can't defend what they're doing. So clean up your act!
RC: Complaints on the website of the Washington area Better Business Bureau, http://www.bbb.org/us/ plus information subpoenaed from that organization, were a prime mover in spurring the attorney general to action. Is the BBB a friend or foe of the home improvement contractor?
DY: I think the intent of the BBB is to be a friend of the consumer. I believe that [the BBB's] research led it to set up standards which, when applied, gave a fair shake to the consumer. I believe that, unfortunately, social entropy has taken over and the BBB is no longer what it was originally intended to be. It set up a standard, invited you to subscribe to that standard, and charged you money for it. Does that contaminate objectivity?
Also I believe there is a weakness in the way the BBB reports and resolves consumer complaints. Someone complains to the BBB. The BBB contacts the contractor. The contractor corrects it but maybe never sends in the right form to report that. So [that complaint] sits there on the record. In addition, if two people complain about a design/build remodeling company, those two people might represent 8% of that company's volume because its jobs are comparatively large. If 50 people complain about a window replacement company, and it does 3,000 jobs a year, what percentage of their business is that?
RC: Let's say I find out that my company is being investigated. Is it too late to do anything?
DY: That depends on what you're exposed to. Do you have grounds for concern about being investigated? What do you know about what you're doing that could expose you to this kind of problem? Change what you're doing. I believe that all these people put themselves into a position of being defenseless.
RC: All the companies so far have signed consent decrees. Why do you think they did that?
DY: Because they were doing some things they couldn't defend if they had to go to court. I also think they had poor legal advice in the structure of their businesses and poor legal advice in the way they addressed the complaints from the attorney general's office. I'm not saying the lawyers intentionally mislead people. I'm saying there are things out there they don't know a damned thing about. There are cases where people do not seek appropriate advice and they're doing things that are unwise and maybe unlawful and they get frightened and say to the attorney: How do we get out of this quickly?
RC: How would you have responded?
DY: I take pains to subscribe to the laws in existence at any time. I would get the best legal advice. Does that mean I am not vulnerable? No. But I would not agree to sign anything where I did not knowingly commit a violation of the law. If I set my business up to avoid these complaints, and last year we did 3,000 jobs and had seven complaints, those seven complaints are an anomaly not a practice. And I'm not going to agree that what I did was wrong.
RC: Do you think this will result in companies abandoning deep-discount selling?
DY: I tell clients: don't use the double drop, that there is a proper way to present rescission. I tell them to sell value. I see people who don't even realize the jeopardy this is putting them in, so that they may fall prey to an abundance of lawyers out there looking for ways to sue.