This article was written by our very own Brad Peacock for the Strategic News Service Newsletter. If you are unfamiliar with SNS it is an amazing publication and very valuable for those of us that believe hard work and innovation can solve many of the problems of the world we live in. Check them out at http://www.stratnews.com/
Bringing “Home Energy Efficiency” into the Home
By Brad Peacock
Buildings and homes consume fully 40% of the total energy demand of the U.S., and 75% of all electricity – more than any other category. Fittingly, a tremendous amount of research and resources – billions of dollars over the past decade – are flowing into this space, and the speed of technical innovation in home energy efficiency is rapidly increasing.
But to realize the promise of these new technologies, they have to be actually installed in the field – and at a scale to make a material difference.
Innovation is also required downstream in market development, sales and marketing, distribution and installation, and homeowner financing solutions. Though less “glamorous” than the latest technology solutions fresh out of R&D, innovations in downstream business models warrant and require the same level of talent and resource investment.
The Imperative: Doing More While Consuming Less
The fundamental engines of long-term growth of any economy include population growth, innovation, access to capital, and stable energy supply.
It is no wonder that long-term access to increasing supplies of low-cost energy has become a volatile political issue. The growth and vibrancy of our nation critically depend on it, yet global forces challenge both availability and cost.
One of the key drivers of the increasing pressure on energy economics comes from the rapid rise of developing countries. The BRIC countries (Brazil, Russia, India, and China) represent 42% of global population. But troublingly, these countries today require 40% more energy to generate one dollar of GDP than does the U.S. As these countries continue to grow significantly faster than the global average, pressures on global energy supply will only increase. Regardless of one’s political position on climate change or “peak oil,” the fundamental laws of economics will drive prices up. It’s not politics; it’s just math.
And therein lies the imperative: the countries, companies, communities, and families that learn how to do more, how to drive growth, and how to win in the marketplace while consuming less energy will be the countries, companies, communities, and families that most prosper and thrive in the decades to come.
The good news is that more and more people are rising to the challenge of improving their residential energy efficiency, while technology rises to the opportunities of vast profits to be made in this rapidly growing space. Continued advances in building integrated photo-voltaic technologies, thermal storage systems, integrated home control systems, home-scale wind generation, and more are delivering higher-efficiency solutions at lower and lower cost. And it’s not just financial investment that is flowing into this sector. The best and brightest engineers, strategic focus of senior leadership, and media attention are migrating toward this important challenge and vibrant growth market.
But it is critical to recognize that the residential energy challenge does not stop at the edge of the R&D park. The chasm between manufacturing plant and installed homeowner solution is analogous to the “last mile” concept in transportation and telecommunications: for all of the technical advances that are driving upstream efficiency, the last mile of delivering service to a home presents a fundamentally different set of challenges and can sometimes represent as much as half the total cost.
In the world of residential energy efficiency, these last-mile challenges include:
- Market development
- The complexity and cost of customer acquisition
- Consumer financing
Breakthrough change can only happen when business innovation joins with technical innovation to deliver profitable solutions through the entire value chain.
Market Development: The Importance of Reaching “Everyone Else”
Today there are nearly 80MM single-family homes in the U.S., and 98% of them have a current or future opportunity to upgrade for energy efficiency. Over the next 25 years, the cumulative market value will readily exceed $1 trillion.
To date, this market has been driven by the “green” community – that 2% of the population for whom energy efficiency and sustainability are important moral issues and who choose to spend their discretionary income pursuing these goals in lieu of other expenses (e.g., vacations). But while this is a critical market segment of early adopters, the big opportunity is the segment of “everyone else” – those people who generally want to “do the right thing” but have no idea how to get started, and/or don’t necessarily have $3,000 to $10,000 in discretionary income to throw at energy efficiency improvement projects out of the “greenness of their hearts.”
The work required to tap this market is classic marketing: defining actionable segments, developing tailored value propositions, establishing priorities, and targeting investment. But to appreciate the challenge in this, one has to understand the current structure of the industry. Today, the front line soldiers in the battle for U.S. home energy efficiency are the tens of thousands of local plumbers, furnace and windows contractors, and electricians – skilled tradesmen, to be sure, but not typically best positioned to solve the business challenges of creating and driving a new market.
On the surface, many technical developments in the world of home energy efficiency can appear to be evolutionary: incremental efficiency gains, economies of scale driving cost decreases, etc. But in many cases, these evolutionary technical improvements are creating revolutionary business innovation opportunities to tap whole new markets.
Consider the case of emerging micro-inverter technologies in the world of photo-voltaic solar. Micro inverters speed installation and offer significant safety advantages over traditional solar inverter technologies. (Market leader Enphase Energy recently raised $40MM to expand production.) But beyond just an improved replacement for an existing product, micro inverters create an opportunity to build modular, scalable residential solar systems. In this model, a low-cost “starter system” can be sold at a price point low enough to ease a whole new segment of buyers into the market while providing a platform for future expansion as household budgets allow.
It is an important technological advance which is enabling fundamentally new markets. But in most markets around the country, solar solutions are carried to market by local electricians – again, committed, capable tradesmen, but often not innovative market development professionals.
The Complexity and Cost of Customer Acquisition
The cost of developing these new markets is an expensive proposition, and customers are not cheap to acquire. This has often been cited as a key barrier to accelerating growth in the home energy efficiency market. Even as technical innovations create new market opportunities, the hard work has only begun.
Consider the case of SeriousWindows, made by Serious Materials [Pub. note: a past FiReStarter company]. SeriousWindows boast efficiency factors up to three times that of the traditional market leaders, and competitors are scrambling to maintain market share. But while the energy efficiency economics of SeriousWindows technology are compelling, the cost of bringing new customers to the table can be daunting. In a recent interview, Serious Materials CEO (and SNS member) Kevin Surace estimated that their cost of acquiring a homeowner as a customer can run as high as $2,000. For a $15,000 replacement-window project, that equates to 13% in overhead that falls directly to the bottom line. Clearly, greater efficiency is required.
Solving this challenge requires solving simultaneous equations: creating leveraged sales and marketing models, and maximizing the lifetime value of customers once they are acquired.
Creating Leveraged Sales and Marketing Models
Residential energy efficiency solutions are ultimately bought and sold at kitchen tables. It’s a fundamentally intimate transaction that taps into the emotions of family comfort, the realities of household budgets, and core values of conservation. The challenge, of course, is how to get a seat at the kitchen table in a place of trust and credibility.
In September 2010, the Lawrence Berkeley National Laboratory published a study looking at the past 25 years of home energy efficiency incentive programs, to glean lessons on what worked and didn’t work when it came to driving demand. Its findings suggest that consumer awareness and compelling economics are not, alone, enough to drive broad market acceptance and action on energy efficiency investment. The research pointed to the fact that social dynamics were often the primary decision drivers – including engagement with group/community leaders, fostering a sense of competition, and reinforcing decisions through peer contact. Innovative marketers have the opportunity to create leveraged points of opportunity while simultaneously satisfying buyers’ social needs for purchase.
Consider the affiliated group marketing strategy: more and more companies, nonprofits, and industry associations are recognizing the business value of driving sustainability in their operations and leveraging the results in their marketing efforts. What many of these groups don’t know is that for most non-manufacturing organizations, the homes of their members are often one of the largest components of their extended carbon footprint.
These organizations can drive toward their goals by creating incentives for their members to take action. In this model, innovative service providers have the opportunity to position their solutions as a subsidized resource to these groups. Thus, with one group relationship, the provider now has access to hundreds or thousands of kitchen tables, complete with the sense of community, group competition, and peer awareness that the research has shown to be so important to driving behavior.
Maximizing Lifetime Value
Consider the challenge of the local windows contractor, whose business is predicated upon a once-every-25-years, $8,000 transactional relationship with a customer. The local furnace contractor looks to reach that same customer and sell a new $4,000 premium efficiency furnace once every 20 years, and then hopes to get him or her to call once a year for a $40 annual tune up, in which the contractor clears maybe $10. The local electrician rides the latest wave of incentives to make a run at this same beleaguered customer and turn him into a one-time, $20,000 customer.
In each case, the same customer is being courted multiple times to execute multiple one-time transactions. The contractors are all competing against one another for the homeowner’s budget. It is not efficient for the contracting industry, nor for homeowners.
Contrast this with the emerging Home Performance Contracting industry. This holistic, multi-solution business model dramatically reduces the cost of customer acquisition by dramatically increasing the lifetime value of the customer. A single, integrated business model servicing the above customer example would cut its acquisition costs to 6%, while at the same time improving the customer’s overall experience.
Several years ago, global building materials manufacturer Owens Corning commissioned research that found home improvement contractors have the second-lowest rating of customer satisfaction, behind auto mechanics. So while long-term, loyal customers are invaluable assets to contractors, so too are trustworthy, reliable contractors to homeowners. A business model that moves beyond transactional sales of products toward the development and harvesting of long-term customer relationships has the opportunity to fundamentally change the economics of residential energy efficiency.
While a multifaceted service offering and outstanding customer service are obviously required, the business challenge of maintaining and maximizing a long-term customer relationship are far more complex. It requires sophisticated collection and analysis of customer data, it requires innovative marketing programming, and it requires an ever-evolving solution offering.
It is the Internet retailing industry that perhaps has best leveraged this strategy. By tracking items researched and purchased, the retailer is able to learn customer preferences, tastes, and needs, and carefully craft “push” marketing messages to keep him or her coming back time after time.
After a thorough home energy audit, the best Home Performance Contractors have collected a wealth of data – not only physical data about the home (e.g., age and condition of key equipment, etc.), but also homeowner priorities, values, budgets, family dynamics, aesthetic tastes, and other more personalized information. Thoughtfully leveraged, this data provides the foundation for a long-term relationship with not only an individual homeowner, but also with a physical home that extends to the next family that moves in.
Financing
Many home energy efficiency improvements are inexpensive; some are not. By the time you reach the high-tech side of things, project values can exceed $10,000. At this point, financing solutions are required to open up the mass market. The challenge is that traditional financing options are not always a great fit. Credit cards and traditional unsecured consumer financing solutions are too expensive. Retail banking solutions such as home equity loans and lines of credit are complex and time-consuming to secure.
Several forward-thinking municipalities (e.g., Berkeley, California, and Aspen, Colorado, to name two) have experimented with Property Assessed Clean Energy (PACE) loan programs as a way to provide low-cost financing solutions. Under the PACE scheme, home improvement funds are provided by local municipalities and repaid through property-tax assessments.
One advantage to such programs is that property-tax increases stay with the home even after sale to another owner; thus, future owners share in the cost of the upgrades even as they share in the benefits. While such programs have passed in select municipalities around the country , the mortgage banking industry – including Fanny Mae and Freddy Mac – has come out strongly against this program, recognizing that in case of default, the mortgage is subordinate to the PACE loan in debt recovery.
But other, more tailored solutions are beginning to emerge. For example, EnerBank USA, a Salt Lake City, Utah–based industrial bank, has developed innovative short-term financing options tailored for (and marketed to) home performance contractors for use with their customers. While EnerBank’s current programs are not designed as long-term financing solutions, they are a good example of forward-thinking companies seeing the enormous market potential in home energy efficiency and beginning the hard work of developing tailored solutions.
Summary
The national imperative for improving residential energy efficiency is clear, and it is compelling. The best and brightest are rapidly joining the cause of technical innovation, and vast sums of money are being invested.
But to date, the downstream legs of the value chain have been neglected by investors and top talent. Technology investors do this at their peril, since none of their latest gadgetry can be monetized without solving these challenges. Recognizing that the existing value-chain partners are not well equipped to address these needs, new approaches and active leadership are required.
New and innovative players are entering the market, but the landscape remains wide open for innovative businesses to create sustainable leadership positions in the market.
Now is the time to act.
As a co-founder of DwellTek, Brad Peacock brings 20 years of experience in corporate finance, strategy, global business development, and operations leadership to the fight for breakthrough gains in home energy efficiency.
Prior to DwellTek, Brad held various executive positions with global building material giant Owens Corning, including several years leading the Asia Pacific business development team in Shanghai, China. In addition to his corporate experience, Brad spent years in the strategy consulting industry with Mercer Management Consulting (now Oliver Wymann).
Brad holds an MBA from Northwestern University’s Kellogg Graduate School of Management and lives in Park City, Utah, with his wife and two young children.