Does customer lifetime Value (LTV) provide an answer?
Across America, things are beginning to bloom. In the Southern climes, spring is tickling forth new growth. From DC, there are strong signals of Federal cooperation. From cities are clarion calls to mobilize toward aggressive reduction in greenhouse gas emissions. Talks about international cooperation are buoying our spirits. We see light at the end of the pandemic’s tunnels.
All of this is pushing the sails of solar. A record year in 2020 is in the books and we are on pace in Q1 2021 for greater penetration. Solar is bridging the gap, we can imagine.
In absolute terms, the price per watt has barely budged. The nationals- Sunrun, Tesla, Sunnova are still putting up shockingly high numbers for “project creation costs”. While the long tail segment of the industry enjoys the benefits of drafting the marketing spend of the large players, we would nonetheless expect that the maturation of our industry would begin to erode this persistent line item on the cost stack.
Let’s start with the obvious. What is the Customer Acquisition Cost (CAC)? And what is an acceptable cost? There is a rigorous, and simple, way to calculate the cost. Choose a time period to evaluate. Add up the number of new customers during that time period and divide this into the total expenses of sales and marketing over that time period. This includes employees' salaries, marketing, lead generation, advertising- everything you’ve spent to bring the customer in the door.
CAC = (Sales + Marketing Expenses) / Number of New Customers.
You can slice this into more refined analytics, but this general number will capture the diversity and net efficacy of your strategies to bring new customers to your services.
Looking at other industries and the average CAC, it is immediately and shockingly apparent that solar is in a league of its own. While retail averages about $10 per customer, software is close to $400, solar can be as high as $3000 or more. Even looking at the auto industry, which has a comparable average revenue per sale, the comparison is skewed- 4% per sale for the auto industry and as high as 30% in solar. Sunrun reported from Q2 2019 to Q4 2020 a reduction from $.77/watt to $.69/watt for “project creation” costs. While the balance of long tail companies lower the overall average to closer to 15% of the average revenue per sale, it does not reflect an efficient marketplace or optimized mainstreamed characteristics.
Solar is still a complex and impactful sale. Even with the retail mechanisms of Tesla, grid parity in places and aggressive financing models, the sale of a long term energy producing asset on an individual’s home, installed by a relatively young industry requires deftness and agility that is just expensive. From lead generation to lead qualification to consultation to design to conversion, we are still overcoming the perils of a fragmented marketplace, the traps of quasi- informed customers and the pressures of a highly competitive field.
It has, however, widened the access of solar to new customer segments which holds the promise for leveraging new tools into the solar industry.
Standardization is a dream being vigorously pursued (Solarapp). Marketplace facilitators like EnergySage have proven effective. Aggregated buying models like IChoosr of the Netherlands are coming to America. Signaling from the Federal rostrum is encouraging consumers to move toward the technology.
All of these trends and efforts are encouraging and necessary. But perhaps we are asking the wrong question- or at least asking the right question but with an overly narrow perspective.
To justify a certain CAC, a business must also analyze the value this customer will continue to bring over time. Think about your favorite restaurant. Imagine you read a feature in the local newspaper, became intrigued and visited the restaurant. Ten years later, you have been to the restaurant 100 times. If the restaurant paid to place the featured article and attracted a customer who is really the equivalent of 100 customers over 10 years, it is clear that the cost of the initial conversion may be far less important than the time frame of the relationship.
LTV = Lifetime Value of Revenue from a Customer
Let’s look at these 2 concepts together. An accepted target ratio of the LTV to CAC is 3:1. That is the total value of the customer purchases over a time period divided by the CAC. It is reasonable to assume the time period is 25 years- equivalent to most warranty periods in solar.
From this perspective, spending $2000 as a customer acquisition cost is not as unpalatable if the threshold for a reasonable lifetime revenue value is only $6000. Most figures hold a potential lifetime value to be closer to the original sale’s revenue. A $25,000 initial sale may equate to an LTV potential of $25,000.
This introduces a new way of thinking. If the perspective of the lifetime value of the customer can keep the apparent impact of the initial CAC in check, then perhaps the question is not simply “Why is the CAC so high?, but “Why is the customer relationship so short?”
Now consider what is happening at the moment, given we are entering a new springtime for solar. New technologies like energy storage, electric vehicle charging, and grid management tools are arriving early and with renewed vigor. These are the manifestations of a mature customer journey. Start with solar, add storage, then add management. A solar company committed to cultivating a relationship with the customer is poised to extend, and therefore capitalize, on the lifetime value of the customer. The cost of customer acquisition may not go down, but its investment value goes up.
This is not to say that the CAC must remain as high as it is. A referral can lower the CAC, especially when paired with a sensible referral program. A focus on the customer relationship can create a positive feedback loop that yields referrals and lowers the CAC. Producing a referral is not actually the goal, it is a by-product of treating customers in a way that encourages referrals. From this perspective, a focus on the experience and relationship of the customer has an added, but powerful benefit of lowering the CAC and lifting the LTV.
And then we must consider what a referral can do. A referral is not simply a less expensive conversion, it provides a series of powerful multiplier effects. For example, 1 offline word-of-mouth impression drives sales at least 5x more than 1 paid, and much more - as much as 100 times more- for higher-consideration categories- (Association of National Advertisers).
The trust a company builds with a customer will erode primarily if the relationship is neglected. With simple tools like Bodhi, a solar company does not have to spend inordinate amounts of money to maintain the customer relationship and therefore lower the effective cost of customer acquisition.