The business model shift driving growth in digital music, solar panels, and other consumer technologies is poised to have the same impact on commercial energy efficiency in the United States.
This innovation could increase annual energy-efficient technology spending — LED lights, high efficiency HVAC systems, and smart thermostats — by 42 percent, unlocking $20 billion in new investment by 2020 and doubling annual industry revenue to $48 billion by 2025.
“As-a-service” is popping up everywhere. Software-as-a-service. Rides-as-a-service. Home-maintenance-as-a-service.
For a customer, the service model swaps complications of ownership — high upfront costs, numerous vendors, and decision fatigue — for an all-inclusive pay-as-you-go option. This delivery model spreads the total cost of product ownership over time into predictable payments with worry-free upkeep. It’s transforming how we all purchase and own goods, expanding markets by lowering cost barriers and reaching new customer segments.
Consider the music industry. The web and mobile devices enabled digital downloads and music streaming services, pushing CDs aside. Revenues from music streaming services like Spotify outpaced CD sales for the first time ever in 2014 at $1.87 billion.
But Spotify hasn’t just usurped CD and digital purchases; it has created an entirely new group of music consumers. In 2014, streaming services represent 27 percent of the total U.S. music industry sales, compared to just 5 percent five years ago.
The same market evolution has already transpired for residential solar in the United States. Ten years ago, rooftop solar panels were prohibitively expensive and more of a curiosity than a serious consideration for homeowners. With no-money-down offerings, homeowners could cut their utility bills quickly, while a professional handled maintenance and utility interactions.
So what makes the service model so appealing? Framing is the key. More than just marketing, framing refers to how the sale and delivery of products are presented to potential customers. The as-a-service frame fundamentally changes how customers consider a purchase by tapping behavioral economics around user interface, cost structures, and buyer choices.
An “iPhoned” interface: An easy-to-use, streamlined interface is critical to a fast and effective sale. Consider the magic behind Uber’s app. You tap to confirm your location and voila: a car is en route with a live-to-the-second ETA. The driver knows exactly where and when to pick you up (and even what you look like). You’re dropped off at your location and you hop out of the car. Payment, including a tip, and receipt delivery are automated and paperless. Each step involves numerous behind-the-scenes technology-driven interactions and dollar flows, but all the minutiae is hidden behind the glass phone screen.
Costs spread over time: Upfront cost burden is diminished with the as-a-service model. Goods sold through a service model generally combine zero upfront costs with low (relative to the purchase price) ongoing payments over time. Costs are also less alarming to buyers when presented as a package deal instead of as individual line items, each requiring evaluation. AT&T sold an estimated 7.78 million iPhones in Q4 2014 with a simple monthly payment plan.
Reduced choice anxiety: The as-a-service solution also reduces psychological burdens of making purchases. Barry Schwartz’s influential paradox of choice concept highlights how shoppers presented with fewer options experience less decision anxiety. A prepackaged service minimizes unknowns, with fewer steps required to start realizing benefits. Buyers also perceive the lower commitment of services agreements as freedom of choice, so they make faster purchase decisions.
A new crop of startups are shrewdly tapping this approach by launching businesses featuring easy processes, few decisions, and predictable costs. Take Super, recently launched to outsource homeownership headaches through a monthly subscription covering unexpected home repairs without the added expense or comparison shopping. Consumer beauty apps like Vive and BeautyPass offer unlimited services at a selection of salons for a set monthly price, bundling salon selection, appointment-setting, tipping, and payment into a single service.
So what does this mean for energy efficiency?
Efficiency upgrades and technologies have seen remarkably low market penetration considering the simple value proposition: cut energy use and save money by installing better equipment. Despite an estimated $279 billion potential U.S. market for energy efficiency investment, just a fraction of this has been spent. The industry’s greatest failure, arguably, is tied to how products and services are framed and sold to customers.
Historically, energy efficiency sales pitches have relied on the inherent savings created by retrofits, ignoring more compelling customer purchase triggers. Because LEDs and HVAC systems aren’t thrilling buys, vendors tend to lead with basic economics: $100 upfront cost and $20 annual savings equals a five-year simple payback.
For businesses, this framing pits efficiency purchases against core operating investments and glosses over non-energy benefits like improved air quality and occupant comfort, creating an indefinite purgatory where the economics make sense but projects lose priority and momentum.
Efficiency as- a service changes the game by presenting building owners with packaged solutions covering equipment use, maintenance, repair, and servicing. For example, an LED retrofit previously requiring a $700,000 capital expenditure may be installed as a service for a monthly operating expense of $18,000.
The service model won’t impact debt ratios or lines of credit, conflict with core purchases, or require approval from a CFO or mortgage holder. And the provider owns the system, ensuring it works and delivers cost reductions — the same value propositions driving residential solar uptake.
Efficiency as a service has until now been easily accessible only to large, highly credit-worthy entities spending at least $2 million on new equipment. But creative vendors are adapting the as-a-service model for smaller customers and projects.
Consider Dwelo, a new company empowering energy efficient “smart apartments” through technology and software letting tenants remotely control locks, thermostats, and lighting. Clean energy solutions provider Revoltagen has seen sales skyrocket by introducing lighting-as-a-service to local businesses. And Sealed, a residential energy auditor and implementer, is gaining traction by delivering bundled and fully funded efficiency improvements with contractually guaranteed savings.
Even corporate titans like General Electric are betting big on the service model approach. GE is launching its new Current business based entirely on selling energy equipment through an as-a-service style power agreement
These new offerings are enjoying early success with customers and initiating the same shift for energy efficiency we’ve seen with music consumption, transportation and solar power. Project sales cycles are shrinking from over six months to under 60 days, and buyers are retiring the simple-payback equation.
Instead, they’re weighing monthly expenses against expected savings. Enticed by flexible end-of-term options encouraging continual equipment upgrades, building owners are embracing long-term relationships with vendors, while service providers are happily accepting the extended and predictable revenue streams.
The as-a-service model empowers a truly evolved approach for energy products benefiting both customers and vendors, increasing accessibility to new technologies, and lowering electricity demand to reduce utility bills. It also may spur billions of dollars in additional market value over the next few years. Energy-efficient technologies are rapidly advancing into the 21st century, and now it’s time for our industry’s way of doing business to do the same.
Angela Ferrante is chief marketing officer for SparkFund, a financial technology company enabling energy manufacturers and installers to sell “as-a-service” with integrated pay-over-time options for commercial customers.