Energy efficiency programs are undergoing major changes, and many constituents are demanding better results for their dollars. Today’s programs will not be here tomorrow if they don't start adapting to coming changes.

The good news is that today’s efficiency programs have the potential to double the amount of efficiency generated with two simple changes that are practiced in almost every other industry:

1. Focus more marketing efforts on those homes most likely to need and want to make improvements,

2. Focus less on those who are not in need of improvements or are least likely to make improvements.

Our thesis at Sagewell is that traditional energy-efficiency marketing campaigns and energy-efficiency program administrators will increasingly have to utilize target-marketing techniques that are common in most other industries. 

The evidence for a need for change: The unreached 50 percent and the missing 90 percent

One of the easiest ways to illustrate why target marketing is crucial for the long-term success of energy-efficiency programs is to look at the profiles of the people who request energy assessments when responding to non-targeted energy assessment advertising campaigns. The award-winning Massachusetts Mass Save program is deservedly heralded as one of the most successful efficiency programs in the U.S. However, our data shows that when using non-targeted broad media marketing, 80 percent of the resulting Mass Save energy assessment requests made through the Sagewell website come from Sagewell-identified demographic segments representing just 40 percent of households. This implies that non-targeted advertising may be able to reach only about half of the households, leaving the other unreached 50 percent underserved.

Furthermore, our thermal imaging data indicates that 60 percent of non-targeted energy assessment requests come from homes that do not appear to need wall insulation, which is one of the primary efficiency improvements targeted by Mass Save. This suggests that there is potentially a significant self-selection bias among the people who respond to non-targeted general energy efficiency marketing. In other words, the “greenies” may be more likely to request an energy assessment than the “energy hogs.”

Collectively, this implies that traditional mass-media-driven marketing efforts may only reach half of the population, and that 60 percent of those who respond are not among the best candidates for weatherization improvements.

In addition, the analysis of our thermal imaging data of over 1 million buildings shows that the unreached 50 percent contains large numbers of excellent improvement candidates for energy-efficiency programs.

This illustrates a significant limitation of existing market segmentation efforts: energy efficiency program analysts have historically only looked at past program participants, who typically only represent 5 percent to 10 percent of the total housing stock -- ignoring the 90 percent who have not responded. Furthermore, our data suggests that the 10 percent are not necessarily representative of the remaining 90 percent in their energy efficiency needs. The traditional approach of “searching for similar people who participated in past efficiency programs” is like drilling for water in a field where another well is drying, but ignoring a stream that runs nearby.

Conversely, by thermally imaging entire cities and states at a time, Sagewell can measure heat-loss data on the missing 90 percent of homes that have not yet participated in efficiency programs -- and then target those homes for participation based on demonstrated need for improvement and likelihood of making the improvement.

Maturing industry and changing trends

As the $8-billion-a-year energy efficiency industry matures, programs are being expected to become more efficient. “Do more for less” is a phrase heard in many quarters, even as the industry has been growing at double-digit rates annually. Today’s programs often focus on in-home energy assessments, a relatively expensive way to find improvement candidates. Technological advantages such as mass-scale thermal imaging of buildings, smart meters and data mining techniques are increasingly being used to find the “low-hanging fruit” buildings. These advances can enable efficiency programs to find good candidates at a fraction of the cost of traditional in-home energy audits.

In addition to the desire to lower the cost of energy assessments, the shift to more technology-driven remote assessments is also being driven by changes in the state and utility energy efficiency program goals. Today’s residential programs often focus on lighting and low-flow showerhead upgrades. However, many of these programs will likely shift their focus to other improvement strategies as higher lighting efficiency standards, in-store point-of-purchase subsidies, and reduced deemed savings assumptions shift efficiency program attention to the building envelope and HVAC improvements. This means that fewer and fewer homes will meet the programs' savings targets and that the programs will have to work harder to find them. 

The concepts of cost of customer acquisition, conversion rates, marketing responses and yield will increasingly become important metrics across efficiency programs nationwide.

What can energy efficiency programs learn from the Oakland A’s?

What if energy efficiency programs picked target homes the way that the Oakland A’s pick baseball players? Consider the following: how much more effective would energy-efficiency marketing programs be if they targeted those homes that both 1) needed a building-envelope improvement such as air sealing, insulation, window or doors, and 2) were likely to purchase it? Sagewell estimates that this focus change could potentially double the amount of efficiency delivered while reducing program costs.

The above approach is similar to what the Oakland A’s manager Billy Bean did to select his players for the Oakland A’s (as described in the book and the movie versions of Moneyball). Billy Bean’s player selection method priced the value of each player’s contribution to the team by summing up the player’s ability to bat or run, or his ability to play specific positions in the field. If the player’s modeled contribution exceeded his price on the market by a significant margin, he was a steal. If his contribution was substantially less than his value in the traded market, then the player was traded to another team.

Similarly, if the estimated customer lifetime value of a house exceeds the cost of acquiring the customer, it is worth marketing to that house? Alternatively, one should not spend outbound marketing resources trying to market to a house that is likely to have conversion costs in excess of its customer lifetime value.

There is nothing new with the above logic, and it has been applied in just about every other industry worldwide. The energy-efficiency industry may be one of the last businesses to adapt customer lifetime value analysis techniques to make target marketing decisions. However, it is (somewhat) understandable because of the lack of regulatory incentives and the lack of data to make these decisions -- until the advent of mass-scale thermal image analysis that allows the detection and valuation of building defects without the upfront expense of an on-site energy assessment.

Where next?

The future of energy-efficiency programs is bright, but not without some interim clouds. The overall industry spending may have reached a plateau and may even be decreasing in the next few years. In addition, without the use of more sophisticated target marketing efforts, energy-efficiency programs will likely face increasing marketing and conversion costs. This trend is already visible in many programs across the nation where the energy savings yield for dollars spent has been steadily decreasing and the efficacy of the programs has been called into question.

Sagewell’s data shows that a significant portion of the building stock remains highly inefficient even after decades of promoting efficiency programs. Somewhat counterintuitively, Sagewell’s data further indicates that much of the so-called low-hanging fruit still remains to be picked because the traditional marketing approaches are not reaching the unreached 50 percent. While many of those buildings can be remedied with relatively simple and inexpensive measures, new highly targeted outreach methods have to be utilized to encourage them to make improvements.

Fortunately, with the advent of new thermal imaging technologies and sophisticated customer segmentation methods, efficiency programs of the future can cost-effectively focus more resources on those buildings that can provide the greatest energy savings. Furthermore, it is likely that other innovations, such as the use of individually tailored incentives or triaging of leads to receive different response levels, will complement the thermal imaging and target marketing initiatives.

These and other innovations will show that today’s efficiency programs can increase their results while decreasing the customer acquisition, conversion and overhead costs of the programs and help demonstrate that efficiency is truly the first fuel of the United States.

***

Brad Harkavy is the COO of Sagewell Inc., a city-scale thermal imaging energy efficiency company.