The biggest challenge facing the country's largest solar installers may be the industry's out-of-date sales tactics. If the residential solar market is to keep expanding, the costs must continue to fall, and the easiest cost reductions may come from sales. As more people become familiar with solar, SolarCity (NASDAQ:SCTY.DL), Vivint Solar (NYSE:VSLR), and Sunrun (NASDAQ:RUN) can spend less time educating customers on what solar is, but where there are well-informed consumers, the door is open to companies with more efficient and innovative sales methods.
The old-school solar sale
Over the past decade, the residential solar industry has relied on some pretty old-school sales tactics: primarily telemarketing and door-to-door sales. That's right, the solar industry is counting on the same tactics as a 1950s vacuum cleaner salesman used to sell high-tech energy systems in 2016. Here's what SolarCity said in its most recent 10-K filing:
We sell our products and services through a national sales organization that includes specialized internal call centers, a door-to-door sales team, a channel partner network and a robust customer referral program. We have structured our sales organization to efficiently engage prospective customers from initial interest to customized proposals to signed contracts. We intend to continue growing our sales teams as we focus on cost-efficient growth to educate consumers about the benefits of our solar products in order to lower customer acquisition costs and further expand our operations.
A couple of things jump out here. The first is that call centers and door-to-door sales are the foundation of SolarCity's sales strategy. The second is that SolarCity is doubling down, planning to expand the sales team as the company grows.
More efficiency is needed in solar
For an industry built on technology, solar hasn't been very advanced in using technology to make sales. The ability to get a computer-generated price quote online is still relatively new in the industry, and national installers still want a phone call or in-person touchpoint to get customers to sign on the dotted line.
The problem is, that strategy is expensive. In the second quarter, Sunrun spent $0.78 per watt installed on sales and marketing. If the average solar system was 7 kW, that means it spent $5,460 per installation on customer acquisition costs. Vivint Solar was more efficient with $0.56 per watt in sales and marketing costs, while SolarCity spent $0.71 per watt, but we're still talking about thousands of dollars per sale.
Solar companies have to become more efficient in how they sell solar systems. The easy answer is that they need to move sales online and that's starting to happen. But online sales brings up the flaw large installers have in their business models.
Online marketplaces are starting to grow
We're finally starting to see online marketplaces and portals start to grow in the solar industry. EnergySage and Pick My Solar have marketplaces, and Google's (NASDAQ:GOOG) Project Sunroof brings customers to solar installers with more data. In each case, customers are getting apples to apples comparisons of what they're buying from each installer.
SolarCity, Vivint, and Sunrun are used to competing based on leasing prices, but the details of costs and components are hidden from consumers. On a marketplace, customers can choose what solar products they want and how to finance their systems with the prices laid out clearly in front of them. And marketplace customers usually choose loans, meaning solar companies are competing head to head on the cost of a solar system, something national installers aren't used to.
Interesting consumer preferences also emerge when they are given choices. EnergySage's Solar Marketplace Intel Report says that 34% of solar customers put the highest priority on maximizing production or using the most advanced solar technology. SolarCity, Vivint, and Sunrun have traditionally not given customers much, or any, choice about what solar components that go on their roofs, so they'll have to adapt to that change.
SunPower (NASDAQ:SPWR) is participating in marketplaces because it can show how higher-efficiency panels can be better options for customers. And with a sales process that's focused on technology rather than door-to-door sales, it's easier to adapt to these online sales platforms.
Hard transition to a modern solar market
One obstacle residential solar companies face today is that the needs of a mature solar market aren't the same as the needs of a nascent one. Customers require less education and want more choice, which works against the model these companies built over the past decade. But a transition to more online education and sales will help lower costs, making solar more affordable and expanding the market, which is good for the solar business overall. It's a catch-22 if you're a national solar installer.
Moving to more automated, online sales will be a tough transition, but those companies that can do it will have a big growth opportunity. This is a transition investors should watch closely over the next year, because not everyone will get it right.