At this point in the solar industry's development, it seems like residential solar installers should be generating leads online and through social media and closing deals without ever meeting the customer face to face. After all, these are technology companies, so using technology to make the sales and marketing process more efficient makes all the sense in the world. 

In reality, most residential solar installations are sold with high-touch sales methods like door-to-door and telemarketing contacts that seem to be out of the 1980s. Even if a customer is reached through a digital channel, a personal visit is often needed to close the deal. The problem for installers is that these sales methods are getting more and more costly, and as a result, residential solar installations are actually getting less cost-effective. If the trend continues, it'll be tough for some of the most well-known renewable energy stocks to beat the market or compete with traditional sources of energy. 

Home with solar panels on a cloudy day.

Image source: Getty Images.

The solar sales conundrum

Long-term, we would expect that all costs going into a solar installation would come down over time. Solar panels are getting cheaper, installation is getting more efficient, and sales, marketing, and general costs should be spread over a wider base as these companies grow. But that's not at all what we're seeing. 

Below is a table showing the installation, sales and marketing, and general and administration costs that go into each watt of solar installed at Vivint Solar (NYSE:VSLR). You can see that installation costs are slowly coming down and so are overhead costs, but sales and marketing expenses have exploded.  

Component Q3 2017 Q3 2018 Q3 2019
General and administrative $0.38 $0.36 $0.33
Sales and marketing $0.77 $1.03 $1.37
Installation $1.82 $1.77 $1.78
Total $2.97 $3.16 $3.48

Data source: Vivint Solar earnings releases. 

Below are the same figures for the largest residential solar installer in the country, Sunrun (NASDAQ:RUN). The trends are similar.

Component Q3 2017 Q3 2018 Q3 2019
General and administrative $0.27 $0.23 $0.25
Sales and marketing $0.49 $0.73 $0.81
Installation $2.72 $2.52 $2.48
Total $3.34 $3.34 $3.28

Data source: Sunrun earnings releases.  

A small portion of the increased cost can be attributed to the cost of expanding into new markets since there's a lag between spending on sales and marketing and when that turns into significant installations. But management pointed out in its quarterly filing that the increase in sales and marketing cost is due to higher compensation expenses and higher costs to acquire customers through retail channels. The continual cost increase of these ongoing expenses is the real problem. 

No efficient options for solar sales

Solar companies simply haven't found an efficient way to reach customers and explain their value proposition. Tesla (NASDAQ:TSLA) tried online sales only to see its solar business shrink into oblivion. SunPower (NASDAQ:SPWR) is trying to use automated tools online to assist dealers in quoting and closing sales, but there's still a very manual sales process involved for its dealers. The problem now is that costs aren't stable as you might expect if sales methods were as effective as they were a few years ago, they're rising rapidly.  

One big reason costs are increasing is that the low-hanging fruit (customers highly interested in rooftop solar) has already been picked. Early adopters who may have been a pull on demand have already installed solar and companies are now having to push product more into the market. This makes the sales process more difficult and costly over time. Vivint and Sunrun have tried to lower costs by working with partner channels and offering more tools for customers to learn about solar online, but none have led to a decrease in acquisition costs per watt sold. 

Growing for growth's sake

Residential solar companies have been able to mask some of these rising costs by leveraging low interest rates to get cheap financing and even by raising prices. But long-term, the sales and marketing component of solar energy needs to start coming down to be sustainable. Vivint Solar and Sunrun don't seem to have the answer to that problem and that may open the door to smaller, more nimble competitors to eventually take market share. 

I think the answer is that these companies need to slow their growth and become more efficient, not grow as quickly as they can. Growth may actually be a path to disaster, as it was for SolarCity before its fortunate bailout by Tesla. Hopefully, for investors, that doesn't happen again. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.