Woodlawn Associates

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Listening to the Voice of the Customer

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Strategy is a hard thing to define.  People often ask me what we do as strategy consultants.  A simple, but unsatisfying, answer is that we help companies figure out what to do to create value.  But that’s not especially elucidating, either.  How do we help them determine what to do?

Among other things, we talk—and listen—to customers.  We have delivered valuable, actionable insights to clients by doing voice-of-the-customer (“VOC”) research.

For example, consider one of our clients, which had dutifully built its products largely on the basis of customer feedback.  We recently interviewed a cross section of their current and potential customers.  Our client was started to find a large difference between what customers and non-customers valued.  They hadn’t realized that, by designing their product to be desirable to current customers they had ended up with a product suited only to one segment of the overall market.  They are now designing a refresh that should allow them to reach a much larger effective market.

Here’s another example of how voice-of-the-customer research can create value.  A few years ago, we were interviewing channel partners for a consumer products company.  Asking about the relative importance of various product attributes, we kept hearing about the importance of one particular attribute that our client was not even aware of.  After reviewing our findings, our client decided to make performance on this attribute a key part of its product development and marketing investments.  This client has gone on to become one of the largest and most successful companies in its industry.

It’s surprising to me the number of companies that try to make big, strategic decisions without having a crystal clear understanding of what buyers value, what they are struggling with, or how competitors are addressing their problems.  This is where VOC research can really add value.

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SolarCity Customer Acquisition Cost and What Really Matters

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We are regularly asked to comment on customer acquisition cost (“CAC”) in the solar industry because we’ve calculated it for so many firms.

In 2012 we published a report on CAC called Solar Marketing Effectiveness.  We concluded the average CAC was $5373 / customer, or $0.89 per Watt.  We have since helped several firms with CAC on a proprietary basis and the numbers we’ve seen in those projects aren’t too different.

It’s not uncommon for us to get objections that go something like this: “SolarCity says their customer acquisition cost is only $2500.” or “Other sources say it is only $0.50 or $0.60 / Watt.  Why are your numbers different?”

In both cases it comes down to how expansive the definition of CAC is.  Our approach is not unlike that of a sculptor.  We start with a solid block of material—all costs, as captured in a company’s books—and we cut away everything that is not CAC.  Thus, we are unlikely to overlook certain acquisition costs just because we forgot or did not know to ask for them.

How straightforward this is depends on the financial detail we have.  If we have access to a company’s general ledger, we can review each transaction to determine if it is related to customer acquisition.  It can be more difficult if we only have access to the P&L.  Some lines on the P&L may contain certain expenses that are CAC and others that are not.  For example, a company might have one line for “marketing & advertising” and another for “salaries & wages”, but that doesn’t give us enough information because we should realize that some—but not all—of the salaries and wages line is for the marketing and sales teams.

Nonetheless, it is often possible to make an CAC estimate from financial statements and other reasonable assumptions.  For example, we estimate that SolarCity’s residential customer acquisition cost in for the quarter ended March 31, 2014 is about $1 / Watt installed or $0.70 / Watt booked.

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Determining Sample Size

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Developing proprietary insight often requires doing primary research.  We are often asked how we determine the sample size necessary for such research.

Larger sample sizes usually require higher cost. Therefore, we want to use the minimum sample size that will provide a useful answer.  When the costs of being wrong are very high, it may be worth the cost of a large sample size to achieve very high confidence in the answer.  For example, if a client is considering a $400 million investment whose success depends on the true value of a particular variable, she is likely to be willing to spend a fair amount to be highly confident in an estimate of that variable.

In other cases, limits on the resources available may require smaller sample sizes.  However, when we know very little to begin with even a relatively small sample can achieve significant reductions in uncertainty.  This reduction in uncertainty can be worth far more than the cost of obtaining a modest sample.

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Solar Dealers Spend $5373 to Acquire Each Customer

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Woodlawn recently examined the sales and marketing practices of residential solar dealer/installers in the United States.  We collected detailed quantitative and qualitative information from a representative cross section of U.S. solar installers.  With this, we were able to answer questions such as:

  • What is the average solar customer acquisition cost? (An average of $5373, or 16.9% of revenue)
  • What is the “typical” marketing mix?
  • Which channels account for the most customers?
  • Which marketing channels are most effective in terms of new customers per dollar spent?
  • How can dealers optimize their mix of channels?
  • How can dealers maximize the potential of each channel?

You can download an extract.  Please feel free to contact us with any questions.

U.S. Residential Solar Distribution: Lessons from Mature Industries

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Note:  A version of this post appears in the May 2012 issue of Solar Industry magazine.

The U.S. residential solar market has grown substantially over the past several years. Companies such as SolarCity, Sungevity, and SunRun have brought innovative business models and scale to the business. However, the market is still served by a very large number of dealer-installers. As solar increasingly becomes a mainstream business, we thought it would make sense to look at how mature industries with similarities to solar distribute and sell their products to find hints about the business models that will be successful in the future.

To do this, we identified industries whose products are, like solar, sold to consumers or installed in single family homes, related to energy, professionally installed, and that have long expected lives. We also looked for products that have an aesthetic aspect and that cost $10,000 or more. In the end, we studied the sales channels for circuit breaker boxes, hot water heaters, flooring materials, roofing materials, central air conditioners, backup generators, and windows.

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