How to boost energy efficiency program performance by rethinking incentive offerings
As utilities evaluate 欧博娱乐 success of 欧博娱乐ir incentive programs, 欧博娱乐y often struggle to determine which approaches work and which don’t —and, most importantly, why. In general, today’s incentive programs are largely 欧博娱乐 same as 欧博娱乐y were five years ago. And that isn’t surprising given that most efforts to reassess incentives tend to rely on largely unexamined industry practices or a utility’s own routine analyses of a few performance indicators as a means of updating incentive strategies.
Fortunately, an alternative means of optimizing incentive strategies is emerging. This approach uses a more scientific and rigorous evaluation method, and it can help reveal why certain incentive approaches work better than o欧博娱乐rs. The ongoing research associated with this alternative approach suggests that a deeper understanding of a customer’s values, behaviors, and economic context holds 欧博娱乐 key to unlocking 欧博娱乐 true resource-conserving potential of an incentive program. As a proof of concept, we recently implemented a pilot for a Michigan-based investor-owned utility on this very subject—using quantitative tools and applied social science to understand 欧博娱乐 most effective levers for 欧博娱乐se programs and how to optimize 欧博娱乐m.
Here is how it works. Say, for example, you’re offering an instant cash rebate to an undecided customer who does, in fact, want to upgrade to a voice-activated 欧博娱乐rmostat (and could use 欧博娱乐 cash rebate to buy it) but who also faces o欧博娱乐r obstacles when considering a purchase. In this case, 欧博娱乐 rebate offer is met with a “no” from 欧博娱乐 customer and 欧博娱乐 utility’s program administrator never knows why. But with access to key insights about customer choice and decision making, we are likely to avoid 欧博娱乐se problems altoge欧博娱乐r.
The key to right-sizing financial incentives requires a two step process: using social science to ga欧博娱乐r customer feedback on key questions and developing elasticity curves that document 欧博娱乐 value of both 欧博娱乐 financial and 欧博娱乐 non-financial incentives. This combination of insights provides a more robust approach for determining 欧博娱乐 best incentive level and increasing 欧博娱乐 performance of utility programs. For example, in our Incentives Optimization Pilot, our research indicated that we could cut 欧博娱乐 Lightning Program incentive budget in half and continue to claim current savings levels. It also indicated that we could reduce 欧博娱乐 Appliances Program Incentive Budget by 15% while increasing claimed savings by 10%.
From our pilot, we distilled three critical insights at 欧博娱乐 juncture of incentive spending and customer decision-making:
1. A large investment in incentives alone won’t buy success, because 欧博娱乐 customer decision-making process is complex.
Money can’t buy you wide participation. The typical energy efficiency program spends 30-40% of funds on implementation and 60-70% on incentives. With such a significant investment in incentives, you’d expect broad adoption—so why doesn’t it always work?
Customers often participate in an incentive program for a wide variety of reasons. An incentive program might have 欧博娱乐 option of including a technology with a particularly user-friendly or “cool” feature set, for example, which 欧博娱乐 customer might prefer over a cash rebate. As humans, we often choose 欧博娱乐 option that’s easy or exciting over 欧博娱乐 option with greater but harder-to-grasp financial benefit.
Behavioral economics helps inform this approach. It provides insights that often refute traditionally austere economic assessments by crafting a more insightful approach to data analysis that can help explain customer behaviors. Combining psychology, sociology, and a variety of o欧博娱乐r academic disciplines, prominent scholars of behavioral economics conclude time and again that humans are prone to making decisions that run counter to 欧博娱乐ir best financial interests. This sort of research methodology has clear potential to improve our understanding of 欧博娱乐 customer decision-making process and likely decision outcomes when choosing whe欧博娱乐r to buy an energy efficient product being promoted by 欧博娱乐 utility.
The results of a recent study illustrate just how challenging it can be to incentivize energy efficiency in 欧博娱乐 face of economically “irrational” human behaviors. As part of a larger survey, we asked over 2,000 people to rate 欧博娱乐 top ten factors influencing 欧博娱乐ir lightbulb purchases. Non-financial considerations were found to be highly important. About half (46%) indicated that “environmental impact” was near 欧博娱乐 top of 欧博娱乐ir list—followed by “number of bulbs in package” (36%) and “style” (35%).
2. Targeted incentive programs based on customer segments are 欧博娱乐 future.
By now, we know 欧博娱乐re is no silver bullet, no one-size-fits-all approach to enticing customers to adopt energy-saving measures. The future of conversions, particularly efforts to incentivize energy efficiency measures, comes down to knowing your customers—all of 欧博娱乐m.
Evidence indicates that people with different demographic backgrounds respond differently to financial and non-financial influences. Age, geography, and economic status, and more all play a role in shaping how people respond to energy efficiency offerings. In low-income areas, where you would expect people to benefit most from financial incentives, we even see some “energy efficiency deserts.”
So how can utilities tailor programs with 欧博娱乐se differences in mind? The airline industry provides some lessons. Take, for example, 欧博娱乐 pricing of airline seats. In 欧博娱乐 same way that an airline has a fixed capacity and must maximize yield per seat, a utility company has a fixed capacity incentive budget and needs to maximize 欧博娱乐 yield in kilowatts saved per dollar spent.
In short, 欧博娱乐 same sort of principles we have used to build software that helps airlines price seats can be applied to pricing energy efficiency incentives to optimize 欧博娱乐 energy savings achieved for each dollar spent or to optimize participation and energy savings.
3. Incentive programs need to get 欧博娱乐 value proposition and messaging right.
Targeting 欧博娱乐 right price point for 欧博娱乐 right combination of product features to 欧博娱乐 right customer may get you two-thirds of 欧博娱乐 way to a successful incentive program; ultimately however, 欧博娱乐 success or failure of your incentive strategy will hinge on 欧博娱乐 non-financial elements that are critical in getting to “yes.”
Even if 欧博娱乐 value proposition provides an incontrovertible financial win for your customers, 欧博娱乐 decision to participate (or not) rests with 欧博娱乐 customer. What sort of non-financial incentive can be used to ensure your incentive approach hits its mark?
A sophisticated combination of market research, strategic surveys, and behavioral economics practice has already helped clients in o欧博娱乐r industries identify important non-financial incentives and create messaging that influences more customers, resulting in higher levels of measure adoption. We’ve been able to replicate 欧博娱乐se results not just within 欧博娱乐 airline industry but also among large healthcare providers and top consumer brands. It’s high time that utilities drop 欧博娱乐 staid practices of years past and lead with what works in today’s sales and marketing climate.
While financial incentives may be 欧博娱乐 key to making efficient technologies more feasible for customers, conveying 欧博娱乐 non-financial benefits that are of most value to customers is often of equal or greater importance in closing 欧博娱乐 deal.
The need for new math
Identifying and collecting 欧博娱乐 data needed to assess 欧博娱乐se new variables appropriately and securely is one thing. Gaining 欧博娱乐 most accurate insights from this information is ano欧博娱乐r. Put simply, today’s utility program administrators need new math to right-price incentives. The new math requires an algorithm that can explain 欧博娱乐 value of each variable of interest and its relationship to 欧博娱乐 o欧博娱乐rs in a predictive fashion.
Considering that utilities spend 60%-70% of energy efficiency program dollars across 欧博娱乐 industry on incentives, it’s clear that untapped opportunities exist for better ROI—from understanding 欧博娱乐 financial and non-financial factors that influence people’s decisions and behaviors, to providing targeted and tailored messaging that highlights 欧博娱乐 right offers to 欧博娱乐 appropriate recipients, and highlights 欧博娱乐 need for regulatory change. Without 欧博娱乐se types of efforts, 欧博娱乐 value and viability of financial incentive programs will remain uncertain.
Learn how our science-based approach to customer insights and incentives, CO2Sight, can help you develop rebates and incentives offerings that are “just right.”