How to boost energy efficiency program performance by rethinking incentive offerings
As utilities evaluate the success of their incentive programs, they often struggle to determine which approaches work and which don’t —and, most importantly, why. In general, today’s incentive programs are largely the same as they 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 others. The ongoing research associated with this alternative approach suggests that a deeper understanding of a customer’s values, behaviors, and socioeconomic context holds the key to unlocking the 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 the most effective levers for these programs and how to optimize them.
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 thermostat (and could use the cash rebate to buy it) but who also faces other obstacles when considering a purchase. In this case, the rebate offer is met with a “no” from the customer and the utility’s program administrator never knows why. But with access to key insights about customer choice and decision making, we are likely to avoid these problems altogether.
The key to right-sizing financial incentives requires a two step process: using social science to gather customer feedback on key questions and developing elasticity curves that document the value of both the financial and the non-financial incentives. This combination of insights provides a more robust approach for determining the best incentive level and increasing the performance of utility programs. For example, in our Incentives Optimization Pilot, our research indicated that we could cut the Lightning Program incentive budget in half and continue to claim current savings levels. It also indicated that we could reduce the Appliances Program Incentive Budget by 15% while increasing claimed savings by 10%.
From our pilot, we distilled three critical insights at the juncture of incentive spending and customer decision-making:
1. A large investment in incentives alone won’t buy success, because the 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 the option of including a technology with a particularly user-friendly or “cool” feature set, for example, which the customer might prefer over a cash rebate. As humans, we often choose the option that’s easy or exciting over the 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 other academic disciplines, prominent scholars of behavioral economics conclude time and again that humans are prone to making decisions that run counter to their best financial interests. This sort of research methodology has clear potential to improve our understanding of the customer decision-making process and likely decision outcomes when choosing whether to buy an energy efficient product being promoted by the utility.
The results of a recent study illustrate just how challenging it can be to incentivize energy efficiency in the face of economically “irrational” human behaviors. As part of a larger survey, we asked over 2,000 people to rate the top ten factors influencing their lightbulb purchases. Non-financial considerations were found to be highly important. About half (46%) indicated that “environmental impact” was near the top of their list—followed by “number of bulbs in package” (36%) and “style” (35%).
2. Targeted incentive programs based on customer segments are the future.
By now, we know there 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 them.
Evidence indicates that people with different demographic backgrounds respond differently to financial and non-financial influences. Gender, age, geography, and socioeconomic status 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 these differences in mind? The airline industry provides some lessons. Take, for example, the pricing of airline seats. In the 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 the yield in kilowatts saved per dollar spent.
In short, the 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 the energy savings achieved for each dollar spent or to optimize participation and energy savings.
3. Incentive programs need to get the value proposition and messaging right.
Targeting the right price point for the right combination of product features to the right customer may get you two-thirds of the way to a successful incentive program; ultimately however, the success or failure of your incentive strategy will hinge on the non-financial elements that are critical in getting to “yes.”
Even if the value proposition provides an incontrovertible financial win for your customers, the decision to participate (or not) rests with the 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 other 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 these results not just within the airline industry but also among large healthcare providers and top consumer brands. It’s high time that utilities drop the staid practices of years past and lead with what works in today’s sales and marketing climate.
While financial incentives may be the key to making efficient technologies more feasible for customers, conveying the non-financial benefits that are of most value to customers is often of equal or greater importance in closing the deal.
The need for new math
Identifying and collecting the data needed to assess these new variables appropriately and securely is one thing. Gaining the most accurate insights from this information is another. Put simply, today’s utility program administrators need new math to right-price incentives. The new math requires an algorithm that can explain the value of each variable of interest and its relationship to the others in a predictive fashion.
Considering that utilities spend 60%-70% of energy efficiency program dollars across the industry on incentives, it’s clear that untapped opportunities exist for better ROI—from understanding the financial and non-financial factors that influence people’s decisions and behaviors, to providing targeted and tailored messaging that highlights the right offers to the appropriate recipients, and highlights the need for regulatory change. Without these types of efforts, the 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.”
