IEPEC_The Revenue Neutral Sales Model_Buhr

THE REVENUE NEUTRAL SALES MODEL: A NEW APPROACH TO ESTIMATING LIGHTING PROGRAM FREE RIDERSHIP

Presented at the International Energy Program Evaluation Conference –Chicago 2013

Tami Buhr, Opinion Dynamics

Stan Mertz, Applied Proactive Technologies

Overview

IEPEC Chicago 2013 2

If a lighting evaluator were granted three wishes, what would he wish for?

Why existing methods for estimating lighting program free ridership are problematic

Describe a new model that grants the evaluator’s wish and the theory behind it

Example of the model in practice

IEPEC Chicago 2013

The Challenge of Evaluating Upstream Lighting Programs


“Participants” disappear when they make purchase and walk out of retailer

Program data contains number of bulbs sold but not who bought them

Cannot contact participants at end of program year and conduct NTG self-report surveys

Three Wishes


Evaluators wish they had sales data to calculate lift in sales due to discount

Pre and post-program sales data

Comparison area or store sales data

Complete lighting category sales data

IEPEC Chicago 2013

Evaluators Have Not Been Granted Their Wish


Retailers will only provide sales of program-discounted bulbs

Sales data is a trade secret. Provides clues to a retailer’s merchandising strategy that could be used by competition.

What Have Evaluators Done?


Attempted to make traditional methods work with mixed results

Wide ranging NTG results

Large confidence intervals

Results are contentious

No one is happy

Attempts at Self-Report


General population telephone surveys Call utility customers and ask detailed questions about past lighting

purchases

Results are of questionable validity due to timing of survey, small nature of purchase, and difficulty identifying program purchasers

In-store customer interviews Interview customers in store immediately after they make purchase

decision

Greater confidence in self-report results

Challenging to get retailer permission to conduct

Usually make use of non-probability samples

Survey mode may heighten social desirability bias

Other Methods Attempted


Retailer Interviews

Becomes another request for sales data that is denied

Store level staff often do not know sales

Corporate level do not know for a specific utility territory

At best, get rough estimates

May have vested interest in seeing programs continue

Modeling Techniques

Many require use of self-report data in addition to other data (e.g. multi-state model, revealed preference models)

There’s Hope! Using the Sales Data We Have


We have program sales data

From the contracts retailers sign with the utility (MOUs), we also have:

Program discounted price

Full price

Number of bulbs utility will discount

Based on an understanding of retailer decision making, we use the data we have to estimate what sales would be at full price

Retail Accounting and Upstream Programs


Total Revenue = Price * Quantity Sold

Total Profit = Revenue - Costs

Retailer income statement

Revenue on Top Line = “Topline Sales”

Profits on Bottom Line = Company’s “Bottom line”

Retailers can only claim the actual sales price as revenue on their topline

Reimbursement from the utility for the discount cannot be claimed as revenue.

Reimbursement goes into profits a reduction in cost of goods sold

Profit = Revenue – Costs + Utility Reimbursement

What Happens to Retailer Profits and Revenue when Participating in an Upstream Program?


Profits?

No problem.

Retailers are reimbursed for discounts and added to profits.

If retailer sells one additional bulb, profits increase

Revenue?

We might have a problem.

Can only claim discounted sales price as revenue

For each unit sold with the program, less revenue than before the program

Retailer revenue could drop if sales do not increase enough to cover lost revenue due to the discount

Revenue with and without Upstream Program


$-

$100

$200

$300

$400

$500

$600

$700

$800

100 125 150 175 200 225

Rev

enue

Quantity

Revenue With Program ($3 per bulb)

Revenue With Program ($2 per bulb)

Revenue Neutral Point. Without the program discount, 100 bulbs sold at $4/unit for revenue of $400.

Profits and Revenue Matter to Retailers


Upstream programs are good for a retailer’s profits

Retailers still care about revenue

Wall St. looks at change in revenue (e.g. year over year growth, same store sales comparisons)

Buyers’ and managers’ bonuses are based on revenue

Unhappy if utility program causes revenue to drop

Retailers structure their MOUs with utilities so at minimumthe revenues remain the same.

Program impact must be revenue neutral Theory confirmed by interviews with biggest nationwide

corporate retailers

Retailer Decision Tree


Model Implementation


If retailers structure their MOUs to be revenue neutral with the program, can use a reverse calculation and the data we have to estimate their revenue without the program

Price (P) = R/Q Allocation/Sales(Q) = R/P

Revenue (R) = P*Q

Without Program $5.85 ?? ??

With Program $1.85 4,000 $7,400

Price (P) = R/Q Allocation/Sales(Q) = R/P

Revenue (R) = P*Q

Without Program $5.85 1,265 $7,400

With Program $1.85 4,000 $7,400

Data from MOU

Planning Results

Planning Free Ridership


Free Ridership = Units without Program/Units with Program

FR = 1,265/4,000FR = 0.32

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

1265 units @$5.85 4000 units @ $1.85

Rev

enue

Units Sold at Regular and Program Pricing

Need to sell 2,735 more units at $1.85 for revenues to remain neutral

1,265 units would have been sold at $5.85

End of Year Free Ridership


Fell short of goal for product. Sold 2,535 bulbs.

FR = 1,265/3,800FR = 0.33

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

1265 units @$5.85 3800 units @ $1.85

Rev

enue

Units Sold at Regular and Program Pricing

Sold an additional 2,535 units due to price drop to $1.85

1,265 unitswould have been sold at $5.85

Model in Practice


0

5000

10000

15000

20000

25000

30000

Bu

lbs Removeddiscounts on

top‐selling spirals

Reinstated discounts but at lower rate on some products

Delaware Department of Natural Resources and Environmental Control Lighting Program

Period 1 FR = 0.39

Period 2 FR = 0.60

Period 3 FR = 0.49

Overall Program FR = 0.51

Model Advantages


Based on all sales from all retailers

Can estimate free ridership by:

Retailer

Bulb Type

Time Period

Can be used as a planning tool

Have an estimate of free ridership before program year

Can make midyear corrections if not meeting goals

Information can be used to improve program

Analysis is inexpensive to conduct relative to other methods

Model Challenges


Data tracking is important

For each product sold, need:

Regular pricing

Program pricing

Program allocation

Number of units sold

Price changes

Is an estimate of the maximum free ridership

Actual free ridership could be lower

Currently only considers influence of program pricing and not other program efforts such as education or product placement

Conclusion


Upstream lighting programs are a key component of many utilities’ residential program portfolios

All methods for estimating lighting program net-to-gross have strengths and weaknesses.

The Revenue Neutral Sales Model is based on a verified theory of retailer behavior that allows us to estimate what sales would be without the program

The method has a number of advantages that other methods do not

Questions and Comments?


Tami Buhr

Director of Survey Research

Opinion Dynamics

[email protected]

617-301-4654

Stan Mertz

Director of Retail Operations

Applied Proactive Technologies

[email protected]

413-731-6546

IEPEC_The Revenue Neutral Sales Model_Buhr

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