Program Mistake Month: The Incentive Roller Coaster

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When people think about programs they often think about rebates, loans, or other incentives. That’s where I’ll start this series.

Bad Incentive StructureDo you want to confuse the home efficiency market? First overheat demand and then freeze buying? Undermine the contractors trying to deliver the very efficiency improvements you want to see? Well, one way to do that is with the bouncing incentive programs that we put in place. Requirements change frequently. Incentive levels change frequently. And sometimes no one can figure out what’s going on until right about the time that “what’s going on” is about to change to “what will be going on”.

The first graph here gives you an idea of what happens in too many programs. Incentives go up and down. I’ve conveniently labeled this as “Bad”. I’m not going to dive deeply into the reasons for this. There are many. Examples include short program life cycles dictated by the utility commissions; delayed program approvals by those same commissions causing gaps, late starts, and mad dashes; poor launches caused by lack of planning and preparedness, weak contractor recruitment, and marketing that falls flat; just plain bad design. And more. Whatever the causes, the incentive roller coaster isn’t a good answer.

Bad incentive structure 2Here’s why. First, the market learns that home efficiency work not only should be incentivized, but that from time-to-time, the incentives get really lucrative, and a smart consumer is best off waiting for spike. Why would I want to do $10,000 of dollars of work today when I have a reasonable expectation that waiting a few months or a year or two will get me a couple grand back in incentives? Waiting for the incentives becomes a smarter investment strategy. I’m not suggesting this is often a very conscious decision, but sometimes it is.

The flipside of times with higher incentives means times with lower incentives. This creates a Valley of Death in which it’s not rational to buy outside of emergencies. Wow, incentive structures can actually entice people to hold back and not buy. Of course not knowing when incentives will peak may cause some to hold off even longer with a wait and see approach. Sort of like me waiting for that magic moment when Apple stock drops momentarily down to $2 a share. It’s not the way to support contractors who invest tens or hundreds of thousands of dollars to gear up to deliver for the program.

From the contractors’ perspective, the incentive trampoline makes marketing more difficult–and that’s even if you let the contractors know ahead of time. Changing incentives without ample notice is madness. Ample notice? More than “the incentives changed last week”.  Even more than “the incentives are going to change next week”. Can’t you plan further ahead and communicate the plan with a lot of lead time? Months? Even years?

Sales are more difficult, too. “Hey, hurry up and buy that attic insulation and air-sealing from me today because if you wait and do it in a couple of months you might be a rebate.” Huh? Quality contractors want to do the best for their customers on all levels–the incentive roller coaster makes that difficult and awkward at best.

Even worse than the implied roller coaster? Be explicit! Tell the customers in October, “Sorry, the incentives for this year are all used up. But don’t worry, they’ll be back in January!” Talk about, pardon the indelicate phrasing, screwing your participating contractors. And it really happens. I’m not making this stuff up.

good incentive structure.A better way? Do you want to change a market? Help the contractors who are helping you? And in the long term create the awareness and buying behaviors that make incentives less important is a way to “create” demand? It’s possible. And it’s not that difficult. Ideally you want two things. First is a s long enough time horizon. 6 months isn’t it. And even a typical three-year PUC program cycle isn’t it. Heck, it might take much of your contractor base half that to even start rolling. Second, is a predictable, and well-telegraphed plan of consistently decreasing incentives. Yes, I said decreasing.

A good incentive structure would start high. Very high is even ok. It lures in both early adopting homeowners and contractors. Obviously, high incentives aren’t sustainable at scale. But with the lower participation that we see at start-up, the high incentives don’t even cost you that much. They create hype and awareness. And they help generate the early success stories that can support longer-term outreach. Heck, they can also compensate early-adopting customers and contractors alike for the headaches of being the guinea pigs while deployment kinks are worked out.

Add to this a well-communicated decrease, say a big step down every year, and you’ve got a built in sense of urgency that sticks around for the life of the program. The message “Hurry, you’d better do this before the end of the year because after that the rebate decreases (or interest rate increases or other benefit disappears)” helps contractors market and sell now. And after the first of the year, they get to reboot with the same message, just at a lower incentive level. And you stick with in and let the market know, yep, the incentive really is lower. It will be lower next year. And lower still after that. “If I’m going to do this it makes sense to do it sooner rather than later.”

It worked with the solar industry. It could work for efficiency, too. So let’s leave the roller coasters to the amusement parks and think a lot more wisely about have we set incentive levels.

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About the Author:

Mike Rogers is the President of OmStout Consulting. A nationally recognized expert in residential energy-efficiency, he works with contractors and programs to scale sustainable market approaches to improving homes. More on Google+

Comments

  1. Amy  September 3, 2013

    Hi Mike –
    Great post. I must say, though, that a major missing component to this discussion is the fact that there are often too many maestros trying to command one orchestra. With so many entities in charge of various aspects of program design, any tips on how to navigate that as a program implementer? I am a huge proponent of making it easier for contractors, but often run into regulatory or administrative road blocks.

    Amy

    reply
    • Mike Rogers  September 3, 2013

      Absolutely. As I mentioned in the post, I wasn’t diving deeply into the reasons for the roller coaster, merely pointing out that it is generally a bad idea. Consider this as shining a light and building awareness, the first step. To fix it, a lot of the maestros you allude to near to be made aware of, and admit to the problem. And this is just one of many problems that need to be confronted, something policy makers haven’t done a great job at yet. Stay tuned for some others that I will lay out this month.

      Thanks,
      Mike

      reply

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