Why are US distributed solar customer acquisition costs still on the rise?


Customer acquisition costs and installation volumes tend to have an inverse relationship, but the first half of 2023 proved that trend wrong. Installation backlogs created under California NEM 2.0 and high retail rates in some states contributed to overall strong H1 2023 installation volumes. However, growth was not as strong in traditionally larger markets with lower retail rates and many installers reported a continued decline in sales during this period.

Installers now face tough decisions on the riskiness of investing in marketing while trying to stay afloat in a contracting market. Despite the market slowdown, many installers have increased or kept marketing budgets the same to keep up with competition, driving up acquisition costs. Wood Mackenzie expects that costs will continue to increase up to $0.87/W in 2024 as the residential market contracts by 4%. After 2024, we expect acquisition costs to decline by 7% on average through 2028.

Larger installers who can afford to invest during low sales periods may not feel the impact of the residential market slowdown as intensely. Sunrun has been able to increase their sales and marketing budget by an average of 6% per quarter since Q2 2022 to drive demand in a contracting market. This investment has been uniquely effective, as their customer acquisition costs have in turn decreased by 23% year-over-year in Q2 2023, despite the market average increasing.

Customer acquisitions cost are also on the rise for community solar developers

Although community solar is an entirely different business model than residential solar, there are distinct similarities in customer acquisition strategies that residential installers and community solar developers use. In both cases, customer acquisition tactics require a high level of community engagement and trust building to ensure success.

Although the cost of acquiring community solar customers has also increased over the last few years, a decrease in community solar demand was not the driver. Instead, as community solar programs evolve, more and more states implemented strict requirements for low-to-moderate income (LMI) subscription levels. Acquiring LMI customers is nearly two times more expensive than acquiring non-LMI residential customers on a $/kW basis. Therefore, as the share of project capacity subscribed by LMI customers increases, customer acquisition costs will also increase. To minimize these costs, community solar developers almost always partner with a third-party subscriber management company. These companies have regional expertise and often utilize software tools to optimize cost efficiency.

Installers are reluctant to invest in new growth mechanisms

The use of virtual sales spiked during the COVID-19 pandemic, as installers heavily invested in digitalization. However, despite previous predictions that virtual sales would continue to grow, most installers returned to in-person sales. Investments in digitalization did not pay off as expected, as economic headwinds forced installers to return to elementary business practices.

Although many installers are hesitant to increase investments while competing for market share, software tools can draw in more potential customers. Lead generation platforms and third-party sales organizations can create efficiencies and produce cost savings for installers, leading to greater customer satisfaction and increased referrals, two key elements for installer growth.

Software solutions give installers the opportunity to close the gaps where failure most often occurs. Customer satisfaction typically drops around the close of sale stage, after customers have signed the contract. Software solutions can alleviate customer anxiety during the installation process by automating communication between customers and installer, making sure customer queries do not go unanswered.

Although the cost to acquire residential solar customers has not yet reached its peak, a hopeful future of decreasing costs is not far away. We expect installers to feel the effects of the market slowdown for the next year, but customer acquisition costs will steadily decline from 2024 to 2028. Software solutions remain a key factor in optimizing efficiency, lowering soft costs for installers, and improving customer experience.

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