iepec_the revenue neutral sales model_buhr
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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
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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
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The Challenge of Evaluating Upstream Lighting Programs
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“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
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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
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Evaluators Have Not Been Granted Their Wish
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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?
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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
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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
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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
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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
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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?
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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
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$-
$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
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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
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Model Implementation
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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
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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
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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
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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
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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
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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
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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?
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Tami Buhr
Director of Survey Research
Opinion Dynamics
tbuhr@opiniondynamics.com
617-301-4654
Stan Mertz
Director of Retail Operations
Applied Proactive Technologies
stanm@appliedproactive.com
413-731-6546
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