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MEEA Technical Webinar Series:

A New Approach to Estimating
 Free Ridership for Upstream
      Lighting Programs
                   Presenters:
   Stan Mertz - Applied Proactive Technologies &
         Tami Buhr - Opinions Dynamics

        Thursday, October 18th, 2012
MEEA’s Role in the Midwest
• Nonprofit serving 13 Midwest states
• 10+ years serving states, energy offices, utilities
  and communities
• Staff of 25 in Chicago
• Actions
   –   Designing & Administering Energy Efficiency Programs
   –   Evaluating & Promoting Emerging Technologies
   –   Regional Voice for DOE/EPA & ENERGY STAR
   –   Coordinating Utility Program Efforts
   –   Delivering Training & Workshops
   –   Advancing Energy Efficiency Policy
   –   Promoting Best Practices
REVENUE NEUTRAL MODEL
   A New Approach to Estimating Free
Ridership for Upstream Lighting Programs

             October 2012
Agenda

1. Challenges associated with estimating lighting program NTG
2. Theoretical background underlying Revenue Neutral Sales Model
3. Example of how the model works
4. Questions




                                                                Revenue Neutral Model   2
Lighting Program Evaluation

Challenges and Traditional Methods




                            Revenue Neutral Model   3
Estimating Lighting Program Free Ridership is Challenging

•   Programs usually delivered through an upstream markdown method


•   Customers purchase discount lighting, walk out the store and disappear
    •   Often unaware of the discount
        •   Note that this does not mean customer would have purchased bulbs at full price


•   Retailers are fully aware of their participation


•   Traditional methods use data from both customers and retailers to estimate
    free ridership




                                                                            Revenue Neutral Model   4
What Evaluators Really Want: Full Sales Data

•       Data that tracks sales of EE lighting with and without program pricing would
        provide the best estimate of program impact
    •     Could see the actual lift in sales when program in effect


•       Depending on how long program has been running, measurement approaches
        could include:
    •     Pre-program sales, sales when programs turn pricing on and off, sales of like products
          that are not discounted, sales in comparison areas that do not have programs


•       Unfortunately, retailers will not provide sales of EE lighting at regular price. Will
        only provide sales of products lighting programs discount.




                                                                          Revenue Neutral Model    5
Sales Data Alternatives for Estimating Free Ridership

•   Participant self-reports
    •       Common method for estimating program free ridership for rebate programs
    •       Difficult with upstream programs where customers purchase program incented product
            and disappear


•   Two survey methods commonly used:
    •       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
        •     Usually make use of non-probability samples
        •     Expensive and challenging to conduct




                                                                                        Revenue Neutral Model           6
Sales Data Alternatives for Estimating Free Ridership (2)

•   Retailer Interviews
    •   Conduct interviews with corporate or store level retailers and ask for
        estimate of program impact on sales
           ti t f       g      i    t      l
    •   Are no more likely to give up the numbers in an interview than a request for
        data.
    •   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)
               model,
    •   Suffer from the same validity problems




                                                               Revenue Neutral Model   7
Another Look at Sales Data

•   Existing FR methods are challenging, expensive and produce questionable
    results
•   We keep going back and asking for complete sales data.
    •   Maybe if we ask again, or ask nicer, or ask a different person, we’ll get it.
•   We have asked everyone for sales data including program implementers
    •   Implementers also h l evaluators g t access t stores t conduct intercept
        I l       t   l help     l t     get        to t     to   d ti t       t
        interviews
•   We started talking about the challenges associated with our existing free
    ridership methods and alternatives
            p
•   Is there something we can do with the sales data we do have?
    •   Have program sales data. Also have program prices, regular prices, and sales goals
        for each retailer for each product
•   Estimate non-program sales using data we do have and a model of retailer
    behavior



                                                                         Revenue Neutral Model   8
Revenue Neutral Model

The Alternative Sales Data Method




                            Revenue Neutral Model   9
Retailer Behavior

•   Retailers will only participate in utility lighting programs if their participation is
    revenue neutral
    •    Their “top line sales” remain the same or increase; cannot decrease


•   But why are “top line sales” so important to a retailer?


•   How exactly do retailers factor topline sales into their decision to participate in
    utility programs?




                                                                     Revenue Neutral Model   10
What is Topline Sales?

•   “Top Line Sales” is a reference to the gross sales or revenues of a
    company.


•   The "top" reference relates to the fact that on a company's income
    statement, the first line at the top of the page is generally reserved for
    gross sales or revenue.
    •   Program reimbursements for sales are not included in revenue


•   A company that increases its revenues is said to be "growing its top line", or
    "generating top-line growth".


•   This contrasts with net income (or net earnings per share), which is usually the
    bottom line of the company's income statement.



                                                                  Revenue Neutral Model   11
Topline Sales Impact Example

•     Retailer must sell a minimum of 254 additional units just to get back to $697
      total sales dollars generated before program


                                   $697.00                    $697.00



                                                                                 Incremental 
                       Top Line                                                    sales lift
                        Sales $ 
                        Sales $                                                   +254 units
                                                                                  +254 units
                      Generated                 $197.00


    Regular Retail $6.97
    R l R il $6 97
    Discount       $5.00           100 Units     100 Units    354 Units 
    Promo Retail   $1.97             sold          sold         sold



                                                                 Revenue Neutral Model          12
Gross Margin Impact Example

•   Retailer is made whole on the Gross Margin line after discounts have been
    reimbursed on first 100 units and all additional units provide incremental GM $
    Growth.
    G th
•   Unfortunately, the rebate dollars are not able to be credited to Top Line Sales
    dollars.




                                                                   Incremental 
                                                                   Incremental
             Gross                                                    Gross 
            Margin $                                                Margin lift 
           Generated                                                    on
                                                                    +254 units



                         100 Units     If only 100    354 Units 
                        sold before    Units sold       sold
                         Program          during 
                                        Program
                                                                       Revenue Neutral Model   13
Retailer Decision Tree: Year 1 (SKU Level)


                                                                    Decline to participate OR
                                    Less than 
                                                                  Revise Strategy of Incentives to 
                                                                               gy
                                     prior to 
                                       i t
                                                                  meet Necessary Revenue Dollar 
    How many units can              Program
                                                                               level
       be sold in the 
     Promotional time 
       p
       period at the 
      reduced price?
                                  Same or Above 
                                  prior to Program




                  Same                                    Above

                    Participate at                Participate at
                Agreed Upon Incentive      Agreed Upon Incentive level 
                 level and Allocation       and Negotiate Additional 
                       Amount                  Allocation Amount



                                                                             Revenue Neutral Model    14
Retailer Decision Tree: Additional Years (SKU Level)

          Was the 
                                           No                             Discontinue 
        Previous Year 
                                                                               OR 
     promotion revenue 
     promotion revenue
                                                               Participate with Revised Incentive
      neutral or better?


                                                                        Discontinue  OR
         Yes                         Less than                  Revise Strategy of Incentives to 
                                   Previous Year                meet Previous Year Revenue or 
    How many units can                                         Additional Promotion Opportunity
      be sold in the 
       Next Year?
                                     Same or Above 
                                      Previous Year



                      Same                                 Above

                        Continue at                 Continue at 
                     Current Incentives          Current Incentives 
                            and 
                               d                   and Negotiate 
                                                      d
                      Same Allocation           Additional Allocation
                                                                                 Revenue Neutral Model   15
Model Implementation




                   Revenue Neutral Model   16
Required Data

•   Need program tracking data at sku level for:
    •   Sales goals
    •   MSRP
    •   Incentive amount (and any changes in incentive amount over the promotional
        timeframe)
    •   Program sales
•   Use the first three to estimate sales without program discount pricing
•   Use program sales to calculate free ridership




                                                                  Revenue Neutral Model   17
Model Implementation

•   Can estimate the program’s likely free ridership before the program year


•   Likely free ridership is what the program will receive if each sku meets its sales
    goal and the program does not allow sales to exceed goals


•   Actual free ridership is based on final program sales
    •   Will be higher for skus that do not meet sales goal
    •   Will be lower for those that exceed goals




                                                                 Revenue Neutral Model   18
Use in Actual Evaluations

•   Have used the model in two evaluations so far


•   Results are not yet publicly available


•   Used multiple methods for one evaluation and all came up with similar
              p                                            p
    numbers


•   We are pursuing a patent on the model.




                                                             Revenue Neutral Model   19
Model Benefits

•   Can calculate free ridership by
    •   Bulb type (standard, specialty, fixtures, CFLs, LEDs)
    •   Retailer
    •   During special promotions compared to regular program pricing


•   None of the existing lighting free ridership methods provide this level of detail




                                                                   Revenue Neutral Model   20
Program Design

•       Can use results to identify changes to program implementation to minimize free
        ridership within existing program budgets.
•       Tailor the product mix by bulb type
•       Vary incentive levels by retailer and bulb type
    •     Some retailer and bulb types have higher FR rates
    •     Need greater incentives to encourage purchase by non-free riders
•       Maximize incentive dollars by matching incentive amount to bulb and retailer
        types




                                                                        Revenue Neutral Model   21
Questions or Comments?

                           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
                         413 731 6546




                                                  Revenue Neutral Model   22
The EE Story (Future)
• Future: Finding a new portfolio
  – Lighting savings going down
  – Some program saturation
  – Need ‘new’ programs
     •   Whole home (HPwES, air sealing, etc)
     •   Systems work (HVAC systems, smart homes, etc)
     •   Behavior programs (changing the customer habit)
     •   Education
     •   Building Energy Codes (adoption, training and
         compliance)
  – Challenges
     • Cost effectiveness (non-energy benefits not counted)
     • More complex (contractors, systems, etc)
Presenter Contact Information

 Stan Martz, Applied Proactive Technology –
       StanM@AppliedProactive.com

       Tami Buhr, Opinion Dynamics –
       tbuhr@opiniondynamics.com

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MEEA Technical Webinar: A New Approach to Estimating Free Ridership in Upstream Lighting Programs

  • 1. MEEA Technical Webinar Series: A New Approach to Estimating Free Ridership for Upstream Lighting Programs Presenters: Stan Mertz - Applied Proactive Technologies & Tami Buhr - Opinions Dynamics Thursday, October 18th, 2012
  • 2. MEEA’s Role in the Midwest • Nonprofit serving 13 Midwest states • 10+ years serving states, energy offices, utilities and communities • Staff of 25 in Chicago • Actions – Designing & Administering Energy Efficiency Programs – Evaluating & Promoting Emerging Technologies – Regional Voice for DOE/EPA & ENERGY STAR – Coordinating Utility Program Efforts – Delivering Training & Workshops – Advancing Energy Efficiency Policy – Promoting Best Practices
  • 3. REVENUE NEUTRAL MODEL A New Approach to Estimating Free Ridership for Upstream Lighting Programs October 2012
  • 4. Agenda 1. Challenges associated with estimating lighting program NTG 2. Theoretical background underlying Revenue Neutral Sales Model 3. Example of how the model works 4. Questions Revenue Neutral Model 2
  • 5. Lighting Program Evaluation Challenges and Traditional Methods Revenue Neutral Model 3
  • 6. Estimating Lighting Program Free Ridership is Challenging • Programs usually delivered through an upstream markdown method • Customers purchase discount lighting, walk out the store and disappear • Often unaware of the discount • Note that this does not mean customer would have purchased bulbs at full price • Retailers are fully aware of their participation • Traditional methods use data from both customers and retailers to estimate free ridership Revenue Neutral Model 4
  • 7. What Evaluators Really Want: Full Sales Data • Data that tracks sales of EE lighting with and without program pricing would provide the best estimate of program impact • Could see the actual lift in sales when program in effect • Depending on how long program has been running, measurement approaches could include: • Pre-program sales, sales when programs turn pricing on and off, sales of like products that are not discounted, sales in comparison areas that do not have programs • Unfortunately, retailers will not provide sales of EE lighting at regular price. Will only provide sales of products lighting programs discount. Revenue Neutral Model 5
  • 8. Sales Data Alternatives for Estimating Free Ridership • Participant self-reports • Common method for estimating program free ridership for rebate programs • Difficult with upstream programs where customers purchase program incented product and disappear • Two survey methods commonly used: • 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 • Usually make use of non-probability samples • Expensive and challenging to conduct Revenue Neutral Model 6
  • 9. Sales Data Alternatives for Estimating Free Ridership (2) • Retailer Interviews • Conduct interviews with corporate or store level retailers and ask for estimate of program impact on sales ti t f g i t l • Are no more likely to give up the numbers in an interview than a request for data. • 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) model, • Suffer from the same validity problems Revenue Neutral Model 7
  • 10. Another Look at Sales Data • Existing FR methods are challenging, expensive and produce questionable results • We keep going back and asking for complete sales data. • Maybe if we ask again, or ask nicer, or ask a different person, we’ll get it. • We have asked everyone for sales data including program implementers • Implementers also h l evaluators g t access t stores t conduct intercept I l t l help l t get to t to d ti t t interviews • We started talking about the challenges associated with our existing free ridership methods and alternatives p • Is there something we can do with the sales data we do have? • Have program sales data. Also have program prices, regular prices, and sales goals for each retailer for each product • Estimate non-program sales using data we do have and a model of retailer behavior Revenue Neutral Model 8
  • 11. Revenue Neutral Model The Alternative Sales Data Method Revenue Neutral Model 9
  • 12. Retailer Behavior • Retailers will only participate in utility lighting programs if their participation is revenue neutral • Their “top line sales” remain the same or increase; cannot decrease • But why are “top line sales” so important to a retailer? • How exactly do retailers factor topline sales into their decision to participate in utility programs? Revenue Neutral Model 10
  • 13. What is Topline Sales? • “Top Line Sales” is a reference to the gross sales or revenues of a company. • The "top" reference relates to the fact that on a company's income statement, the first line at the top of the page is generally reserved for gross sales or revenue. • Program reimbursements for sales are not included in revenue • A company that increases its revenues is said to be "growing its top line", or "generating top-line growth". • This contrasts with net income (or net earnings per share), which is usually the bottom line of the company's income statement. Revenue Neutral Model 11
  • 14. Topline Sales Impact Example • Retailer must sell a minimum of 254 additional units just to get back to $697 total sales dollars generated before program $697.00 $697.00 Incremental  Top Line  sales lift Sales $  Sales $ +254 units +254 units Generated $197.00 Regular Retail $6.97 R l R il $6 97 Discount $5.00 100 Units  100 Units  354 Units  Promo Retail   $1.97 sold sold sold Revenue Neutral Model 12
  • 15. Gross Margin Impact Example • Retailer is made whole on the Gross Margin line after discounts have been reimbursed on first 100 units and all additional units provide incremental GM $ Growth. G th • Unfortunately, the rebate dollars are not able to be credited to Top Line Sales dollars. Incremental  Incremental Gross  Gross  Margin $  Margin lift  Generated on +254 units 100 Units  If only 100  354 Units  sold before  Units sold  sold Program during  Program Revenue Neutral Model 13
  • 16. Retailer Decision Tree: Year 1 (SKU Level) Decline to participate OR Less than  Revise Strategy of Incentives to  gy prior to  i t meet Necessary Revenue Dollar  How many units can  Program level be sold in the  Promotional time  p period at the  reduced price? Same or Above  prior to Program Same Above Participate at Participate at Agreed Upon Incentive  Agreed Upon Incentive level  level and Allocation  and Negotiate Additional  Amount Allocation Amount Revenue Neutral Model 14
  • 17. Retailer Decision Tree: Additional Years (SKU Level) Was the  No Discontinue  Previous Year  OR  promotion revenue  promotion revenue Participate with Revised Incentive neutral or better? Discontinue  OR Yes Less than  Revise Strategy of Incentives to  Previous Year meet Previous Year Revenue or  How many units can  Additional Promotion Opportunity be sold in the  Next Year? Same or Above  Previous Year Same Above Continue at Continue at  Current Incentives  Current Incentives  and  d and Negotiate  d Same Allocation Additional Allocation Revenue Neutral Model 15
  • 18. Model Implementation Revenue Neutral Model 16
  • 19. Required Data • Need program tracking data at sku level for: • Sales goals • MSRP • Incentive amount (and any changes in incentive amount over the promotional timeframe) • Program sales • Use the first three to estimate sales without program discount pricing • Use program sales to calculate free ridership Revenue Neutral Model 17
  • 20. Model Implementation • Can estimate the program’s likely free ridership before the program year • Likely free ridership is what the program will receive if each sku meets its sales goal and the program does not allow sales to exceed goals • Actual free ridership is based on final program sales • Will be higher for skus that do not meet sales goal • Will be lower for those that exceed goals Revenue Neutral Model 18
  • 21. Use in Actual Evaluations • Have used the model in two evaluations so far • Results are not yet publicly available • Used multiple methods for one evaluation and all came up with similar p p numbers • We are pursuing a patent on the model. Revenue Neutral Model 19
  • 22. Model Benefits • Can calculate free ridership by • Bulb type (standard, specialty, fixtures, CFLs, LEDs) • Retailer • During special promotions compared to regular program pricing • None of the existing lighting free ridership methods provide this level of detail Revenue Neutral Model 20
  • 23. Program Design • Can use results to identify changes to program implementation to minimize free ridership within existing program budgets. • Tailor the product mix by bulb type • Vary incentive levels by retailer and bulb type • Some retailer and bulb types have higher FR rates • Need greater incentives to encourage purchase by non-free riders • Maximize incentive dollars by matching incentive amount to bulb and retailer types Revenue Neutral Model 21
  • 24. Questions or Comments? 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 413 731 6546 Revenue Neutral Model 22
  • 25. The EE Story (Future) • Future: Finding a new portfolio – Lighting savings going down – Some program saturation – Need ‘new’ programs • Whole home (HPwES, air sealing, etc) • Systems work (HVAC systems, smart homes, etc) • Behavior programs (changing the customer habit) • Education • Building Energy Codes (adoption, training and compliance) – Challenges • Cost effectiveness (non-energy benefits not counted) • More complex (contractors, systems, etc)
  • 26. Presenter Contact Information Stan Martz, Applied Proactive Technology – StanM@AppliedProactive.com Tami Buhr, Opinion Dynamics – tbuhr@opiniondynamics.com