Before incentives and rebates, a typical 10kW residential solar system costs around $12,000 in Australia. In the U.S., pre-incentives, the same system costs almost $30,000. $18,000 difference. $1.20W vs $3.00/W. A $1.80/W problem, which I believe is almost entirely caused by a single fact.
America sucks at selling solar. As an industry, we’re caught in a vicious cycle. Our low close rates necessitate higher commissions, higher margins, bigger booms, and more biting busts, all of which increase the price of solar… (which means fewer people buy solar, which drives up commissions, margins, etc.) . In this post, I’ll walk you through why I don’t buy alternative explanations, what’s causing our selling shortfalls, and what I think we should do to fix solar sales.
First I want to underline the gravity of the situation. Just last year, the U.S. residential solar industry somehow lost around six billion(!) dollars to this inefficiency. I hope your head is spinning.
As a management consultant who follows the data with my clients, and as a human who wants to solve the climate crisis, this fact led me down a rabbit hole. Have I simply failed to notice that 60% of my resi clients’ cash is being lost, cause unknown? If so, where is the ship leaking? And how did the solar pros Down Under plug the leak?
I did what I tend to do when confronted with the unexpected – I looked for more data. The first clue: the difference in price is almost entirely explained by higher American soft costs, which basically amounts to “stuff that’s not stuff” – labor, permitting, engineering, marketing, and sales.
Blame the AHJ?
The most common explanation for high resi solar soft costs point the finger at the impact of America’s absolutely insane, medieval-village-style, permitting and zoning fiefdoms. It’s a valid point. But, (spoiler alert), it’s mostly wrong, or at least nowhere close to a full explanation.
To be clear, residential solar truly is subject to the whims of a few dozen individual public officials in each of the roughly 108,000 incorporated U.S. cities, not to mention state, territorial, ISO, utility, and federal regulations. Needless to say, this creates complications.
Most planning boards are akin to kings that rule with an iron first, relying on zoning ordinances that are as verbose as they are totally unclear. Yet the iron fist is simultaneously an unsteady hand, shifting with the winds of whichever five citizens show up and are loudest at a board meeting.
Most local inspectors, meanwhile, are effectively highly opinionated emperors who rule without checks and balances. If and when they decide that the National Electric Code is nothing more than a very long suggestion that doesn’t override their own personal feelings about the right way to do things, solar companies don’t have a realistic route of appeal.
All of this creates real uncertainty, causes re-work and canceled projects, and is generally the source of much indigestion for solar companies and their clients alike. It’s surely part of the $3/W story, and I am strongly in favor of our trade groups continuing to use the discrepancy to rhetorically hammer governments at all levels to make solar permitting less insane. (Sidenote: the current U.S. housing cost crisis is also largely an artifact of the local zoning and permitting nightmare. At some point, America has to prioritize building stuff again).
With all that said, the “Blame the AHJ” explanation doesn’t add up to the soft cost chasm. It is, at best, a small piece of the story. Most solar companies spend less than 10% of gross revenue on engineering and permitting combined. That’s about $0.30/W, not the $1.80/W U-S Australian soft cost gap. And the $0.30/W doesn’t go to zero if you fix the permitting process – maybe you could claw back half of it, but that’s still a long way from Aussie prices.
Some inefficiency in a piece of the pie that represents only 5%-10% of the overall cost structure simply cannot explain away 60% of the overall cost of solar.
SEIA’s analysis also argues that delays caused by permitting lead to cancellations, which indirectly drive up soft costs across the board. Again, fair point, but I still don’t buy it as anywhere close to a sufficient explanation. Are companies having 90%+ of their sales canceled? Not in any reputable business that I’ve heard of. If this is happening in your market, let me know and I’ll stand corrected. But anything short of 9 out of 10 projects canceled shouldn’t explain 10X higher soft costs.
Why are American Margins So Gross?
The next clue is the general wisdom that residential solar project gross margins are 25-40%. Which is very, very high for the construction industry. Generally, in competitively-efficient mature industries, that level of gross margin is rare.
So where is the money going? Are residential solar company owners getting rich?
With some obvious exceptions, it’s mostly the opposite. Those sky high project gross margins are mostly turning into net losses most years. Most medium and large resi solar companies carry a very high debt load as a result. If you look at the financials of the public resi companies, the pattern of big margins turning into negative profit seems to persist at scale.
(Sidenote: Most public residential solar companies are able to keep operating with increasing operational losses and debt in large part because they (and particularly SunRun’s CEO Mary Powell) have done a fantastic job convincing Wall Street to keep giving the taps flowing based on the idea that there will be a big tail to their investments some day when demand for virtual, deployable clean power plants eventually skyrockets and only they can control/serve load sufficiently to meet that demand. Most medium-sized private residential solar companies accept operating with a high level of debt because their owners, whose personal homes are usually on the line,
A) have family jewels that are as hard as diamonds, and/or
B) see themselves as growing the company in the shadow of millions in debt to the point where they can land a big acquisition and pay off their debtors).
If company owners aren’t pocketing those billions, where are they going? What’s the hole in the boat that’s keeping those fat margins from turning into personal yachts?
America Sucks at Selling Solar – Booms, Busts, and (Lack of) Buffers
My own very strong suspicion: America simply sucks at solar sales. Particularly training solar sales consultants. American solar companies simply don’t have a working method for convincing Americans to buy solar, nor a consistent framework for teaching solar sales to their teams. They rely on a scattershot approach and heavy sales consultant turnover to filter for individual talent. This causes a vicious cycle of ballooning costs, all of which are ultimately passed onto the client. Here’s my best attempt at breaking the vicious cycle down into five steps.
- Root Cause – Low sales close rates cause very high Customer Acquisition Costs. Cost of client acquisition (CAC) in the U.S. resi market ranges from 10%-30% of gross project price (~$3,000-$10,000 for a typical system). On the high end, that $10,000 price tag for customer acquisition represents the entire pre-incentive price of an 8.3 kW system in Australia.
This (mostly) isn’t a story of greedy sales consultants. High compensation per sale makes sense when close rates are very low, as it takes a lot of work for a sales consultant to get a sale. The average professional solar sales consultant is earning an upper middle class income. However, very good sales consultants can make several multiples of that upper middle class income. High commission rates end up being driven instead by the demand for a limited supply of natural talents, because solar companies can’t easily increase the supply of good sales consultants through training.
- Being bad at training sales exaggerates boom and bust cycles. In most industries, some of the sting of short-term market disruptions can be buffered by spending more on sales and marketing for a while. During downturns, most consumer-facing businesses can spend a bit more on sales to maintain deal flow and revenue, while letting margins slip, so that their operations can remain stable. Most solar companies can’t use this lever. They don’t have a predictable system for hiring and training new salespeople, so they can’t simply hire and train to reduce the impact of a downturn.
Instead, often the opposite happens – their best sales consultants look for greener pastures as soon as close rates decline. The company ends up with a shrinking team at the exact same time as each team member is generating fewer deals. This exaggerates the downturn. In short, lack of good sales training methods leads to lack of company control over deal flow, which leads to even wilder ups and downs of the solar coaster.
- Companies have to charge a lot more per project to be able to survive famine periods. The boom and bust cycles caused by inconsistent and unpredictable deal flow cause lots of operational inefficiencies. These are papered over with high gross margins.
The story usually goes like this. During boom phases solar companies hire new, unqualified people to try to solve problems caused by the operational firehose being opened up. These new people are not skilled at their jobs yet, much less efficient at their work, and lack the management structures that they need for support.
During bust phases, (triggered by a regulatory change, covid lockdown, global geopolitics, the economic news cycle, etc.), the company must run deeply in the red. All of those new hires, who were just starting to learn how to do their jobs well, create high operational overhead, with everyone sitting on their hands and hoping that the salespeople start bringing in deals soon. Layoffs and tightening of belts ensue. Rinse and repeat.
Smart companies must squirrel away high margins as retained earnings during boom times, only to see those savings disappear during busts. It makes sense to have 30%-40% gross margins if you’re going to be running in the red for months or even years at a time. Any company running leaner than that goes under fairly quickly.
- High employee turnover and constant strategy pivots further decrease efficiency and increase overhead. There are less data here, but at least as of a decade ago, Australian residential solar labor efficiency was higher than in the U.S. as well. As of a decade ago, for a 10kW system, American installers required an extra twenty-three labor hours on average. There are a lot of arguments as to why this difference exists, and overall, alone it explains less than $1,000 of the overall difference in price. Viewed from the inside, however, I think it points to a much bigger issue.
U.S. residential solar installers never hit a rhythm. The exaggerated boom and bust cycle means employee turnover goes way up, and often companies come back from a bust period with a brand new product/pricing/market strategies shift, which creates its own internal chaos. As a result, most people in a U.S. residential solar company are either learning or re-learning their job at any given moment. It’s easy to measure the impact of this on the labor side. But in my experience, it impacts every single position – operations managers, engineers, executives, trainers, receptionists, and accountants. Old hands have to re-learn parts of their job each time the solar coaster wheel turns. Replacements have to be recruited, hired, and trained.
- All of these cost increases are passed onto the client. Clients buy less solar at higher prices. This causes even lower close rates. Return to step 1 above.
To bring the impact of this vicious cycle home with a simplified example, it is not unusual in the U.S. that on a $30,000 solar sale, $7,500 may go to sales and marketing, with another $7,500 going to margin, which is really a rainy day fund to be used when business slows down (due to lack of results from sales and marketing). The CAC on the same 10kW system for an Australian project might be $1,000, with another $2,000 for margin.
Toss in the direct and indirect permit costs noted above, the operational inefficiencies created by booms and busts, and a few more pennies extra paid for getting boats from China across the Pacific with mods, inverters, and racking, and you’ll likely have a complete picture as to the difference in prices.
Why is American Solar Sales Not Improving?
I’m honestly not 100% sure why the U.S. hasn’t improved on its soft cost problem over time. I’m curious to hear your thoughts, but the whole space seems ripe for disruption. Here are my working guesses:
1) For political, geographical, and cultural reasons, I suspect that Americans are much more diverse in their attitudes toward solar and their ultimate reasons for choosing solar – probably much more diverse than other countries like Australia. With so much diversity, you can’t use the same script successfully with every client, which complicates the sales process.
As a result, successful sales consultants need to be taught how to be actual consultants, working to understand the individual client in front of them before trying to sell them a product. This is a skill that can be trained, but it requires a much greater investment of time and deliberate practice to train it than learning a script. Most solar companies don’t know where to start.
2) Most new solar sales consultants receive about as much training as the guy at the Verizon store selling you phones that cost $100 after rebates. Most solar companies hand someone some scripts, let them shadow a couple of proposals, and then push them into the deep end and hope they float. Naturally great sales people eventually become sales managers. They do their best to provide ongoing coaching, but don’t have a methodology or structured resources to refer their team to, so it’s largely one-off, as-needed, situational training (necessary, but not sufficient, nor efficient).
The Humble Solution: Actually Train Solar Sales
So, here’s where I start selling you something – after all of the above, it’s only fair to let me know if I suck at selling it! I promise to try to improve if so.
Despite huge opportunities, my view is that the solar industry has been stalling the last few years. We’re struggling to get big projects sited and interconnected and struggling to get small projects sold.
It seems like the small system sales problem should be the easier one to solve in the short-term. So I recently took a break from several years of working almost exclusively with companies focused on commercial and utility scale solar to return to my residential sales roots. I wanted to see if I could make a dent in the problem I’ve outlined above. To make progress, we have to get to the root of the soft cost issue. This involves solving two separate problems.
1) We have to find a method to generate consistent solar sales in what will probably always be an inconsistent market.
2) We have to build a sales education system that works for the average applicant for a sales position. (And yes, these are two separate problems. A great method you can’t teach anyone is not of much value).
The Psychology of Solar Sales on-demand course on Heatspring is the result of my initial stab at beginning to solve this six billion dollar problem. It’s based on the methodology I used many years ago when I was just starting out as a sales consultant in a very diverse part of the country (Southeastern Louisiana). By applying principles of psychology, many of which I learned as a undergraduate research assistant to Dr. Robert Cialdini, the world’s leading scholar in the Psychology of Persuasion, I lay out a step-by-step guide for getting to know the motivations of the individual client in front of you, finding out what drives them, and then connecting the dots to get to solar.
Using this methodology, I was personally able to maintain a 20%-50% close rate through several ups and downs in the market, which is much higher than your average solar sales consultant, and more in line with close rates in other industries. As a solar management consultant and coach, I’ve taught many clients about these principles over the years. They’ve been able to apply them with great success in many different business contexts. With this course, I’ve attempted to put the most important principles all in one place, and in an on-demand format, which allows them to be priced at a small fraction of the cost of a coaching and consulting package.
I don’t know if the course will cut your costs in half, Australia style, or if that’s even possible in our beautiful, majestic mess of a nation. What I do know is that despite all of the investment, innovation, and hype in the residential solar space, there’s a big, soft, elephant in the room. It’s time to innovate out of the real problem – America sucks at selling solar, and the climate may depend on us finding solutions.