How to Use Lean Startup Methods in Renewable Energy to Increase Profits
In the last few posts I’ve written about the process of expanding an existing construction company into renewable energy business and the single thing our marketing planwill focus on. If you’re new to the solar industry, go to the Solar 101 Reading list. It has free tools and articles on solar design and installation, sales and marketing, policy, finance and best practices.
The main metric I’m using is “profit per time invested”. I’m not as interested in increasing top line growth rather then profitability, especially as we get stared. My goal is to reach a profitability of 20% pre-tax. This seems very “doable” given the general construction industry has a profit margin of around 10%. How does this number impact the scale of the business? I can live well with a business that sells $500k a year in revenue providing me with $100k in profit. That is not a lot. This is a little under $48k revenue per month. That is 2 solar pv or geothermal jobs per month, equally 24 jobs a year. Or 4 to 5 solar thermal jobs per month or a combination of solar pv, geothermal and solar thermal. Very “doable”, especially if you look at the number of jobs that companies are doing and the small profit they’re making. From a marketing perspective, the key will be to understand what really is the cause of these jobs so that we can make sure the revenue will be stable and predictable. Most companies take jobs as they come and think its because of something they’ve done. When revenue decline they’re end up in the dark.
Many people like to think big, going after larger and larger projects and getting into commercial work. Often times, they do this by suffering through slimmer and slimmer margins while having to deal with more and more headaches. I’m into thinking big, but by big, I think of net profit. Basically, I’d like to focus more on efficiency then growth of absolutely numbers. A company making 20% margin on $500k in revenue makes the same money as a company with a 5% margin and $2 MILLION in revenue. I’d argue it’s easier to increase efficiency then to grow revenue because you have more control over your own operations then the decisions of clients.
I’m a huge believe in the “crawl –> walk –> run” philosophy of business development and that’s why I spent the last two posts discussing my entire marketing strategy, the goals and metrics of each business task. Now I’m going to outline the operational strategy.
In order to run a super efficient service based business (all construction companies are service based) there are two critical components that need to be optimized. First, your marketing and sales and second the design and installation. On the marketing and sales side this mean decreasing the number of leads you’re getting but making sure that more of them close. Again, you’re goal should to be getting 5 to 10 leads month and have a 50% close rate, rather then sifting through and doing site visits on 50 leads, only to have 3% close. Remember this, dealing with leads takes time and is expensive.
Enough about marketing, for this article let’s focus on operation of running the business.
Many people have been looking for a connection between clean energy and technology for some time now and there aren’t many, other then the goal of “world-changing” technology. However, I believe I’ve found a similarity that can be used to increase operational profitability of small clean energy companies. In tech startups, there tends to be two teams of people. One group is focused on the customer and the other on developing the product. Here’s the reason for this. In most new tech companies, not only does the team not know exactly what the product will be, but they don’t know who the exact customer will be either. So, the customer development team is always performing tests with the product to determine who the customer is and what they will pay for the product. While the product development team is tweaking the product to see if a certain customer will pay for it. I’m not a tech guy, so I might have missed a few things. But to my understand these are called Lean Startup principles.
We can apply a similar model to the sales/marketing and operations activities within a small clean energy company. NOT that the sales/marketing team don’t know who the customer is and the operations team doesn’t know what the product should be. In clean energy both of these variables are known. The logic applies to how the teams are organized so that it a has a huge impact on their effectiveness and the profitability of the company. To display this, let’s review how the “traditional” organization structure of most construction companies is focused.