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THE REVENUE NEUTRAL SALES MODEL: A NEW APPROACH
TO ESTIMATING LIGHTING PROGRAM FREE RIDERSHIP
Presented at the Internation...
Overview
IEPEC Chicago 2013 2
 If a lighting evaluator were
granted three wishes, what
would he wish for?
 Why existing ...
The Challenge of Evaluating Upstream Lighting
Programs
IEPEC Chicago 2013 3
 “Participants” disappear
when they make purc...
Three Wishes
IEPEC Chicago 2013 4
 Evaluators wish they had sales
data to calculate lift in sales due
to discount
 Pre a...
Evaluators Have Not Been Granted Their Wish
IEPEC Chicago 2013 5
 Retailers will only provide
sales of program-discounted...
What Have Evaluators Done?
IEPEC Chicago 2013 6
 Attempted to make traditional
methods work with mixed
results
 Wide ran...
Attempts at Self-Report
IEPEC Chicago 2013 7
 General population telephone surveys
 Call utility customers and ask detai...
Other Methods Attempted
IEPEC Chicago 2013 8
 Retailer Interviews
 Becomes another request for sales data that is denied...
There’s Hope!
Using the Sales Data We Have
IEPEC Chicago 2013 9
 We have program sales data
 From the contracts retailer...
Retail Accounting and Upstream Programs
IEPEC Chicago 2013 10
 Total Revenue = Price * Quantity Sold
 Total Profit = Rev...
What Happens to Retailer Profits and Revenue when
Participating in an Upstream Program?
IEPEC Chicago 2013 11
 Profits?
...
Revenue with and without Upstream Program
IEPEC Chicago 2013 12
$-
$100
$200
$300
$400
$500
$600
$700
$800
100 125 150 175...
Profits and Revenue Matter to Retailers
IEPEC Chicago 2013 13
 Upstream programs are good for a retailer’s profits
 Reta...
Retailer Decision Tree
IEPEC Chicago 2013 14
Model Implementation
IEPEC Chicago 2013 15
 If retailers structure their MOUs to be revenue neutral with the program,
can...
Planning Free Ridership
IEPEC Chicago 2013 16
 Free Ridership = Units without Program/Units with Program
FR = 1,265/4,000...
End of Year Free Ridership
IEPEC Chicago 2013 17
 Fell short of goal for product. Sold 2,535 bulbs.
FR = 1,265/3,800
FR =...
Model in Practice
IEPEC Chicago 2013 18
0
5000
10000
15000
20000
25000
30000
Bulbs
Removeddiscounts on 
top‐selling spiral...
Model Advantages
IEPEC Chicago 2013 19
 Based on all sales from all retailers
 Can estimate free ridership by:
 Retaile...
Model Challenges
IEPEC Chicago 2013 20
 Data tracking is important
 For each product sold, need:
 Regular pricing
 Pro...
Conclusion
IEPEC Chicago 2013 21
 Upstream lighting programs are a key component of many
utilities’ residential program p...
Questions and Comments?
IEPEC Chicago 2013 22
Tami Buhr
Director of Survey Research
Opinion Dynamics
tbuhr@opiniondynamics...
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IEPEC_The Revenue Neutral Sales Model_Buhr

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IEPEC_The Revenue Neutral Sales Model_Buhr

  1. 1. 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
  2. 2. Overview IEPEC Chicago 2013 2  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 IEPEC Chicago 2013
  3. 3. The Challenge of Evaluating Upstream Lighting Programs IEPEC Chicago 2013 3  “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
  4. 4. Three Wishes IEPEC Chicago 2013 4  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 IEPEC Chicago 2013
  5. 5. Evaluators Have Not Been Granted Their Wish IEPEC Chicago 2013 5  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.
  6. 6. What Have Evaluators Done? IEPEC Chicago 2013 6  Attempted to make traditional methods work with mixed results  Wide ranging NTG results  Large confidence intervals  Results are contentious  No one is happy
  7. 7. Attempts at Self-Report IEPEC Chicago 2013 7  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
  8. 8. Other Methods Attempted IEPEC Chicago 2013 8  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)
  9. 9. There’s Hope! Using the Sales Data We Have IEPEC Chicago 2013 9  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
  10. 10. Retail Accounting and Upstream Programs IEPEC Chicago 2013 10  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
  11. 11. What Happens to Retailer Profits and Revenue when Participating in an Upstream Program? IEPEC Chicago 2013 11  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
  12. 12. Revenue with and without Upstream Program IEPEC Chicago 2013 12 $- $100 $200 $300 $400 $500 $600 $700 $800 100 125 150 175 200 225 Revenue 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.
  13. 13. Profits and Revenue Matter to Retailers IEPEC Chicago 2013 13  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 minimum the revenues remain the same.  Program impact must be revenue neutral  Theory confirmed by interviews with biggest nationwide corporate retailers
  14. 14. Retailer Decision Tree IEPEC Chicago 2013 14
  15. 15. Model Implementation IEPEC Chicago 2013 15  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
  16. 16. Planning Free Ridership IEPEC Chicago 2013 16  Free Ridership = Units without Program/Units with Program FR = 1,265/4,000 FR = 0.32 $- $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 1265 units @$5.85 4000 units @ $1.85 Revenue 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
  17. 17. End of Year Free Ridership IEPEC Chicago 2013 17  Fell short of goal for product. Sold 2,535 bulbs. FR = 1,265/3,800 FR = 0.33 $- $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 1265 units @$5.85 3800 units @ $1.85 Revenue Units Sold at Regular and Program Pricing Sold an additional 2,535 units due to price drop to $1.85 1,265 units would have been sold at $5.85
  18. 18. Model in Practice IEPEC Chicago 2013 18 0 5000 10000 15000 20000 25000 30000 Bulbs 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
  19. 19. Model Advantages IEPEC Chicago 2013 19  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
  20. 20. Model Challenges IEPEC Chicago 2013 20  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
  21. 21. Conclusion IEPEC Chicago 2013 21  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
  22. 22. Questions and Comments? IEPEC Chicago 2013 22 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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