Patrick Rizzetto and Jon Worren, ClearSky Advisors
October 29, 2012 | 2 Comments
When asked about choosing a module brand, about two-thirds of surveyed buyers cited price per watt as one of their top three buying criteria. This trend was found both in ClearSky Advisors' Ontario Buyer Study and U.S. Buyer Study (70% and 63%, respectively).
Table 1: Percentage of Surveyed Ontario Buyers Citing a Given Criterion in There Top Three
So, presumably, the key for a solar manufacturer to penetrate and dominate any solar market is relatively simple: Cut prices and buyers such as installers, integrators, and developers will surely flock to the module that has the lowest price per watt, right?
Well, not so fast…
Of course, price is always a consideration. In any industry, no matter the product, price will be one of the most important factors in deciding what brand to buy. But, is price per watt really the key to winning and keeping customers in the solar energy industry?
Share of Wallet
In examining the importance of price per watt we turn to a commonly used metric called Share of Wallet. This metric measures a form of brand loyalty; it is the average fraction of use of a given brand among customers of that brand. A rudimentary example would be a brand that only has two users, call it brand x. One uses brand x for 25% of its installation volume; the second uses brand x for 75% of its installation volume. The brand’s Share of Wallet is therefore the average of the two, 50%.
So, given the reported importance of price per watt, we might presume the cheapest brands are also the brands with the highest Share of Wallet. After all, those are the brands that are giving buyers what they want. Or at least giving buyers what they say they want. But, in examining the above-mentioned buyer studies, this relationship between low price per watt and high Share of Wallet is nowhere to be found. In fact, there was an inverse relationship between the two metrics both in the Ontario study and in the United States study. For example, the three brands with the highest reported average Price per Watt in Ontario (Conergy, Sharp and Heliene) also had the highest Share of Wallet. Exactly the opposite of what one might expect.
Table 2: Share of Wallet in Ontario
How can we make sense of what appears to be a glaring contradiction?
Price Isn’t That Important, After All…
There are a few possible reasons. The most obvious way to explain the above inconsistency is that although price per watt is important, it is not the deciding factor. After all, price per watt was not the only criteria cited by buyers in this specific case (buyers that use the most expensive brands). In fact, when zeroing in on the brands that had the highest Share of Wallet in the Ontario study, we see that reliability and warranty were cited as the number one criterion more often than price per watt. In this situation we might come to a fairly straightforward conclusion, price per watt is outweighed by other concerns.
However, this explanation is somewhat unsatisfactory because price per watt was still cited as most important by some of these buyers, and made it into most buyers’ top three lists. Why would buyers cite a factor that does not appear to have influenced the final decision? Also, when only considering surveyed Ontario buyers that cited using one brand at least 80% of the time, the most brand loyal buyers in the survey, price per watt was still the most reported top three criterion.
Greater than the Sum of Its Parts
A second possible explanation is a type of first-mover or early-mover advantage. Many higher priced panels in North America right now are also the brands that have been in North America a relatively long time. When a brand enters a market earlier than its competitors it not only has first crack at gaining loyal customers, it also has time to learn the idiosyncrasies of the market. Being afforded the time to make many small but important improvements to your market approach can really add up, resulting in increasingly loyal buyers. Buyers may not value any one of these smaller factors at the same level as price, but combined they can create a level of loyalty that might withstand the lure of a slightly lower price.
Another advantage to entering a market early on is that once a buyer finds a brand they like simple inertia can help keep them from straying. With the panoply of decisions buyers are faced with on a daily basis, they may not be eager to revisit old decisions without a very good reason. This type of if it ain’t broke don’t fix it mentality can keep buyers using one brand longer than they otherwise might.
Considering what Price per Watt Means
A final possibility we’ll consider, is that there is actually no contradiction at all. The inconsistency is predicated upon the common understanding of price per watt, meaning buyers are only considering the cost at the time of installation. However, if a buyer values price per watt highly but then turns around and purchases one of the most expensive brands the inconsistency can be reconciled by expanding on the narrow definition of price per watt. Buyers may be implicitly defining price in a broader sense, interpreting it as the total costs involved with the module over the long term, which can drastically change the bottom line.
If the buyer expects one brand to last longer than another, or appears to be less likely to have problems down the line, then it may end up being much cheaper than a brand with a lower price per watt at the time of installation. This is a concern to buyers not only because it’s a concern for the end user, (down time and module replacement costs can be very expensive) but also because any supplementary visits to the installation site to fix or replace faulty modules cost both time and money. A few too many of these return visits can turn a once profitable project into a money loser.
Reliability, another often cited buying criterion, really just means that these types of problems are not likely to occur. A good warranty means that if problems do occur it they will be taken care of by the manufacturer. Both boil down to keeping the buyer’s costs down in the long run. Both keep the broader definition of Price per Watt low.
When approaching the relationship between price per watt and Share of Wallet from the other end of the spectrum we find similar results. The cheapest modules in the world right now are coming out of China. Stories of trade disputes between China and much of the rest of the world have been prevalent in the news in recent months. That protective tariffs are being employed or considered in the U.S. and Europe is a testament to the staggeringly low prices of Chinese modules.
Once again, if we assume a narrow definition of price per watt given its reported importance by surveyed buyers, we should see the Chinese brands with relatively high Shares of Wallet. But, in the United States, not only are the major Chinese brands with the lowest prices not at the top of the Share of Wallet rankings, they actually round out the bottom of the list (e.g. Yingli, Suntech, Canadian Solar, Trina). Buyers' stated preference is for modules with a low price per watt but their revealed preference is for modules they know and trust.
Table 3: Share of Wallet in the United States
It should be noted that this is not meant to imply anything about the quality of these Chinese modules. Whether the modules coming out of China are of the highest quality and reliability, buyers don’t seem to be convinced — at least not yet. Until buyers in North America are convinced that cheaper brands are reliable, and therefore cost effective in the long term, they appear to be relegated to back up status.
Given that this survey is a snapshot of the market at one point in time, it will be interesting to see how the dynamics between buyers’ stated preferences and actual behavior changes. If cheaper brands convince buyers of their reliability, we may see their Share of Wallet increase as they continue to establish themselves in North America.
What Does It Mean?
This is good news for more expensive brands. Module manufacturers that do not have the lowest installation price per watt but offer a solid warranty and have above average reliability would be wise to take the above into consideration. After all, with falling module prices already butchering profits, there is only so much more a brand can do to cut prices further.
These brands should be emphasizing long-term costs to potential buyers. This will help ensure buyers and end users are fully informed in their buying decision. If module brand marketing teams frame campaigns around the cost benefits of the module over it’s entire expected lifetime, rather than focusing directly on warranty, reliability, or installation price per Watt, they would be highlighting the trait that buyers are actually seeking. Whether buyers realize it or not.