How Subscription Models Work for Home Energy Management

After coming up with a successful technology to put in the home, a home energy management systems (HEMS) vendor has to think about payment operations on its path to becoming a sustainable business venture.

The subscription revenue model is a clear and sustainable winner in the HEMS space for both utility and non-utility vendors. 

I have spoken to a handful of HEMS vendors that each have over 1 million installations of combination hardware and subscription services, and many more vendors with tens of thousands of installations. With about 115 million household units in America, this represents about 4.5 percent of the potential HEMS installation base.

Most of the vendor solutions on the market today come in a subscription form or are in the process of adding subscription services if they are from hardware companies. Depending on the business model, the fees are covered either by the end customer or the utility. In both cases, subscriptions are common and effective pricing tools.

Let’s start with the basics. As it relates to HEMS solutions, what is a subscription?

A subscription is an agreement between a customer and a vendor to make recurring payments to receive a product or service. The payment need not be fixed --- Genability, for example, has a monthly data pricing plan for its customers (generally developers of utility and HEMS solutions) that varies based on the number of calls to its electricity pricing database per hour. Other companies, predominantly non-utility HEMS providers, have fixed pricing schemes because it makes sense when they are trying to sell to millions of end customers.

How many vendors are going after subscription business models? I did a quick review of the approximately 100 vendors that I researched and reviewed for the recently released GTM Research report, Home Energy Management Systems: Vendors, Technologies and Opportunities, 2013-2017, and found that 75 percent of the vendors currently offer some type of subscription solution.

These vendors are diverse: some sell components to assembly companies, while others sell solutions to homes that include hardware and services. Only about 50 percent of the vendors also offer a non-subscription option, and a number are looking to get into subscriptions or are hardware suppliers that arguably sell their hardware packages as a subscription, due to the high volumes and manufacturing deals required.

The numbers speak for themselves: the subscription trend is here today and growing -- but why?

Most interviewees noted that customers preferred to pay monthly fees rather than a big one-time purchase, suggesting a unique and solid win-win opportunity for HEMS vendors, allowing them to satisfy customer needs while maintaining a sustainable revenue stream. When paying for a subscription, customers also have access to technical support and system upgrades in the future.

The vendors I spoke with faced a number of challenging decisions when they rolled out their subscription packages, including pricing their services, developing payment options, and devising an approach to customer support.

Profitability depends on correctly pricing services, yet oftentimes the first few attempts to develop amenable pricing schemes are experimental, seeking to understand the pricing levels and tiers to which customers will respond most favorably. Pricing depends on the customer, and in the HEMS business, it can be complicated. There are B2B, B2B2C, and B2C strategies that have all been successfully implemented by startups and well-established companies in the space.

What has worked to date is to develop an entry-level pricing plan via which vendors can easily get their product or service through the door to educate and convince the customer of the value of a HEMS solution. Once the end customer is convinced, the add-on sales are crucial to deliver higher value to the customer and to increase revenue for the vendor. The more connected the package is, the more value accrues, because the multiple domains of data being collected are greater than the sum of their parts. Entry-level kits cost just a few hundred dollars and have a low monthly fee of around $10 for energy services or $40 for packaged solutions.

End customers pay for HEMS services through a number of payment methods, including PayPal, credit cards, checks, ACH, and wire transfer. For the HEMS vendor, this can be a major challenge to satisfy customer requirements without shifting focus from product development to operations and engineering support. A handful of vendors are in the scaling stage from the tens of thousands to hundreds of thousands of customers, and they will certainly be running into these kinds of challenges in the coming year.

Another problem relating to payment methods is updating account information. According to Visa, 30 percent of credit cards will expire or have a card number change annually. For a HEMS vendor with 1 million customers, this equates to a potential 300,000 customers that the vendor has to reach out to or face losing their business. Multiply 300,000 by $600 a year, and the VCs on the vendor’s board of directors will start questioning the business strategy. It will be interesting to see the solutions to this problem that vendors develop.

Once pricing services are established, vendors can easily experiment with a number of pricing and service levels to discover the optimal configuration of product offerings, customer satisfaction and profits. The table below provides a general overview of what those price points are today. While I won’t go into the details of the services offered, a typical solution includes a few control switches, a gateway device, and the option for remote control and access to the home for energy, automation, and/or security purposes.

Note that the chart below does not show the vendor pricing to the utility. Through my interviews, I have found that pricing per household from the vendor to the utility is typically between tens of cents to a few dollars per home, per month. Figures are rounded for simplicity.

FIGURE: Upfront and Recurring HEMS Solution Costs by Vendor

* As mentioned, the monthly billing fee does not go to the household but instead to the utility, and prices are in the tens of cents to low single dollars per home range.

Customer service is another key to a successful subscription business model for a HEMS vendor. It is important to allow customers to have the option to upgrade their HEMS service plan as easily as possible. If the vendor has to call the customer to upgrade or make changes to a service plan, the time and budget necessary to service 1 million customers quickly adds up and can become problematic for the customer service and support center. There will be a number of both unforeseen and regular billing and technical support problems, and vendors are split on the issue of whether to build their own customer support system or to outsource this function to a more experienced partner firm.

Keeping track of customer information is crucial in order for vendors to understand sales trends and respond accordingly. Vendors can and do track the best months and locations for signing up customers, and they can change their product line or price points to adjust for these trends.

Pricing is a crucial part of the vendor solution. A product might be the best in its class, but if it is not affordable or profitable for the company, it will not lead to sustainable business. According to my research, most vendors operating in the market today are on the right track to finding the right price points to keep both customers and management happy.

Learn more about the report Home Energy Management Systems: Vendors, Technologies and Opportunities, 2013-2017 from GTM Research.