New technology is usually too expensive for the masses to afford. Take Tesla for example, which makes the world’s only truly compelling electric vehicles: With an average purchase price close to $100,000, these vehicles would break the budget for the average consumer. More broadly, even mainstream innovations like consumer electronics, renewable energy, and advanced healthcare remain out of reach for many, especially for cash-poor customers – both individuals and businesses. This is a serious problem, for a number of reasons. First, it denies life-enhancing innovations to a massive subset of the population. Second, it harms all, including the wealthy, as fast-growing economies will be leading contributors to global challenges like climate change where advanced technologies can help. But beyond these big-picture problems, a cash barrier to new technology adoption is simply bad for business, because it causes technology developers to miss a revenue growth opportunity.
But these issues can be solved. To show how, take energy, which presents a good case study for how to better target cash-poor customers. The energy industry is rich with such business models because energy decisions tend to be economically-motivated but may take several years to pay off. To explore this further, consider how energy developers use two broad strategies to sell technology upgrades to retail businesses:
- Transforming a capital expense into an operating expense, with immediate payback: Third-party ownership models have been tremendously successful with solar developers like SolarCity, which will offer our grocery store a no-money-down solar system paid back with a fixed or per-usage fee that immediately lowers its monthly energy bill. To avoid oversizing its solar system, a customer may also seek out an energy efficiency upgrade. These frequently employ a similar pay-for-performance model, in which the monthly fee is calculated as a portion of the cost savings it sees from the upgrade, creating an immediate payback and reducing the risk to the customer. SolarCity started with solar panels only, but it is now owned by Tesla – so expect batteries and other technologies to benefit from this business model soon.
- Sharing the upfront cost with another party, when both can benefit from the purchase: Cost-sharing models reduce the payback period of an investment by exploiting every possible value stream. Sharing the cost of an electric vehicle charging station with Tesla brings a better cost-benefit ratio than purchasing a station outright, and each party benefits: Tesla’s customers are happier since they have more places to recharge (addressing range anxiety), and the retailer boosts its revenue thanks to increased traffic as customers wait for their vehicle to charge. In a similar relationship, a store might work with a microgrid developer like Enchanted Rock (client registration required), sharing the upfront cost of a reliability-enhancing microgrid with the developer, which recovers its investment by selling the microgrid’s capacity when the store does not need it.
Cash-poor customers are not just an issue in energy, though, and these same structures can be found in other industries as well: For example, car-sharing programs like Zipcar and Car2Go have in effect transformed a capital expense into an operating expense in the automotive world, allowing customers to pay for each use of a vehicle – a model that Elon Musk has even alluded to as a way to improve consumer access to Tesla’s vehicles in the future. In consumer electronics, Amazon has famously engaged in cost-sharing by offering a discount on ad-laced electronics (such as smartphones and its Kindle e-reader), covering a portion of the upfront cost, and in exchange, getting value from the device as an advertising channel. In some cases, offering these pricing models requires a cash-rich (or debt-heavy) developer that can carry the upfront cost in place of the customer. However, when designed well, these business models can speed-up adoption of early stage technology and open up new customer segments.