Small and medium businesses: An untapped energy efficiency market
Large businesses represent the vast majority of commercial-sector energy consumption worldwide, and it makes sense that energy efficiency service providers and technology vendors have mostly tailored their offerings to major enterprises. However, according to the U.S. Census, there are 1.3 million businesses in the United States with 500 or fewer employees, compared to just 12,000 large businesses, and small businesses in the United States spend about $60 billion on energy every year, so there remains considerable opportunity among small and medium businesses (SMBs), too.
From a sales and marketing perspective, SMBs are often considered less attractive because of the sales fatigue associated with acquiring hundreds of SMBs as customers. In contrast, a single large business could net just as much business with fewer salespeople. In addition, the energy savings achievable among SMBs is often measured in hundreds or thousands of dollars per year, rather than the millions achievable among Fortune 500 companies.
Another reason is that counting large companies as customers can help energy efficiency start-ups establish a reputation as a top company in the space. For example, C3, which started developing enterprise energy management software in 2008, already counts major companies like General Electric, PG&E, and Dow as customers. Small businesses don’t offer this kind of reputation-building cachet that’s so critical for new entrants.
‘A Big Difference’
Although many service and technology providers have passed over the SMB sector, that lack of competitive intensity also represents an opportunity for early entrants. For example, while most of the building energy management system developers like Johnson Controls and Schneider Electric target large companies as initial customers, others, such as Pulse Energy, eSight, and C3 have found success in serving SMBs, in many cases through utility demand-side management (DSM) programs.
In addition, companies like World Energy have found success providing energy efficiency services to SMBs. Since World Energy’s acquisition of energy efficiency service provider Northeast Energy Solutions a year ago, it has posted considerable growth in its energy efficiency business, largely by serving SMB customers. According to Phil Adams, CEO of World Energy, SMBs are particularly attractive because their level of awareness of energy efficiency tends to be so much lower than larger firms. “Small and medium businesses often don’t have energy managers and don’t take advantage of the utility incentives available to them,” Adams told me recently, “so we can make a big difference there.”
Much of the latent opportunity in the SMB sector lies in the gap between the target markets of major energy efficiency service providers and smaller ones. Top-tier ESCOs and energy retrofit providers such as Siemens and Honeywell generally prefer contracts of $1 million or more, which puts many small businesses out of their reach. At the other end of the spectrum, local contractors and engineering firms, which dominate the market, often have limited resources for marketing and customer acquisition. As a result, aggressive energy efficiency service providers, particularly those that can provide value-added services like energy procurement and financing (like World Energy), often find a great deal of untapped opportunity among SMBs.
The SMB market isn’t as large as the enterprise energy efficiency market potential overall. However, it represents an important and to-date largely underserved segment of the market. Over time, I expect more service providers and technology vendors to address it as efficiency services commoditize and mature. In the meantime, however, it remains an early market that a handful of companies are starting to serve profitably.
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