Customers Are Rational In Their Minds, Not Yours

LED lights. I like LED lights.

Yes, those very cool bulbs that use almost no energy at all, do not heat up, can give lots of different colours, and require almost no changes.

LED (and CFL) light manufacturer have struggled for some time to get these wonders of modern technology to be mass consumer products. Yet, like the electric car manufacturers, they cannot seem to convince individual consumers that it is worth it. In the manufacturers’ minds, everyone should be rational and do the following calculations:

  • Incandescent (that’s the official name for the good old filament-in-glass bulb):
    • Average life of the bulb: 1,000 hours
    • Cost of bulb : $0.50
    • Cost of running the incandescent for its life of 1,000 hours: 1,000h * 60W = 60kWh * $0.20 / kWh = $12
    • Total cost of that incandescent for 1,000 hours of running: $12+$0.50 = $12.50
  • LED:
    • Average life of bulb: 25,000 hours, or the lifetime of 25 incandescents
    • Cost of bulb: $10
    • Energy requirement of an LED bulb that gives the same light as the 60W incandescent: 7W
    • Cost of running the incandescent for the same 1,000 hours as the incandescent: 1,000h * 7W = 7kWh * $0.20 / kWh = $1.40
    • Total cost of that LED for 1,000 hours of running: $10/25 (since it is only 1/25 of the life of the bulb) + $1.40 = $1.80

That old incandescent cost you $12.50 to run for half a year; the LED cost $1.80. It’s a no-brainer! Buy them! And yet, people are not buying them in droves. Given the sheer economic sense – these things pay for themselves in months – why aren’t they?

There’s an old truism in business: if your customer isn’t buying what you are selling, the problem is yours, not the customers.

The people manufacturing, marketing and selling these lightbulbs are in their own dayjobs, thinking about annual budgets, market share targets and sales quotas. They plan around these targets, they make investment decisions, they invest in capex to reduce opex and calculate time to break-even and project ROI. While they are busy dealing with all of the above, they are simultaneously thinking about their potential customers and how to market and sell to them, and, likely subconsciously, project those same “corporate” concerns onto potential customers.

Yet, consumers are not in business mode. They are walking through Walmart or Home Depot, they remember that they need to replace the bulb over the stairs and in the bathroom, take one look at a pair of incandescents for $1.00 and a pair of LEDs for $20, and which do you think they buy? There are two fundamental challenges:

  1. Timing: At the moment of decision, incandescent vs. LED, the average consumer is not thinking about their electric bill, that came 4 weeks ago and won’t come again for another four weeks. It is even likely that the person buying the bulb is not the same one paying the bill. 
  2. Mindset: Even if they could be brought to think about the electric bill, paying twenty times the cost up front to possibly save money later on their electric bill doesn’t seem like a good deal. Besides, haven’t they already been burned on those “Energy Star” appliances that cost $200 more, and save $10 per year?

So how does one solve this problem? You know it is a good deal for the customer, you just cannot get him to see it. If you could, a huge market would open. There are three approaches.

  1. Change your market: Find those markets that actually do think about and calculate those costs. In other words, find budget-driven organizations. Some of the LED manufacturers did precisely that. They went after two markets where the labour cost of replacing the bulbs is very expensive: lit corporate logos on the side of buildings, and traffic lights. Note, however, that they did not sell the electricity savings, which would take longer, but the labour savings of changing bulbs 1/25 as often.
  2. Change your price: As the technology improves, and as more markets open up, e.g. the labour-intensive ones listed above, manufacturing costs go down. Eventually, they will reach the point where more consumers see only a small uplift – probably when an LED costs 3-4x an incandescent, and not the current 20x – and are willing to buy.
  3. Change their mindset: There are ways to change consumer mindset, but it is imperative to create linkage between the electric bill and difficulty in changing bulbs, and the purchase of the bulb. Overall, most of these firms do poor “linkage marketing.” Similarly, if they focused on hard-to-change and/or hard-to-get bulbs – that spotlight way up there, the outdoor bulb, the one in the back of the storage room – they could leverage actual customer annoyance and solve it (in customer minds and hearts, not just in the vendor’s spreadsheets) with a real product. Customers will pay 10-20x to eliminate an annoyance that is present in their mind at time of purchase.

Philips and GE might not know it, but their real competition in the LED bulb market is the electric utility. Every time a customer buys an incandescent, they are saying, “I will give my money to PSE&G or ConEd or London Energy rather than Philips.” Recognize the competitor, change the mindset.

About Avi Deitcher

Avi Deitcher is a technology business consultant who lives to dramatically improve fast-moving and fast-growing companies. He writes regularly on this blog, and can be reached via Facebook, Twitter and avi@atomicinc.com.
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