At MODsolar, we work with all kinds of companies. One of our core missions is to see the solar industry grow as fast as possible. Nevertheless, two primary business models are fighting it out right now, and it will be fascinating to see who comes out on top.
Vertical integration in the solar market essentially means that one company is responsible for everything from acquiring the customer to installing the system and then maintaining that system throughout its lifetime.
On the flip side, Channel strategies refer to companies that specialize in one part of the process, such as a finance company or a dedicated installer. These companies partner up with others to create channels, filling in the rest of the process.
Currently, about 50 percent of the solar market is vertically integrated, and the other 50 percent works through channel strategies. If you are thinking of starting a company in this industry, vertical integration vs. channel strategy is going to be one of the main questions you will need to ask yourself.
There are some pretty clear advantages and disadvantages on both sides. Vertically integrated companies can control the entire customer service experience. Just like a more conventional utility supplier, these companies will be part of the consumer’s life for many years. This integration creates an opportunity for growth, long-term monetary gains, as well as the future ability to expand the relationship with the customer to other products.
Because vertical integration involves the entire chain of the solar business, those who choose this model also have the advantage of something called ‘margin stacking.’ With channel strategies, there may be as many as four or five players involved. This means that each player will need to meet their margins to stay in business.
With vertical integration, this is not the case. Controlling each step of the process means they can combine, or stack these margins and use the gains to grow the business, offer lower prices or increase profits.
So far, it sounds like a simple decision, but bear in mind that the solar industry in the US is still a challenging market for businesses to maintain their position in. The sheer effort and capital involved in building and maintaining a company that can take care of the whole process effectively are extremely tough to manage.
Thus, many people are choosing channel strategies because it means that they can really focus on the things they are good at. Some companies might be excellent at generating leads; some might be experts in financing. Whatever their specialties, the major benefit of this strategy is that it tends to result in larger companies that operate nationally partnering with small companies that operate much more locally – essentially creating a “last mile” for this business model.
Instead of a faceless national company, channel strategy guys probably know you. They might know your brother or next door neighbor. The point is that they are much more likely to be entrenched in the local market and be able to serve the needs of that market. They don’t need to spend money on making you trust them, because you probably already do.
Looking forward to the result of this business model battle will really depend on how the general public thinks and feels about solar power over the next decade.
If solar remains a customized home improvement industry, it’s very likely that channel strategies will win the day. They will be the local guys who come into your home and install your security system, new tiles for your bathroom and your solar panels.
On the other hand, if the public becomes more educated about solar on a national level and begins to see it as an ordinary utility, like broadband or telephone service, it will be the vertical integration that proves the most successful.
Either way, MODsolar will continue to support growth from wherever it comes. Go get ’em!