Q&A: Selling to Retrofit

June 29, 2010
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Rich Green, owner of high-end electronics design firm Rich Green Ink in Palo Alto, Calif., is also on the CEDIA (Custom Electronic Design & Installation Association) Board of Directors and CEDIA’s Sustainable Living Action Team. The “Sustainable Living” part comes from  Green, in an effort to broaden the scope of “green tech” and energy efficiency into an overarching lifestyle. After all, stresses Green, CEDIA promotes an “Electronic Lifestyle,” so why not a sustainable lifestyle that includes technologies that allow people to save energy and save money—and do it conveniently and seamlessly with expertly integrated home systems?

If you think Rich Green is peering into the future, maybe he is. The industry veteran and Silicon Valley insider travels often to present his techno future insights on home systems, networking, gaming, sustainability, and other technologies here and far.

Green is big on the residential retrofit possibilities for electronics pros—especially for energy management systems. But there are some big service providers getting into the market, and it’s a very different business.

It’s also here. Now. And it presents an incredible opportunity. Here’s our discussion.

Are we moving to a retrofit market in CEDIA?

Absolutely. And in some cases kicking and screaming.

Because guys have to change their business models?

Yeah, a lot of guys think that their business is running new wires in new construction projects.

Should they get out of new construction?

No, if you can find it, keep it. [But] a lot of our members are slow to change their biz models from new construction to retrofit. Their marketing, their tool kits, because they can’t see that the new construction market has collapsed right under them, and they’re still hoping it comes back.

The reason it’s so difficult to turn from new construction to retrofit is because of the marketing challenge. In new construction our customers are the industry partners, starting with architects, custom homebuilders, interior designers, landscape architects, lighting designers. These are all the people who bring us clients. But in the retrofit model, you’ve got nobody to turn to but the homeowner.

So how do you market into a retrofit opportunity? You’re going into Yellow Pages and billboards? No way. Can’t do that.

That’s what I’m asking myself in the Bay Area. I’m saying, how do I get the concept of sustainable lifestyles to an existing homeowner, and I’ve been doing my own outreach program. I’m doing lectures on energy monitoring and management, retrofit tools, you know, ZigBee, Z-Wave, the tools that we have from Control4 and Lutron and stuff like that, and I bring hands-on stuff to pass around, and I’m doing this in people’s living rooms. They’re having little wine and cheese parties with me as the featured speaker.

I’ve also done lectures at Xerox Palo Alto Research Center (PARC).  I’m part of their continuing series on entrepreneurs. I’ve lectured at Stanford University, at EMC, at the continuing outreach in San Jose. That’s what I’m doing: I’m trying to get the word out that I’m the expert on outfitting homes for energy monitoring and management, sustainable living and retrofit.

The key message there is: you can do it, because of wireless technologies and networks, because of cloud services, and it’s affordable. So you don’t need a $50,000 Crestron starter package to get into this. You can do it with a $5,000 Control4 starter package. That’s very appealing. When I pass around a Control4 dimmer that’s $129, and the Control4 master controller. This is a $400 box, and it automates your home. They’re like, Wow, I thought it was like $40,000. You’re telling me it’s $400?

But then I’m thinking, ‘Am I fooling myself? Can I really make money doing this?’ Because each retrofit job has less – they’re smaller jobs.

So we have to change our business models from high-margin/low-volume, to high-volume/low-margin?

Exactly.

But that means learning how to sell in the home.

And if you try to do both, it becomes schizophrenic. You can destroy both sides of your company. Because in high-margin/low-volume, it’s all about paying attention. The customers will pay almost any price for you to pay attention to them. That’s custom. In the high-volume/low-margin business, they just expect it to be done. It’s about hitting a price point, and getting in and getting out quickly. So the overhead involved in creating a business designed to pay attention, doesn’t scale.

Can this industry do it and make the switch?

I think so, and I hope so. A few years ago Control4 put together a special group of dealers and consultants called the BCI, which was Business Change Initiative. They hired consultants that created a business plan, a working Excel template, for creating a low-margin, high-volume business. If you want to scale to a $10 million company, this is how much warehousing you’re going to need, this is how many trucks you’re going to need, this is the transmitting to buy, this is the employee insurance, because they knew that going into the CEDIA channel, these guys don’t understand how to run a business like that. There’s a few. Mark Ormiston of Definitive Audio in Seattle made the transition from high-end channel stereo store to a $13 million behemoth. He scaled from high-margin, low-volume, and he’s one of the few who did it successfully.

What do you think of what ADT, Comcast and others are doing with iControl and bringing it into the home?

The term I’m using to describe this activity is C2C: Cloud to Consumer. Cloud to Consumer involves cloud media like Netflix and downloads and that kind of stuff; iTunes and cloud communications, which is cutting the landline, and cloud controls. So we’re seeing a disintermediation of the CEDIA channel, from companies like iControl, that are creating intelligent networking solutions that are secretly hidden in the alarm panel, with ADT as their partner, so once that panel goes into the house it’s the Trojan horse that takes over the home control. And the CableLabs spec for home controls is baked into the cable set top box: Another Trojan horse. The cable guy brings that box into the house, plugs it in and it becomes the nexus of home controls. That specification includes thermostat, an appliance control—from the cable box. What you just touched on is massive disintermediation of our channel, using the existing pathways into the home. So what are those pathways into the home? It’s the security guy, it’s the cable guy, the telephone guy, it’s the CEDIA guy, it’s the electrician, right? The big companies that got venture-funded, like iControl, are looking at those pathways into the home, and saying how can we get past the integrator channel, because they’re great guys but they’re a bottleneck. They’re aren’t enough of them to reach the retrofit mass market. So you see iControl using the security pathway. You see the cable boxes’ pathway.

Do custom electronics pros (CEDIA guys, ESCs) see what’s happening?

No. That’s the nature of lecture I’ve been giving. When I put that up there: Cloud to Consumer equals Disintermediation, I get a blank stare. Disintermediation: That means they want you gone. You’re the intermediary. You’re the person who takes a box from a wholesaler and sells it to an end user. They want you gone. You know this. What are you going to do about it?

Can Comcast actually sell this into the house, especially if it’s a security system? I don’t trust them with my TV.

This is going to keep getting better. If the products touch the network in some way, whether it’s Bluetooth, ZigBee, Z-Wave, WiFi, Ethernet, Powerline carrier—I don’t care—if the product touches the network, then the control of that product doesn’t even need to be centered in the home. It can float right out to the cloud. And you’re going to see cloud control services, from the cable providers, from the security providers, from the utilities. That’s what I’m talking about: The black control box from Crestron or AMX doesn’t need to be there anymore if you’re controlling legacy products with stupid relays and IR and all that stuff. If it touches the network, it floats out to the cloud. Once it’s out to the cloud, you can monitor it, you can install it, you can configure it.

Should the strategy for an electronics system contractor be to sell on top of it, or to sell a better system than that?

Sell a better system. Sell time—to people who have more money than time. So if that cable box does take over the house, it’s going to give you limited options of control over that lighting system or thermostat, maybe some appliance control. It probably won’t be very elegant in home theater control. And it may not be very elegant in its integration with mobile devices and in the car. I’m at the early stages of thinking through what those higher-order integration opportunities are—and it has to be with really clever design concepts. And I think it’s those design concepts—those designed services that you can put a name to, can become a line item on an invoice.

Design, design, design, you say—and charge for it.

By the minute. Or, by the category. For example, HDMI is a horrible blight on our industry. It’s not my problem, but I have to accept responsibility for it, because my clients will point to me and attack me if I don’t fix something that breaks and it’s because of HDMI.

You can do HDMI right, but you have to invest in it and learn about it, lab it, push products back to the manufacturers. There’s a lot involved, and it’s not easy. So what if a company like mine invested in an HDMI design policy that said these are products that we use that are prequalified to be HDMI 1.3, 1.4-compliant? They will support 3D 1080p going forward. These are the switching devices that we know will work. These are the Cat 5 or Cat 6 cables that will work. These are the cables that are truly high-speed, certified; they’re more expensive, but they work. So here’s our HDMI design policy. It’s a line item on the proposal. It’s $1,500 for one HDMI design package, and it’s all that research put into a labor product.

These design services act as products that have a price that’s digestible. It’s like buying the carbon fiber option on your dashboard. Make it easy just to click the box. And if somebody says HDMI, that’s plug and play. It’s just supposed to work, right? No, it doesn’t work. We’ve invested dearly in making it work for you. Your neighbor and your friend isn’t going to have the benefit of what we’ve done.

And we can do the same with energy management. Only big parts of it, like energy monitoring, is going to become commoditized, right?

Google PowerMeter, Intel Dashboard, Microsoft Hohm, they’re already free. They’re out there. It’s already done. It’s free.

Can you sell a better system?

I think you can. These are emotional decisions that a homeowner will make. Not practical. Emotional–if you can appeal to their sense of responsibility for the future.

Suzanne Shelton, who researches attitudes of consumer sustainability, said something very interesting. We think green tech is going to be the last on people’s lists, after insulation and the stuff they should do first. She said, no, you guys are selling the sexy green stuff. What she calls sparkly green,” like LED TVs. And she says “I want that. It’s cool.” Maybe we can appeal to people on that level.

I think we have to stretch the concept beyond power. Beyond electricity. That’s why I’m keen on the term “Sustainable Lifestyles.” It’s beyond power. Power is mandatory. You have to have power management. But after power, sustainable lifestyles is keeping people out of their cars and airplanes; walking to the market, walking to the soccer field, walking to church, working from home.

I was at a venture capitalists’ conference, and after their romance with solar and wind, VCs are putting their money behind energy efficiency. They see a lot of low-hanging fruit.

The low-hanging fruit is going to be changing human behaviors. It’s not the electronics. It’s not the products. It’s not the Lutron RadioRA. It’s changing human behaviors. I think that in terms of getting into the homes, to people who can make a difference, with influence—no one is better than the CEDIA channel. We’re in the homes of people who have power and influence over hundreds and thousands of people. We can affect how they live their lives, and there’s a trickle-down in how they encourage their colleagues and employees to live their lives. We can make a huge difference. That’s what gets me up in the morning. It’s not that we’re going to install energy systems in 30 million homes. We don’t have the bandwidth or the members to do that. But we can have an impact on how people behave. That’s the entrepreneurial opportunity in our channel.

In Rob Gerhardt’s “Remodel Your Business” sessions, he’s teaching electronics systems contractors to become in-home salesmen, and he’s selling them the tools to do so.

Well, there’s an obvious need for skills for selling in the home. But the resulting sale is small. So where are you going to find the sales talent to hit the streets and sell? That’s what he’s doing. He’s selling them the tools to do that. But in door-to-door selling, you’re not selling to build a relationship. You’re selling to sell the product, as quickly as you can. Then get out. And that’s a different person …

Can this channel reconcile that?

Maybe it can. I think that if you go into a 1,500- or 2,000-square-foot home and try to sell an $8,000 lighting and thermostat package, you’re not going to build a relationship. But if you go into an existing 10,000-square-foot, $9 million home, where the homeowner didn’t run a single Cat 5 or nothing for networks, so you say, “OK, you’ve got an $800 or $1,500 a month electric bill. Let’s talk about that. If you invest in a $16,000 retrofit lighting control package, this is what happens to the energy consumption in your home. It’s an emotional purchase, but it’s high-end, high-performance. That’s where I would start. I wouldn’t go into the 1,500-square-foot home. I would go into the golf course communities, with golf courses encircled by 5,000-square-foot homes, and get into their homeowners’ association, or into the clubhouse. Do an ROI presentation, and follow up with every one of them.

I think Gerhardt is also saying to go more upscale.

Yeah, go upscale.

So let’s say you want to move into this higher-volume business. Do you start a separate division, and run that differently, because it’s so different than the custom business?

That’s right. The overhead will kill you in the low-margin business. You can’t do it. You’ve got to be able to say no to certain kind of circumstances, or figure out how to charge for it. But we’re addicted to the overhead of the high-margin, low-volume. We’re addicted to it. If you try to carry that model into the low-margin business, you’re going to be running around like crazy. Just handling the communications flood is a challenge. The phone will ring off the hook when you go from 15 to 1,500 customers a year. How are you going to handle the communications? Who’s going to handle the service calls for unrelated products—products that you didn’t touch and aren’t responsible for? That should be turned into a proactive business opportunity, by the way.

So if you’re going to transition to high-volume, start another branch of your company?

Yes, and leverage the knowledge that you gain from the custom company. Leverage that into the high-volume business, with a bridge to the owner. The management structure is the project management style, the communications structure is very different. You can’t deliver on the promise of a custom business when you’re doing low margin.

How is CEDIA looking at this, at the executive level?

“What are we going to do about this? How are we going to teach these guys?” We’re screaming at each other at dinners and meetings—in a very constructive way. We have alignment with the Board now, that the demographics and purpose of our industry is changing—has changed—and we’re catching up with that change. That there’s a whole class of technician/designer that doesn’t even know CEDIA exists. So we’re preparing to embrace a much wide audience of people who need our help.

There are 3,500 CEDIA members worldwide. Maybe that becomes a much bigger number, and it addresses the high-volume, low-margin base of our industry. We can’t just ignore that.

And how many can continue to survive doing high-end home theaters?

There are still people who make good money selling high-performance home theaters. They’re good at—and they need to keep doing it.

I met somebody at the management conference in New Orleans, who just fired 30 people. He went from $11 million in multiple locations to $7 million in one year. He’s on a workout program with a lot of vendors, trying to figure out how to pay his bills. I went from 18 to 6 people. I went from a 7,500-square-foot glorious facility to my home in a matter of a month. There’s still some successful people out there, but there’s a lot of pain in our industry that’s not being vocalized right now. It’s humiliating to talk about, but it’s happening. So what we’re doing at the executive and board level, is saying. “There’s pain. What can we do for our members right now? How do we become relevant to what this industry is becoming, through disintermediation?” Maybe we’re more of a low-margin, high-volume industry. What does that CEDIA look like? It looks pretty interesting.

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2 Responses to Q&A: Selling to Retrofit

  1. Nunya Bidness on July 13, 2010 at 2:39 pm

    Interesting comments from a man who has no company left after driving it into the ground. He’s now suddenly the expert? Give me a break! Yes Rich, you are indeed fooling yourself.

  2. cm on July 25, 2010 at 4:46 pm

    Actually, I thought’s Rich’s comments were rather incisive and useful.

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