A Practical Way to Grow This Market

A letter to manufacturers of high performance building materials and components.

The manufacturers of high performance building components face a number of problems because of the small size of this market and its anemic rate of growth: low volume, a lack of pricing power, low returns on assets, and high per unit sales and marketing costs. Also, despite the enormous potential of the U.S. market, there are currently no indications that, on its current course, this market will be anything but the small and idiosyncratic market it is now.

What are the reasons this market is not growing more rapidly? One is a massive underinvestment in efforts to broadly grow the market. Why is there underinvestment? Because in a fragmented industry the returns for a company who makes certain investments in the market (an ad campaign, for example) may be poor. If one player makes an investment in broad market growth, it will only reap a fraction of the revenues, with the rest going to its competitors.

Nor is there is a unified or coordinated response to the impediments to growth. There is no single entity that owns a particular problem and takes it upon themselves to fix it. In short, there is a hole in the market, a vacuum right at the center of it.

There are excellent policy and code efforts underway but are manufacturers waiting for policy to lift the market? Are manufacturers expecting policy efforts to be sufficient to drive this market? Imagine if the iPhone or Uber had waited for policy to mandate their use? Policy is important but the real energy is going to come from this being a consumer-driven market, not a policy driven one. That’s when growth is going to take off.

What’s necessary, as a first step, is to give manufacturers a vehicle to collective funding of investments (see the list below) in this market. With such a funding vehicle, investments that would otherwise have high capital requirements and low returns for a participant in this industry will have relatively low capital requirements and high returns. We set up Erase40 to be that vehicle to make needed investments and deploy tools that capture the energy of the market.

But let’s take a step back for a minute and ask, what’s worked so far? In terms of moving the market and driving up demand one effort really stands out, the PHFA multifamily passive house effort. This a solution that matches the size of the problem (as opposed to the many that don’t match the size of the problem or even fully seek to understand the problem). This initiative is an example of finding a small lever to shift a market and it’s a boon for manufacturers.

Why don’t we deploy more of these levers? There are other effective levers available to us if we choose to use them.

Our plan is to develop a portfolio of initiatives that each target a specific barrier to adoption. These levers will effect lenders, realtors, institutional investors, renters, developers, buyers and occupants. Using behavioral science we can develop very narrowly focused tools that fill in the pieces necessary to make this a functioning market.

• Find levers that change the way people value the different attributes of a building (noise levels, air quality, maintenance costs)
• Change the way architects and builders sell high performance buildings to clients and develop tools for lenders
• Apply behavioral science to foster community support for projects in the building approval process
• Identity for developers populations of buyers and renters who are willing to pay a premium for better air quality or lower noise
• Make it easier for institutional investors to add more high performance buildings into their portfolios and developing financial instruments to draw in the energy of the capital markets
• Develop a full media strategy and launch a national advertising campaign

Behavioral science uses small levers to cause large shifts in behavior. For example, with eight text messages behavioral scientists were able to get millions of high school graduates to go college. With one simple pledge one behavioral economist increased retirement savings by 27 billion dollars. These are impressive examples but the same process can be used to drive more people to high performance buildings. Using behavioral science we can target the things that cause buyers, occupants and funders to undervalue the costs and risks of conventional buildings and undervalue too the outcomes produced by high performance buildings.

With each Erase40 effort the focus will be on the number of people who opt for a high performance building as a result of the effort. It’s easy to talk about this market in vague terms and in the process lose what distinguishes one idea from another. This is why it’s important to focus on the math and see what works and why. Again, our purpose is not to make recommendations or add to the number of good papers out there but to deploy tools that capture the energy of the market.

Incrementalism is not the way to go here. There is a way to cause a disruption in the conventional building industry. The tools are available to us. Why not use them?

What manufacturers get out of this is a straightforward and practical way to get all the things that come with a rapidly growing market (increased revenues, higher returns on existing assets, a foundation for continued growth.). Manufacturers will also get a team of people (economists, behaviorists, media people and others) developing tools to grow this market without needing to develop these capacities internally. What other path will get us where we need to be? And what other solution matches the size and complexity of the problem?

We’d like this to be the start of a partnership with manufacturers and of a coordinated response to the challenges and opportunities of this market. We’re talking to manufacturers now and we’d like to hear from everyone in this space. Please let us know when you are available for a conversation.

Thank you,
James Geppner (James@Erase40.org)