Sunrun's Big Cost Problem

The residential solar industry should be one of the most appealing segments of the market with solar now cost-effective in states across the country and solar panel costs coming down year after year. But the industry has had a hard time organically attracting customers, relying primarily on archaic sales methods like door-to-door salespeople, telemarketing, and retail pop-ups.

Even as the industry learns what works and what doesn't, the cost to attract incrementally more customers is increasing. The low-hanging fruit has been picked and now the industry leader, Sunrun (NASDAQ: RUN), is spending more and more to keep the growth story alive.

The rising cost of residential solar

The table below shows the cost problem over the last year and a half. After sales and marketing costs fell from $0.72 per watt in 2016 to $0.52 per watt in 2017, the cost of sales started to explode. The $0.78 per watt in sales and marketing costs in the first quarter of 2019 are a level we haven't seen since early in 2016.

You can see that overall costs have started to rise as well. The overall cost of a solar system is important because it determines what price a company can charge and how much margin is left to (hopefully) generate a profit. If costs don't fall over time, the industry won't grow, and if there's no margin, the industry won't be sustainable. So stagnant or rising costs are bad for Sunrun in the long term.

Trying something new

As costs stagnate, companies can maintain their current course of action or they can adapt. Tesla recently announced that it's going to make all of its sales digitally, reducing the sales staff to bare bones. The bet is that the cost savings will allow Tesla to lower prices and attract more customers. We'll see if that theory works out in reality.

SunPower says it's launching a quoting tool that will allow customers and installers to quote a solar system in less than a minute. This could allow for more online sales, but may also allow the company's dealers to start a sales pitch with a fully developed quote, speeding up the sales process. Again, time will tell whether the strategy works, but Tesla and SunPower are betting on digital sales techniques rather than the old methods the industry has used.

Loans are another innovation that Sunrun has decided not to pursue thus far. The company instead chooses to finance its own solar installations and charge customers a fee over decades. But as competitors offer cash sales and loans, they can offer similar monthly payments as leases while avoiding some of the downsides of lease agreements. In the long term, I think loans or cash sales will be a majority of the market, as they are in auto sales, and that could risk leaving Sunrun behind.

Will costs be a long-term problem for Sunrun?

There's no question that Sunrun has a sales and marketing problem on its hands. The company is spending more and more to get incremental customer growth and that's not sustainable. It could move to more digital sales or offer more competitive financing, but right now it's staying the course. That may be a risky strategy in an environment where competitors are offering lower costs.

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Travis Hoium owns shares of SPWR. The Motley Fool owns shares of and recommends TSLA. The Motley Fool has a disclosure policy.