Guest Editorial by Ted Konnerth of Egret Consulting Group
The lighting industry, as most of us know it today, really began to take shape more than 100 years ago with the introduction of “electric lights.” And, in the ensuing century since, the list of game-changing technological advances in the industry is very short. Some of the small earthquakes to the industry have been fluorescent, HID, low-pressure sodium, and MR16. But now, LED is turning things upside down.
Pre-LED innovations were largely accommodated by the lighting manufacturing community through the inclusion of new lamp sources into traditional equipment. With some modifications for optical needs, a metal halide lamp was most often placed into the same reflector as a high- pressure sodium lamp and possibly even an incandescent. CFL and PL lamp configurations were similarly accommodated. The change from T12 to T8 to T5 all have been mostly through the same mechanical equipment.
The summary of the history of lighting technology can be written as follows: we (manufacturers) can offer all of our products in any lamp source you wish. This included new ballast designs as well; from magnetic to electronic and any control applications like dimming or wiring systems. Lighting fixture manufacturers designed and supplied mechanical devices that included lighting elements provided by others. Lighting has endured 100+ years of selling similar-looking and performing products all contained within the same form factors and sold through the same channel path: specification, contractor, distributor – and all coordinated and controlled by the local lighting rep. That’s how it’s always been.
The LED Boom
In 2009, there were approximately 750 lighting fixture manufacturers in the U.S., a total that includes both commercial equipment and residential/decorative. The split between those two markets was roughly equal. From about 2008 until now, there have been 500+ new companies introduced to the U.S. that are exclusively LED. So now there are about 1,250 lighting fixture manufacturers, seemingly all competing for the same dwindling market: new construction. From 2008 until 2010 or later, the legacy manufacturers, distributors, contractors, and reps were in denial about the application and future of LED lighting. With 500 new companies all promising their LEDs to be the best, the cheapest and the longest-lived, it was easy to ignore the impending transformation of the industry due to the “noise” in the system. Included within that noise were legitimate issues of performance standards, outrageous claims, quality issues, and standardized documentation. However, the new LED companies didn’t understand the channels in the U.S. and didn’t have the legacy investments in the channels, so they were free to create their own path to revenue.
Selling LED is Different
The traditional methods of selling lighting aren’t efficient for LED. The specification of costly new equipment can’t be easily accommodated into established construction budgets, and the lighting rep model of adding overage onto any new or different specification hook exacerbates the financial dilemma.
Traditional lighting channels have multiple layers of margins built in for the manufacturers, reps, distributors, and contractors. On top of that are legacy channel investments of distributor rebates, advertising co-op credits, buying group rebates, rep commissions, RMA policies, cash discounts, extended payment terms, sales spiff programs, stocking discounts, etc. This “pyramid of profit” limits the adoption of LED. The manufacturers also abdicated responsibilities for sales development to electrical distributors and their independent reps. That was a mistake.
An electrical distributor functions as a fulfillment service for what their customers need. Put another way, distributors sell what their customers ask for. They are not generally equipped to sell something their customer doesn’t know they need. LED must be sold on a ROI strategy. You can’t simply tell a business owner that he or she can switch from a $3 PAR lamp to a $15 LED lamp and save energy; the delta is too big. LED must be sold on a life-cycle basis that incorporates the initial cost of capital, the life expectancy, labor savings, energy savings, plus utility rebates, tax savings, and local or state incentives to adopt new technologies. For these reasons, that presentation needs to be made to the CFO or CEO of the facility owner. Distributor salespeople and local lighting reps have never been trained to make that presentation nor have the manufacturer regional sales managers.
LED technology is transformative and disruptive. It’s electronic. It’s optically hemispheric. It’s amazingly energy-efficient. Its form factor is bizarre by traditional standards. It’s heat sensitive. It’s power sensitive. It offers attributes never available before, such as color control or easy integration into control systems or diagnostics. It has funny-sounding attributes like chromaticity, Haitz’ Law and epitaxy. And, it just looks weird! It can’t be simply “put” into the same old fixture designs of the past 100 years.
So What’s a new LED Company to Do?
One could ask, “Who wants to buy this weird stuff?” The answer is “Anyone who pays the electric bill for a building, a home, a street, or a city needs to buy it.”
The successful LED companies (and there are a lot of them) have crafted their own sales channel, eschewing the “pyramid of profit” from the legacy lighting industry by going directly to people or governments who actually own and operate their buildings or municipalities. Any organization that uses lighting – especially for long burning hours – is a willing and likely buyer for LED.
Walk into any hotel and look at the number of incandescent or CFL lamps that burn for 24 hours/day. Nearly 100 percent of chandeliers contain incandescent lamps that are expensive, have short lifespans, and require a maintenance person on a ladder to replace them roughly every month. It doesn’t occur to an electrical distributor salesman to sell the local Marriott a case of $15 candelabra LED lamps because it takes someone other than the one purchasing to make that decision – plus they may not be trained to talk ROI to the hotel manager on the cost savings available to them, rebates, etc.
There are approximately 2.7 million commercial buildings in the U.S., 2.1 million of which have lighting systems that are older than 10 years (over 1 million are older than 30 years). LED represents a solution that is ready now and at a price point that makes sense for most lighting applications from a life cycle ROI perspective.
What Lies Ahead?
The new construction market will be slow to adopt LED. The price point is still a barrier to financial accommodation in a market where new construction is still struggling to survive. The acceptance of LED has finally arrived within the channel though. We ran an LED survey 18 months ago and asked the top 200 distributors if they were stocking LED equipment. The results at that time showed less than 61 percent of distributors were selling LED and most had sold LED equipment only on a direct-ship basis. We ran a similar survey in March 2012 and over 93 percent of the distributors were now stocking LED equipment. That’s a dramatic change in adoption!
The real changes though have been systemic. The ability of new manufacturers to carve out new channels of sales and marketing will leave the industry permanently changed. The fastest path to market for LED technology is on a direct-to-end user basis. LED companies are successfully calling on major retailers, chain restaurants, municipalities, banks, hospitality (i.e. hotels, cruise ships, casinos) as well as entering the mass and big box channels for consumer sales. There are new distribution players that are solely dedicated to the sale of LED equipment; these include franchise organizations and manufacturers that have established “certified” contractors that are trained how to sell and install LED equipment.
LED as a lamp source is just the beginning. It can be utilized in myriad applications. The ability of LED to create infinite colors opens the technology into biomedical research for behavioral modification, plant growth, or livestock growth. LED is a native DC system and, as such, can adapt immediately into emerging technologies for large DC power applications for data centers where computer servers are stripped of their internal rectifiers that transform AC to DC power, thereby saving the energy losses associated with that transformation. LED lamps are being fitted with smart chips so that homes can use LED lamps as direct wi-fi networks or connect them into smart home systems that will monitor energy use, or connect to security systems and occupancy sensors or adapt to ambient light levels.
Channel impacts have just begun. The day when your local electronics dealer will integrate your entire sound, lighting, computing, games, entertainment systems into a single interface is close at hand. The ability to build/design homes that feature solar power generation (which is a native DC system) integrated into DC appliances and combine all low-voltage systems into a singular operating system is ready now. The 100-year history of selling lighting has ended. The future is electronics. The global electronic manufacturers have entered the market for LED lighting and will shortly begin the integration of “all things electronic.” Lighting reps, contractors, and electrical distributors will need to adapt rapidly to retain relevancy.
Ted Konnerth is the founder, president, and CEO of Egret Consulting Group, a retained search and consulting firm specializing exclusively in the electrical industry. Ted actively consults with LED companies on channel strategy and organizational development. His background includes the role of global vice president of sales for Cooper Lighting prior to starting Egret. He holds a PhD in Psychology.
For more information on LED Lighting and Information, please see the following articles:
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This is an excellent article, and very thought-provoking. My biggest question to you is this: do the new entrants to the LED manufacturing ranks have the understanding and reach to be able to present their products directly to commercial and residential customers? My own experience is that they are generally long on technical skills and short on the sales and marketing skills necessary to fully realize your thesis, at least in the short term.
I do believe, however, that you are directionally right on the money, and would expect the CEO/CFO-level presentation skills will most likely be developed by lighting maintenance companies, bypassing the existing electrical industry value chain. Do you agree?
Jeremy, thank you for your great reply. I’ve alerted Ted Konnerth to your message (he’s traveling right now) and I hope that others will join in with their opinions so we can get a dialogue going. Thank for you taking the time and energy to write in. I think this is a very interesting topic that warrants further discussion!
Lighting Agents have relied on repeat business from their customers for years and years. LED lasts so long, Agents wont get the repeat sales, in fact , they actively discourage LED options. People paying the bills eventually check online and find out they are paying 5 times what they could,(for products and power-usage) they contact LED companies themselves .
The “pyramid of profit” crumbles when ; you can purchase online for more than half “their” price.
Good article and a dilemma that manufactures are wrestling with. Rob needs to be corrected as agents make a living primarily on new construction, not repeat, business. A case can be said for stock business being ‘repeat’, but that is not where the money is for an agent. As long as there is mystery in LED and controls there will be margin for agents. And, as agents get proficient at selling renovation the scope of opportunity gets enlarged for both agents and distributors.