McKinsey Calls for a New Approach to Market Segmentation in Energy Efficiency

McKinsey & Company logoWhen McKinsey talks energy efficiency, we tend to listen. The world's most influential management consulting company recently published an article called "Giving U.S. Energy Efficiency a Jolt," wherein authors David Frankel and Humayun Tai argue that energy efficiency goals would be well-served by employing market segmentation strategies like those used in other consumer-facing industries.

The article is aimed primarily at utilities and programs, but we believe that there are some important takeaways for independent home energy contractors as well. 

Frankel and Tai divide energy efficiency consumers into the following segments:

Green Advocates: Those "who care about energy-saving behavior as a goal in its own right" fall into this category. They're motivated by environmental factors, and represent about 20% of the total population.

Disengaged Energy Wasters: Another 20% is accounted for by "a group that doesn’t care about saving energy or saving money." They're not interested in the environment, and they're not interested in saving money.

Traditionalist cost-focused energy savers: motivated entirely by cost savings.

Home-Focused selective energy savers: motivated primarily by home improvement, which may involve a cost-savings or technological element.

Nongreen selective energy savers: members of this segment are happy to improve their homes' energy efficiency, as long as they don't have to think about it. "Set it and forget it" options are good for this segment.

(Note: the latter three are said to represent 60% but the report doesn't specify a breakdown.)

Integrated Demographic Segmentation:

The McKinsey article argues for an integrated approach to market segmentation that combines traditional demographic market segmentation -- age, income, gender, geography, etc. -- with segmentation based on these more emotional triggers. You have to consider both, or you may waste money trying to market your services to the "disengaged energy wasters," who aren't going to sign up for an audit no matter what you tell them. Similarly, addressing the "traditionalist cost-focused energy savers" with language about environmental benefits, sustainability, "greening their home," etc., is unlikely to be successful. Your message should be tailored to each audience.

This corresponds very well with traditional marketing wisdom, but our experience is that companies in home performance have a difficult time with segmentation, in part because it requires you to decide who you are NOT marketing to, and many are loathe to make such a choice.


Good News! Separating out the "disengaged energy wasters," we're still left with 80% of homeowners that may be interested in energy efficiency improvements in some regard, whether for technological, environmental, or financial reasons. That's a good-sized segment of the population!

Green is Still Big. Despite the oft heard advice not to market home performance on green values or climate change, McKinsey's research tells us that this segment is big. 20% of the population could drive our industry for years to come.  

Marketing Tactics that Are Easily Segmented Win. Of course, it's one thing to make marketing choices based on segmentation, and another to actually execute a program that tailors specific messages to specific audiences. The more cutting edge advertising and marketing tactics that make this targeting easy are the ones that will work the best.

Segmented Marketing Costs Less. The reason that some types of advertising are so expensive is that they reach many more people than you're actually trying to hit. This is why radio, TV and print are not often on our recommended list. Think about the power of Facebook advertising, for example, where you can limit a particular ad to a unique zip code, 25-50 year olds with kids, voted green or democratic, give money to environmental causes and are interested in home improvement. 

In future posts, we'll look at how specific marketing tactics can target these specific segments.

All thoughts welcome, feel free to chime in in the comments.


Useful way to think about our prospects, but we need to remember there are usually blends of these catagories for those we market and sell to, particulary when dealing with a couple, which we usually do.

John Sutter hit the nail on the head.

Contractors want to make home improvements, not start religions. These approaches that attempt to slice and dice, then appeal to specific segments seems absurd black or white thinking to me. That's simply not how people are, they don't neatly fall into groups, and the size of their problems (the primary motivator) is not neatly uniform.

Instead, how about simply helping people discover and quantify pain, problems, and opportunity? I need to know the "why", but what "why" doesn't much matter so long as there is enough motivation behind that "why" to allocate money to making the "why" go away. From budget I have a place to go with design.

COST and NON GREEN energy savers? PLEASE!! This deserves two segments? These guys don't seem to know how the numbers connect.

The idea that there is much market in the resi sector for self funding improvements is pretty absurd. Energy in the US is cheap as dirt, we need to accept that if other problems are not being addressed at the same time, opportunity for work that "self funds" is about as rare as unicorns. Developing a strategy to market to unicorns is pretty dumb.

Peter hit the nail on the head with this one:

..."our experience is that companies in home performance have a difficult time with segmentation, in part because it requires you to decide who you are NOT marketing to, and many are loathe to make such a choice."

Let's move this from esoteric to real. It's not about segmenting personalities, it's about quantifying problems.

I see validity in both views. Looking at those 5 categories, I could put most of my clients in one or another as their predominant tendency. I question the validity of the distinction between the "home focused" and the "non-green selective" categories because in my experience these two give essentially the same answers to my questions. In the world of sales, the question I eventually ask every client is "What problems or issues do you have with your house that you want us to address with this energy audit?" I've never had a call from a "disengaged energy waster". If they have ice damming or frozen pipes they automatically become engaged and move into the home focused group. These are the people with whom we don't waste time talking about carbon footprints because they want up to solve a problem. Using these groupings one could put together a list of the talking points or "buttons" we need to push to motivate some action on their part which will actually save energy --whether they want to or not!

As to contractors not wanting to start a religion, I consider myself an energy evangelist and I approach this stuff with enthusiasm. The difference between me and the typical evangelist is that I tend to be much more subtle. I'll get you to save a ton of energy and all you'll think you're doing is making the house more comfortable! Using these categories can be helpful for clarifying our thinking and our approach but in the end the success of the sale comes down to whether or not the client perceives you as addressing his/her needs.

Following on Jim's nice post:

The discussion of ROI or IRR when it comes to residential is pretty myopic. When it comes to home improvements or repairs that's simply not how smart people make decisions, that's how emperors buy silken suits.

It's a rare day I've seen home retrofits "self fund" based upon energy savings. One in 20 houses is so crappy that the savings is a lottery winner. Most people I sell $15-$25k projects to are looking at cutting $1500 gas bills by $4-600.

People want their houses not to suck, and most eventually are willing to pay to make that happen. They are tired of trying to solve comfort issues with poke n hope repairs or space heaters. The Comprehensive Home Performance approach fixes houses in a way that is also likely to save energy, thus the savings HELP pay for the repairs and improvements.

The idea that improvements can HELP carry the cost of home improvements is not only appealing to people, it helps them look at and value multiple benefits instead of simply weighing one.. Furthermore, they know promises of "free" are likely fraudulent, so we should stay away from positioning our claims to make us look like carny's:

Peter Troast's picture

John, Ted, Jim--

A good, healthy discussion! Thanks for the comments.

@John: from a pure marketing standpoint, the constraint on the idea of segmentation is whether there are tactical options that divide the world according to those segments. As promised in the post, I'm planning a longer piece on just this issue, but for now would offer this: a good, focused marketing program is one that skews it's messaging to the target audience. Obviously, we want as much exactness as possible, but we'll settle for approaches that "over index" (to use the advertising term) to a particular audience. If you could target, for example, Sonoma homeowners of a certain income that give to environmental causes and vote democratic, would you say this group could fairly be characterized as predominantly "green"?

@Ted: I tend to agree that the McKinsey segmentation overly emphasizes energy cost. Clearly, the cost only message works only in certain parts of the country. Right now here in frigid, oil dependent Maine, it's huge--we're getting killed by oil bills. In Alabama, maybe not so much.

@Jim (and Ted): I am most intrigued by this idea of "home focused" for the reasons both of you mention. If a homeowner is in improvement mode, there is an opportunity there, which will only get better as the value of healthy, efficient homes grows in awareness.

In the end, the challenge of our industry, in which the benefits are so myriad but so not obvious, is to get people into the conversation. Effective marketing via segmentation has only one purpose: to engage more and better people in that discussion at the lowest acquisition cost possible.

And keep in mind, success in any single one of these 20% segments alone could grow home performance exponentially from where it is now. 

@Peter - I don't know if this helps, but here are my thoughts.

I think contractors are going to see anybody with a pulse, and that the idea we should target a segment and build our "pitch" to selling to that "itch" as absurd. Seems to go against what Home Performance is about in my mind; solving complex problems with thorough interviews, comprehensive diagnostics, iterative and collaborative design.

I'm a big fan of checklists and defining process sequences. To me Home Performance is just a giant IF THEN statement. Understanding motives is a discovery process, I help people understand what segments are important to them. Often they don't really know until AFTER the initial interview. My questions get them thinking, and their first answers are not their best answers.

I don't want to limit my market, but I do want to qualify those I go see. I want to understand that my ability to serve them lines up with the problems or opportunity for improvement they think they have. I created this simple calculator for just that purpose:

The only people I don't want to go see are those who have low bills and think improvements are going to be free.

Peter Troast's picture

@Ted: I agree and I disagree.

Very important in this discussion to make the distinction between marketing and sales. 

In sales, where the task is to qualify leads (and obviously close them), successful companies will develop a well-tuned approach to ranking opportunities (I like your notion of a giant IF THEN). When this qualification process works, the segment from which that opportunity originated is mostly relevant to how you pitch the sell. But you're right--if they come out the end of your IF THEN as good immediate and long term customers, who cares if they're home focused or green or whatever. 

Marketing is different. If you challenged me to get you high quality leads in Rochester, and provided no more focus than that, I'm paralyzed.  You, and everyone in home performance, cannot afford generic marketing. Every dollar spent making an impression on a bad candidate is a dollar wasted, and our businesses are all too small to tolerate this misuse of resources. We see this repeatedly in the failed online marketing campaigns we take over from ReachLocal and Yodle and the other generic marketers--they don't understand the nuances of home performance, their targeting is overly broad, and their cost per lead/cost per acquisition is absurd. 

Peter, your powers of communication are impressive.

So if you want to know what segments I don't want you marketing to for me - I don't want to talk to green advocates or traditional cost focused.

When the rubber hits the road and it comes time to stroke a check the "green advocate" hat comes off 99% of the time and get's replaced by a "biggest cheapskate in the world" hat. More often than not these folks are simply looking to justify inaction (unless they have real problems to solve). "Green" is a problem they love talking about solving, but they are not interested in allocating any MONEY toward solving it.

And "Traditional Cost Focused" tend to be financially unsophisticated suckers who only buy from those who tell them the biggest lies.

They're so cheap they get disappointing results a lot, and therefore don't trust anybody and are hard to work with. They talk about "return on investment" but have no money to invest, have never successfully invested money, and they have absurdly unrealistic expectations of "payback" in 3 years or less.

Give me "disengaged, non-focused, and non-green." They have real problems to solve, don't expect the work to be free, and have money they want to invest in improving their homes.

Peter Troast's picture

My only agenda is to promote the idea of segmentation--a marketing strategy that focuses only on the best prospects. 

The risk, of course, is falling into the "one size fits all" approach. What works for you in western NY may not work elsewhere, but inherent in that point is the fundamental challenge of home performance--that its drivers are so diverse.

The best prospects are the ones who have the most pain.

Pain = Money.
More Pain, More Money.
If you do NOT do a good job of helping the consumer understand and define the problem, you won't get the budget you need to solve the problem. More effort needs to be invested in the pain step.

This works everywhere for anyone willing to shift from selling products to selling solutions.

I'm not the only one doing this. Nate is replacing 3 year old very high quality furnaces and heat pumps in Ohio. Let me repeat that, 3 year old $10,000 systems are getting replaced with identical systems - only the size changes.

How does he do this? A very high quality interview that treats the homeowner like an intelligent adult and design partner, a team member rather than a mark.

Unlike our Home Performance programs, Nate's not getting them "all excited" with falsehoods of "all the energy they'll save" then taking advantage of them when they are vulnerable. Instead he's building a collaborative relationship, uncovering the problems, designing solutions, and in these cases helping them understand that a big part of their problems are associated with having the wrong size equipment.

And he follows up. Something few others do. This closing of the feedback loop reinforces his knowledge and allows him to dial in his accuracy and knowledge.

Collaborative, caring, team oriented, relationship building. Not a one night stand. You know what happens? They tell him how excited they are that their house is fixed.

I care about being of service to people who sincerely want to make their lives better. I solve problems that people feel are worth solving. In sales I uncover that by understanding pain, helping them attach money to making the pain go away, and finding out when they will be ready to spend the money to make the pain go away.

Next to you I'm an amateur at the marketing table discussion, but if you want my thoughts on what your agenda should be, please find me people who have pain. I'll take it from there.

Personally, I loved the McKinsey study because it has generated a discussion that I believe is very much needed in the home performance industry. Whenever I work with a company to put together a marketing piece, I develop a profile for the person I am targeting with my ad, whether it be a homeowner, distributor, or contractor. I realize the service or product I am marketing has multiple benefits which will appeal differently to different people, but a good marketing piece is going to focus on a key benefit.

Often times, I believe companies, especially small businesses, define the benefits of their goods or services too narrowly, and it is often the single message on the home page of their web site. The fact is that even the home page message should change from time to time.

Segmentation doesn't have to be complicated, it just requires taking the time to really consider which type of customer is going to encounter a marketing piece at a particular time of year, through a particular advertising medium, or through a particular trade partner.

Here are a few examples. In the shoulder seasons of the year, the green conscious, long-term thinking homeowner is the only homeowner who is going to respond to a home performance advertisement. If you want to focus on the green message and throw in a discount, this is the time of the year to utilize that message.

Another example may include radio advertising if you have the money to go this route. Your agency or the media group will be able to provide you with a profile of the type of listener to each of their channels. You can pick which ones you advertise a green message, which ones you advertise a comfort message, and which one you advertise a cost savings message.

One final example is related to trade partner. If I have an arrangement with a window contractor to pass leads to me for home performance work, and I know the window contractor only sells his windows based on comfort and aesthetics, my green message will probably not appeal very well to his customer base. I would want to match my message to his message, or only choose trade partners who market their services similar to the way I market mine.

There is so much more to home performance than the carbon savings and energy efficiency. The lesson I have learned in marketing and sales is that it is much easier to sell something people want to buy. Most of the time that doesn't require changing the service or product, it just means changing the way the product or service is presented.

Once again, the discussion on this topic is great, and I hope to see it expand even further. Peter, thanks for posting.


I'm late to this party, but I finally figured out what bugs me about it. My clients are everyone from a closeted gay conservative who bought enough incandescent light bulbs to last until he dies (energy doesn't matter much to him...) to the environmental studies department of a local liberal arts college.

Basically, segmentation by customer type is really hard. Segmentation by PROBLEM, on the other hand, is not hard at all. Comfort problems, IAQ problems, ice damming problems - those are easy to create content to address and pull people in, which Peter knows (as well as myself) is the way to drag people into HP.

Perhaps we can adjust the focus from marketing segmentation to problem segmentation? Liberal/conservative doesn't matter when you have frozen pipes and ice dams, you just want the thing fixed. And that's what we do in HP. We fix stuff.

Peter Troast's picture

Happy to have this one re-awakened, Nate!

The distinction, from my perspective, is whether the "problem" based approach provides any relevant focus from a marketing standpoint. Clearly, we want to create content and messaging around comfort that, we hope, draws people to the whole house perspective. But those are lower odds than knowing someone has comfort issues and actively going after them. It is expensive, from a marketing standpoint, to communicate to all people of all stripes and hope we connect with the one who is uncomfortable. 

In contrast, if we know that a certain housing type consistently has a freezing-ass bonus room, we can go after that with radius mailings, or direct targeting. IAQ can at least be narrowed by vulnerable populations (kids and elderly) and we have growing evidence that pregnant women will do just about anything to prepare the nest, particularly if they suspect something's not right. Targeting ice dams is another building stock issue, but more importantly, is time-based. No one fixes their ice dam before it happens. Seasonal and episode-based marketing is a form of segmentation.

Remember the purpose of segmentation is not to force a choice about which limb to sever. It's about narrowing your target audience to focus on the best opportunities and spend less money acquiring customers. It doesn't mean completely foregoing everyone else.  

I completely understand where you are coming from, Peter. My concern comes in that thinking about segmentation makes me tired even considering it.

I see where your points come in, those seem to be much more problem oriented, though, as I'm suggesting. It's not targeting dubious distinctions like 'green advocates' or 'disengaged energy wasters' or liberals, or conservatives, etc. Good luck sorting just those folks out.

For one man operations like myself (and which we both know comprises most HP practitioners), it feels like a big ad agency concept for people that can barely keep the wheels on their business, let alone consider deeper marketing. That's the part that bugs me, I guess. It took me a couple years to figure it out...

All that said, carry on good sir! I'm glad HP has you.

Peter Troast's picture

I fully acknowledge that it's hard. Do me a favor. Sit down with Facebook Ads and walk yourself through the process of selecting an audience. The segmentation options are fascinating. See my slide from this week's Efficiency First webinar below on just a few of the targeting options.

FB is really cool for segmentation. Out of necessity, I reduced marketing spend to $0 last year. I'm doing a crappy job converting hits, but monthly traffic is running 8000-16,000 - all organic. In time, I know I'll need to go back to FB, but for a while I'll stick to writing. =)

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