Finding the most attractive price point for an Energy Broker platform

A few days ago I wrote a post about setting a sales foundation for an energy broker platform ("ED") that a client of mine was working on.   After a few discussions, the client asked that I think about how to price this platform offering.  I immediately began to  consider about the amount of revenue a typical broker grosses and nets.  Why is this important for EDBecause it impacts ED’s pricing, more importantly finding a price point that’s palatable to ED’s target market reduces friction throughout the sales process.  Speaking of target market, let’s first understand the broker landscape, then we’ll make some assumptions to determine average broker gross revenue, and finally we’ll land on a plausible price target for ED. 

So what does the broker landscape look like?  The only valid source we can reference is the DNV KEMA Channel Partner Study that was completed in 2012.  We understand there are hundreds, if not thousands, of unregistered people selling electricity (e.g. MLM agents) but for the sake of this exercise let’s focus on the ecosystem as defined by DNV KEMA.

The chart below shows a total of 600 channel partners of which 75% of these firms have less than 1,000 customers. This is not earth shattering.  It simply confirms what we already know about this space.  It’s highly fragmented and a majority of these firms can be considered lifestyle companies and/or a means to generate passive revenue for the part-time energy broker.

To get to a gross revenue number for an average brokerage firm we need to make some assumptions.  Let’s assume the average customer consumes 100,000 kwh per year.  This means that the segments have 20M, 45M, and 1.485M Mwh under management (e.g. 450 brokerage firms * 1,000 customers*100,000 kwh = 45M Mwh) respectively.   I have no idea if this passes the eye test.  Perhaps an industry insider could tell me.  However, I do know that if I take the Mwh under management and multiply by a conservative $3/Mwh commission then I’ll be able to see the total estimated revenue for these 3 broker segments:

Again, I’m not sure the estimated revenue for each segment passes the eye test, but when I divide the estimated revenue for each segment by the number of firms in the segment, here’s what I get:

Now this looks accurate to me.  As a former commercial broker that focused on the SMB market these numbers feel about right.  For example, the broker segment that has ~1,000 SMB customers (consuming ~100,000 kwh annually) and getting a $3/MWh commission will have annual revenues in the $300,000 range.  I personally know of several firms that fall into this segment.

Ok, so what does this have to do with pricing? If we have a relatively good understanding of each segment’s annual revenue, then we’re able to determine with reasonable accuracy a dollar range each firm dedicates to SG&A expenses.   Why do we care about SG&A?  Because SG&A is the line item that’s positively influenced by using energyDesk.  Operations are where energyDesk provides immense value to the broker.  Knowing what the firm spends in SG&A gives us a baseline of the dollars ED can capture from the brokerage firm.  Take a look the chart below that assumes brokers spends 15% of revenue on SG&A expenses.

We can safely assume that a brokerage firm that grosses $300k in annual revenue spends about $45k in SG&A.  Now consider the operational demands of brokering electricity (info gathering, pricing deals with various suppliers, organizing the info, quoting prospects, contracting, reconciling commission, etc.) many of which are administrative.  It’s a safe assumption that a firm grossing $300/year has some administrative help performing these tasks…even on a part-time basis.  And the cost of this help when annualized is probably in the $45,000 range plus or minus $5,000.  We can look at this and say, “…foremost firms in this segment, ED has a potential revenue pool of $45,000 (e.g. ED replaces this admin and does a better job).  Or ED can make this admin more efficient and capture 10% ($4,500) of his/her annual salary as ED revenue.

If choose the later then ED now has an expected ARR of $4,500/broker that equates to an MRR of $375/broker.  This feels about right especially when you consider comparables such as Salesforce who’s monthly pricing range is $5 - $300 per user.  Given ED is designed to manages all aspects of operations for the energy broker, I think it can charge a premium of $375/user/month.

$375/user/month sounds small but it equates to $4,500/user/year.  And a brokerage firm with just three brokers will drive $13,500 in ARR.  There’s a great opportunity to create a highly profitable enterprise if ED can capture these users via an online channel at a low customer acquisition cost (CAC).

At the end of the day a monthly fee near a target price of $375/user and a focus on the segment that constitutes 75% of the broker landscape makes sense to me…assuming ED uses a subscription based pricing model.  Conversely, ED can hold to the industry norm of charging Mils.  If ED charges $0.50/Mwh per month for the Mwh that are run through ED then the typical firm in the middle segment would pay an ARR of $50,000 and MRR of $4,166. to energyDesk.  Again, this assumes that this segment has ~1,000 customer consuming 100,000 kwh annually and are running this through the ED platform.  I know…there’s a huge delta between $375/mo and $4,166/mo.  Which end of the spectrum will promote sales and allow ED to grow into a decent size business?  We’ll never know until we ask the broker! 

Agree or disagree? What price range do you think the market can bear?