Nobel Prize-winning economist Dr. Myron Scholes is a lecturer at the Stanford Graduate School of Business and has been a long-time adviser to Aurora. In 1997, he received the Nobel Prize in Economics for the Black-Scholes formula—a method to determine the value of derivatives. This formula is used daily by finance professionals around the world to calculate option pricing.
Following up on last year’s conversation with Dr. Scholes, we were excited to have the opportunity to sit down with him again to hear his insights on how solar companies can position themselves for success in the current market.
Do you have insights on how medium-sized businesses, in our case solar companies, can position their businesses to thrive in the new economy?
I think in the current economy the use of computer technology will allow companies to reduce costs and to worry less about a product—which is very narrowly focused—and move their thinking to “What is it that the client wants, and how can we solve client problems?”
With the data that companies now have from clients, and what clients can tell them, they have an ability to grow their businesses much more quickly.
Data’s the key; the availability of data allows you to build models and ways of thinking about what the client wants.
If the client wants something, they’ll tell you what they want. That helps in running your business much more than just thinking about a product. That is one of the crucial innovations we’re going to have in the next number of years in small to medium-sized businesses: the ability to use data, and the ability to think about a solution for clients and then design a product—not the other way around.
The adoption process for new technologies, like solar, is often thought of in terms of the technology adoption curve—a bell-shaped curve in which a small number of innovators and early adopters begin using the product before it is adopted by a broader majority. Where do you think the solar industry currently fits in that curve?
Well, when you have these curves of technology adoption they always apply somewhere to something and someone—they’re not very generalizable.
The most important thing is really figuring out ways to garner the trust of your clients.
Garnering trust involves education, truth-telling, and really thinking of your customer as someone who’s going to educate you about how you can educate them and build trust.
With the technology that is now becoming available in the solar industry to allow for that trust building, we’ll see large growth. Traditionally, trust is generated by asking your neighbor how they enjoyed something, because you trust your neighbor’s experience. But that’s a very slow and tedious process.
Learning to use the data to figure out how to educate and build trust with clients builds exponential growth.
Some of your research explored irrational behavior of investors and how investment managers can try to account for that. Recognizing that humans don’t always act rationally in making economic decisions, do you have any advice for solar companies on how they might want to communicate with customers or market their products in order to maximize sales?
Obviously, there are a lot of psychological effects that influence people and individuals’ behavior. Taking account of these effects can enhance one’s business, but I personally think that taking a more rational approach is better than the psychological approach. That way you have a repeating business.
I worry that the psychological approach—trying to look at irrational behavior of customers and use that as your focus—leads to inconsistent decisions and doesn’t really allow for the growth of the business. While I believe you can use psychological factors to influence or help get the message across, I don’t really think of that as a modus operandi or a way to actually run the business.
In any part of life where you deal with other individuals, I think you should take the view that truth builds trust. If you lie to your clients it will ruin your reputation. Unfortunately, it might be successful in the short run to try to garner business quickly, to try to take advantage of others, but businesses survive, prosper, and grow through trust-building.
Solar companies, or any company, can benefit from trying to think about how they can continue to educate their potential customers or clients and to try to build a sense of community and trust with them.
Trust is the key ingredient for business growth—and how you achieve that trust is the recipe. That has to be individualized to the customer experience and at the same time is generated by understanding why your customers trust you. The key is learning from your customers as well as educating them.
Some of your other research has looked at the impact of tax policy on markets. In the solar industry, the predominant tax incentive is the Investment Tax Credit (ITC), which allows solar system owners to credit 30% of the system cost against their taxes. The ITC will drop down over time starting in 2020—what can the solar industry do today to start preparing to function with lower tax credit levels?
In preparing to operate without the ITC, you should consider that the better your client base is, and the more you have a “network effect” of satisfied customers sharing their experience, the more possibilities there are to grow the business.
The tax credit is in some ways trying to reduce the costs of innovation or moving in the direction of eliminating externalities in our society. It provides an incentive to allow the first movers to generate information for others and build trust, so that others will then adopt on their own. In my view, a lot of its purpose is to overcome the uncertainty of the value of what you’re moving towards.
This network effect will reduce the need for this information advantage that the government is willing to provide through tax incentives to allow for more education of customers. Over time, the price of solar components will come down, and it will become a bigger industry, and therefore the need for these subsidies will disappear.