Conclusions of Commercial Lighting Market Research Study

Editor’s note: This is the executive summary of the Commercial Lighting Market Attitudes Study, which I produced in 2004 based on surveys of participants across the commercial lighting product sales channel. I’ve been receiving some renewed interest in the study, which people have found valuable, so I decided to offer the report’s conclusions here. What do you think? Do you agree this is how the lighting industry works? Beyond technology, has the lighting industry really changed much since 2004?

The construction process in North America, which comprises the lighting equipment sales channel, is highly segmented. A number of professionals may participate in a given project, each with his or her own incentives, metrics of success, level of influence and, perhaps most significantly, differing definitions of “value.”

Understanding how these professionals differ and interact is valuable in attempting to understand in greater depth the dynamics of the sales channel. It will be particularly useful when attempting to understand the forces that result in downward pressures on margins and subsequent “commoditization” of lighting equipment.

The design team is paid fees in exchange for its expertise in designing and specifying lighting systems. The design team’s definition of value is driven by quality and innovation. The specifications then reach the contractors on the construction side. The electrical contractor’s interest is to supply the lowest bid possible while earning maximum profit. Due to these dynamics, the contractor’s definition of value is often driven by cost and comfort level (no callbacks). This conflict between competing interests results in serious business problems for the entire sales channel, most significantly the design team and manufacturers and their reps.

The 2004 Commercial Lighting Market Attitudes Study was formed in part to study this issue. The Study posed the questions, “How often do substitutions occur? What market actors participate in the process of challenging the original specifications? Why do the substitutions occur? Who makes the decision? How do problems resulting from substitutions fit into the context of overall business problems?”

In addition, the Study captured broader attitudes and information about the sales channel. Important objectives are:

1. Determine the level of influence of the major participants in the channel in decisions regarding lighting fixture specification, layout of fixtures, and controls specification in typical building projects.
2. Identify significant relationships between these participants.
3. Determine the makeup of lighting work performed by each channel segment, overall and in each major vertical market, and evaluate whether their lighting work expanded, stayed the same or declined between 2002 and 2003, and what they project for 2004.
4. Determine the relative importance of various factors in decision-making for selecting commercial lighting equipment for each channel segment.

Types of Projects

New building construction projects most often are completed under a plan/specify or design/build contract model. In the Study, Architect respondents report that about 80 percent of their projects follow the plan/specify model.

There are essentially two components of a plan/specify building project—design and construction. Both sides report to the owner. The design side includes the design team, which may be comprised of the architect, interior designer, engineer and lighting designer, usually with the architect leading the team. The construction side of the lighting system includes the general contractor and electrical subcontractor. The distributor sells to the contractor, and the manufacturers’ sales representatives act as liaison between the manufacturers and the lighting specifier, electrical contractor and distributor.

Design/Build projects differ in that the architect and the rest of the design team report to the general contractor along with the electrical contractor, providing the owner with a single contact for decision-making and therefore a faster design and construction process. Unless the owner contractually establishes higher quality or innovative building performance goals, the general contractor’s primary incentive is to take as few risks as possible while keeping costs within budget and finishing the project as quickly as possible.

Market Actors

The primary market actor is the end-user—the owner or operator. The end-user holds the purse and is therefore the ultimate decision-making authority. This end-user essentially has three interests—cost (mostly first or initial cost), speed, and meeting performance criteria and expectations.

The design team is often driven by the architect, who is paid design fees from the owner or operator, also called the client or end-user. The architect in turn may develop the lighting design and specifications, or contract an engineering firm or lighting design firm, offering a fixed price negotiated as a percentage of the design budget. Architects are emotionally motivated by pride in the finished work, which is the result of their artistic expression. Architects have an interest in ensuring that the building meets its design goals and owner expectations within budget.

The engineer may work for an electrical engineering firm, an architectural/engineering firm or the owner itself. Most often, the engineer works for an electrical engineering firm that is contracted by the architectural firm to design and specify the electrical systems, including the lighting systems. The engineer is interested in meeting the architect’s and owner’s expectations, code compliance, design integrity and ensuring that the design will result in minimal or no call-backs or changes.

The lighting designer is often either a sole practitioner or works for a small firm (1-10 employees) if independent, or works for another type of firm, such as an architectural firm or interior design firm, as a resident lighting specialist. The lighting designer is most often contracted by an architectural firm but may be contracted by the owner or an interior design firm. The lighting designer’s interest is in maximizing quality for the benefit of occupants and the end-user.

Since the above three participants share contractual obligations, they are likely to communicate effectively on a project. In addition, while not discussed here in detail, the design team may include an interior design firm.

The construction side is made of up of the contractors. The electrical contractor, subcontracted by the general building contractor, is responsible for electrical systems installation, including lighting. The electrical contractor’s interest is in winning the bidding competition with the low bid, earning maximum profit on the resulting fixed price contract, and delivering the building for the bid amount and according to the contract schedule.

Servicing the design and construction teams are the manufacturer sales rep and distributor.

The manufacturer sales rep more often works for a firm that is an independent electrical manufacturer’s representative, but may work for a manufacturer. The rep’s responsibility is to provide timely product and cost information to the lighting specifier, electrical contractor and distributor. The rep is paid by the manufacturer via sales commission. The rep’s interest is to gain the sale by developing relationships, represent manufacturers that are approved to provide products for a given project, deliver superior product and service, and, if necessary, be able to offer the lowest-cost option. The rep is also interested in maximizing volume on the sale. Reps are sometimes called upon to provide design services in the absence of a lighting designer. The distributor stocks and sells lighting products to contractors and end-users, and occasionally, particularly on smaller projects, may also provide design and layout services. The distributor may finance the purchase of materials. The distributor is paid based on a margin on goods sold to its customers, so its interest is to increase sales and margins.

Channel Dynamics

The inherent dynamics in the type of project encountered, as well as the interests of the end-user, often create the “rules of the game.”

Because plan/specify projects typically compensate the architect with fees based on a fixed percentage of the total budget, the architect has an incentive to build an expensive building. Since lighting is one of the last electrical systems installed, however, it may be subjected to value engineering if the project is over budget. Without a specific interest in lighting quality, little effort may be made to protect lighting items specified by the design team during this process.

Because design/build projects are often fast-track jobs, the incentives are focused on speed. This focus results in low risk-taking, lack of holistic design approaches, favoring of rules of thumb and cookie-cutter approaches, and avoidance of new technologies and methods.

In both types of contractual models—plan/specify and design/build, the contract and its incentives are often based on lowest bid, minimum qualifications and speed.

The lighting of a project often is required to meet only minimum qualifications because the end-user typically is uneducated about lighting. As a result, the end-user often does not contractually define strong lighting performance criteria and expectations from a viewpoint that recognizes higher quality and innovation. In doing so, the end-user abdicates the definition of “value” to the sales channel. Defining value as the ratio of quality to first cost, each market participant may define “value” differently, particularly between the design and construction sides of the project. To the design side, quality and innovation more often drive value, while to the construction side, cost more often drives value.

This is because electrical contractors, again, usually win contracts by supplying the lowest bid, and while having little influence compared to the design team in regards to fixture layout and specification, nonetheless have an arguably high level of influence over what is actually in-stalled. The contractor, in fact, is ultimately responsible with meeting the design intent.

As a result, electrical contractors, in order to supply the lowest bid possible, have incentive to substitute lighting items to reduce cost. In addition, with little time to prepare the bid, contractors often may not prepare realistic bids. After winning the contract with a low bid, the contractor must then attempt to maximize profit. Part of earning maximum profit is to minimize the amount of time spent on installation and also the number of callbacks, or occasions where the contractor must return to the job site to correct an electrical system problem after installation. As a result, the contractor’s interest is to install equipment in which he or she has confidence that it is easy to install, is uncomplicated, and will function properly. To earn maximum profit, the contractor also has incentive to attempt to “value engineer” the lighting project if permitted by the architect and/or the end-user, which provides the opportunity to substitute and purchase lower-cost items on behalf of the end-user. Distributors and manufacturer sales reps, in turn, are given incentive to have offerings ready to satisfy contractor focus on purchasing lower-cost items—through substitution packages. Once a specification leaves the design team, therefore, it is open prey in a game that favors lowest cost.

The end-user, unaware of the benefits of higher lighting quality, often allows these practices to occur. End-users who attempt to become more educated, in fact, are often confused about options due to conflicting recommendations from different actors in the sales channel.

In a number of building projects, quality is not protected unless it specifically relates to a performance target contractually established by the owner. Examples of protected items include HVAC designs that ensure indoor air quality (due to liability concerns) and artwork or materials in the lobby (due to marketing or vanity concerns). Lighting quality does not have an associated liability issue, and is not regarded as a vanity item in most commercial spaces.

Unless the end-user understands the issues and believes in the lighting specifier’s design vision, often requiring the lighting designer or architect to continue championing it until the project’s conclusion, commercial lighting purchases are therefore often focused on cost.

The primary casualty of this business model is, of course, most often design integrity—lighting quality itself. Interestingly, an end-user will care about design quality enough to work with a design team that includes a lighting designer being paid fees to develop the design and specifications, but then discount quality to reduce cost later in the project. In this situation, the end-user appears to be paying a premium for recommendations from a lighting specialist that are discounted later based on the advice of market participants who do not have exceptional expertise in lighting design. The result may be an installation with inappropriate lighting.

Another significant casualty of the prevailing business model is profit margins throughout the sales channel. Despite a small, vibrant community of high-end manufacturers and lighting specialists paid for their creative talent, the laws of supply and demand have pressured the supply chain to favor volume via commodity products versus higher profits via superior products and added value. The focus on first cost not only depresses profit margins and causes commoditization, but results in lower risk taking and innovation, lower investment in R&D, less choice, long product cycles for obsolete technologies, lesser rewards for being different from the pack, restriction of new technologies to high-price niches despite their potential for broad application, and a slow rate of penetration for new technologies. A significant number of innovations in the lighting industry, in fact, occur at the component level and are imported from Europe.

Lighting designers worry that not only is lighting under threat of commoditization, but so is lighting design. Manufacturer sales reps and distributors often provide design services them-selves, as demonstrated in the Study, particularly on smaller projects. Lighting designers are espe-cially concerned about this issue, as it directly threatens the viability of their profession.

The prevailing business model has led the president of the National Electrical Manufacturers Association (NEMRA) to conclude, “Educated and informed users will drive demand for lighting products that deliver desired features and benefits. Only then will lighting function take precedence over price.” The end-user “drives the bus.” For this reason, a number of lighting professionals refuse to define lighting quality according to their own or an independent standard, and instead, perhaps cynically or just pragmatically, define quality as “whatever the client thinks it is.” As stated in Vision 2020: The Lighting Technology Road Map:

“The overriding market-related barrier … is the lack of a strong business case for advanced lighting that can drive end-user demand. Many case studies point to the advantages of high-quality lighting in improving productivity, employee retention, error-reduction, and workplace safety; in attracting retail customers and improving retail sales; and in reducing energy consumption and other operating and maintenance costs. Yet these benefits have not yet been adequately documented, measured, and communicated to make a compelling case to tenants and building owners. Tenants and building owners will be key to driving demand for higher-quality lighting, where life-cycle re-turns justify the greater initial cost of their purchase and installation. Architects, lighting specifiers, lighting manufacturers, and industry trade associations all will have pivotal roles in demonstrating and communicating these life-cycle benefits, and many will re-quire ongoing education on advanced lighting technologies and design standards to perform these roles effectively.”

Primary Conclusions

Major findings for the 2004 Commercial Lighting Market Attitudes Study run throughout this research report, divided by section and intermingled with associated graphs and tables.

Several primary conclusions are shown be-low, which are projectable to the surveyed uni-verse and suggestive of the lighting market. The research suggests:

#1: Lighting designers and engineers are most influential in fixture specification, fixture layout and controls specification decisions, while architects maintain the highest amount of contact with the owner.

The Study findings suggest that lighting designers and engineers are considered most influential in decisions related to lighting fixture specification, fixture layout, and controls specification. The lighting designer is considered most influential by architects and the engineer is considered most influential by contractors and distributors.

Survey respondents on the design team—lighting designers, architects and engineers, consider themselves, on average, to be most influential in regards to lighting fixture specification and layout. Manufacturer Sales Rep respondents, on average, consider the lighting designer to be most influential in decision-making related to both fixture specification and layout. Electrical Contractor and Distributor respondents, on aver-age, consider the engineer to have the highest level of influence in fixture specification decisions, but differ on layout; Contractor respondents regard the architect as most influential, while Distributor respondents regard the lighting designer as most influential.

Regarding controls specification, Lighting Design and Architect respondents, on average, consider the lighting designer to have the highest level of influence in decision-making. Engineer, Manufacturer Sales Rep, Electrical Contractor and Distributor respondents all consider the engineer as most influential in these decisions.

Besides perceptions, amount of contact with the owner is arguably a measure of influence. Architect respondents, on average, report a high-er amount of contact than the other surveyed professional groups, followed by Lighting Design and Electrical Contractor respondents.

While the electrical contractor is not considered significantly influential in fixture specification, fixture layout or controls specification, Electrical Contractor respondents, on average, report a fair amount of contact with the owner, almost as much as Lighting Design respondents.

#2: Manufacturer sales reps report the highest incidence of substitutions occurring on their projects, followed by engineers and lighting designers—the latter two being the very market actors considered most influential in decisions related to fixture specification, fixture layout and controls specification. On average, substitutions occur “sometimes” for lighting designers, architect and engineers, although design team members generally regard the practice with hostility when it occurs without their consent or control.

The Study findings suggest that members of the design team believe that substitutions have a strong impact on their work but, on average, regard them as occurring “sometimes” on their new construction projects. Manufacturer sales reps are most sensitive to substitutions, on aver-age describing their incidence as occurring closer to “frequently” than “sometimes.”

Nonetheless, more than one-third of Lighting Design respondents report it happens “frequently.” More than two-thirds of Architect respondents do not see it as happening more often than “sometimes” on their new construction projects and one-fifth report it occurs “rarely.” Nearly 40 percent of Engineer respondents report it “frequently” occurs and about one-third say it occurs “sometimes.” Meanwhile, nearly 70 per-cent of Manufacturer Sales Rep respondents report that it occurs “frequently” and about 30 percent say it occurs “sometimes.”

#3: Design team members cite a broad range of reasons for substitutions occurring, including value engineering by electrical contractors, substitutions by reps and distributors, poorly written specs, etc. Electrical con-tractors say they substitute in a significant number of projects, primarily to “reduce cost to the owner,” but also to recommend products that are more energy-efficient and to solve delivery/availability problems.

The Study findings suggest that there is a broad range of reasons for substitutions occurring, from inattention to detail at the specification end through unethical business practices in the rest of the sales channel, allowed by an end-user who is uneducated. Electrical contractors, for their part, say they substitute mostly to save money for the owner, and also recommend products that are more energy-efficient, substitute products that are available, and use products that they’re more comfortable with. Comparatively few cite “poorly written specifications.”

Study participants were asked numerous questions about substitutions. One question was open-ended and asked lighting designers, architects, engineers and manufacturer sales reps to indicate why substitutions occurred.

To summarize and paraphrase, a number of Lighting Design respondents answered:

• Electrical contractors value-engineer the project to provide owner savings and in-crease their own profit.
• Specification not specific enough or poorly worded.
• Specification a single-name specification.
• Review of equals not carried out properly.
• Lead time/Delivery schedule problems—the specified item is not available.
• The specification is not held by the architect.
• Rep packaging.
• Substitutions by the distributor who has a relationship with the electrical contractor.
• Owner and architect allowing above business practices to compromise design integrity due to poor knowledge of lighting.

Architect respondents said:

• The client overrides intent without notifying the architect.
• Contractor substitutions without consulting the architect or “sneaking one past” the architect in submittals.
• The contractor does not order products in a timely manner.
• The contractor cuts corners to reduce cost without understanding design intent.
• Reps packaging projects to enable them to bid all the items on a given project, some of which are not in the fixture list.
• Delivery problems.
• Cost/Budget.
• Value engineering.

Engineer respondents said:

• Cost reduction if project is over budget.
• The item is not available.
• Value engineering.
• The lowest bid always wins on government contracts.
• Distributors and reps are allied to packages and attempt to substitute.

• Acceptable alternatives are approved.
• Improper equipment was selected.
• The spec calls “for equal.”
• The contractor does not follow the specifications.

Electrical Contractor respondents report that they substitute alternatives for the original specifications in an average of 32% of their industrial/commercial lighting projects.

Electrical contractors were asked, if they engaged in substitutions, what the three most common reasons are.

The top three reasons are:

• “To reduce cost to the owner” (78%).
• “To recommend products that are more energy-efficient” (57%).
• “The specified item isn’t available” (39%).

About one-fourth (26%) cited “more comfortable with alternative supplier,” which is likely due to an interest in minimizing callbacks. Only 22% cite “poorly written specifications.”

#4: Engineers submit multi-name specifications more often than single-name specifications, and yet experience the highest incidence of substitutions occurring on their new construction projects. Architects submit single-name specifications more often than lighting designers or engineers, and yet experience the lowest incidence of substitutions.

The Study findings suggest that architects submit single-name specifications most frequently, followed by lighting designers. Engineers, in contrast, submit multi-name specifications more frequently.

Interestingly, Engineer respondents report the highest incidence of substitutions, followed by Lighting Design and Architect respondents. While a number of respondents blame the occurrence of substitutions on single-name specifications, the data suggest an opposite trend—that the greater the preference of design team members for multi-name specifications, the higher the reported incidence of substitutions occurring on their new construction projects. This raises interesting research questions that should be explored in future market research studies.

#5: A high percentage of manufacturer sales reps engage in packaging and add a markup to product cost to maximize profit on a sale, and a majority offer lighting design services when a lighting designer is not present on a project.

The Study findings suggest that while manufacturer sales reps regard superior product and service as the formula for success versus lowest price, a significant number of reps engage in packaging—bundling fixture lines on a project and attempting to sell them as a package for a competitive price. This practice is regarded with hostility by some of the other respondents. A significant number add a markup to their cost to increase their profit on the sale above the sales commission. In addition, a majority of sales reps attempt to offer lighting design services as a value-add to help close the sale when a lighting designer is not present on a project. This practice is regarded with hostility by some designers, who view it as competition and degrading the value of the discipline.

Nearly half of Manufacturer Sales Rep respondents “frequently” bundle fixture lines, while about one-fourth do it “always.” Nearly half “frequently” add a markup to the selling price, while more than one-third do this “some-times.” Nearly 70 percent “frequently” provide specification and layout services if a lighting designer is not present on a project.

Interesting research questions could be posed in future market research that explore in greater depth the practice of packaging and its effect on lighting equipment specification and substitutions to original specifications.

#6: Distributors choose lighting commercial lighting equipment in a significant number of projects and are often asked to submit a competitive bid to the original specification.

The Study findings suggest that distributors specify or select lighting equipment in a significant number of industrial/commercial lighting projects and are often asked to submit a competitive bid to the original specification.

Distributor respondents report that they specify/select lighting equipment in an average of 42% of their industrial/commercial lighting projects. More than one-half report that they are asked to submit a competitive bid to the original specification “frequently,” while one out of five are asked “always” and one out of five are asked “sometimes.”

#7: The market outlook in 2003 was mixed, but market actors, often overwhelmingly, project an expansion of their overall lighting business in 2004 versus 2003.

The Study findings suggest that the market has mixed reactions to their sales performance in 2003. Higher percentages of each market segment claim that their lighting sale/work (overall business) increased or stayed the same in 2003 over 2002.

A majority of Lighting Design (52%), Manufacturer Sales Rep (74%) and Distributor (71%) respondents report that their overall lighting business increased in 2003 over 2002. A majority of Architect (56%) and Engineer (48%) respondents report that their overall lighting business stayed the same in 2003 versus 2002.

The Study findings further suggest that the market overall believes that 2004 will see greater sales and lighting project work than 2003. Most market actors believe their business will expand in 2004 in very large percentages, with engineers being the most conservative, with a significant number projecting that their level of lighting project work will stay the same in 2004.

A majority of Lighting Design (84%), Architect (70%), Manufacturer Sales Rep (96%), Electrical Contractor (75%) and Distributor (87%) respondents believe their overall lighting business will increase in 2004 over 2003. Engineer respondents are most conservative; while 49% project an increase in overall business, 45% project the same level of business as 2003.

#8: Market actors are influenced differently by various product attributes and project factors. The average lighting designer, for example, regards lighting quality (visual comfort, color, etc.) to be most important, while the average architect considers aesthetics to be most important, with lighting quality slightly behind. The average engineer considers light level to be the most important selection factor. The average electrical contractor and distributor regard previous experience with the equipment as being most important.

The Study findings suggest that each market segment has slightly different lists of factors it regards as most influential in selecting, specifying or recommending commercial lighting equipment.

Respondents were given a list of factors that are commonly represented in the selection and specification of commercial lighting equipment. They were also given a 1-5 scale, with “1” being “not important” and “5” being “very important,” and asked to rate each of the 15 factors. The responses were compiled into weighted averages.

The average Lighting Design respondent considers six out of the 15 factors to be of high importance (>4.0 rating). These are: lighting quality (visual comfort, color, etc.) (4.5), op-tics/light distribution (4.5), aesthetics (4.3), light level (4.2), previous experience with equipment (4.1), durability and ease of maintenance (4.0), and reputation of the manufacturer (4.0).

The average Architect respondent considers five out of the 15 factors to be of high importance. These are: aesthetics (4.6), lighting quality (visual comfort, color, etc.) (4.6), op-tics/light distribution (4.2), and initial cost of the equipment (4.0).

The average Engineer respondent considers four out of the 15 factors to be of high importance. These are: light level (4.2), lighting quality (visual comfort, color, etc.) (4.2), op-tics/light distribution (4.0) and aesthetics (4.0).

Alone of the market actors studied, manufacturer sales representatives were asked about what they believed their clients’ perceptions to be, not their own, in response to this question. Out of 15 factors, the average Manufacturer Sales Rep respondent reports his/her client considers five to be of high importance. These are: customer service provided by the sales rep (4.4), aesthetics (4.2), optics/light distribution (4.1), lighting quality (visual comfort, color, etc.) (4.1) and light level (4.0).

The average Electrical Contractor respondent considers six out of the 15 factors to be of high importance. These are: previous experience with the equipment (4.3), light level (4.2), life-cycle cost/energy efficiency (4.2), lighting quality (visual comfort, color, etc.) (4.2), initial cost of the equipment (4.1) and optics/light distribution (4.1).

The average Distributor respondent considers five factors to be of high importance. These are: previous experience with the equipment (4.2), customer service provided by the sales rep (4.1), lead times/fast track shipping (4.1), light level (4.0) and initial cost (4.0).