It’s Working

From mid-2001 through mid-2003, the $23 million spent for consumer education generated a $35 million net increase to the propane industry’s bottom line income – a 17.5 percent return on investment in the residential market over a 10-year period, according to a Virginia research firm.

From billowy white clouds to cuddly babies and gritty warehouse workers , early promotion of “the exceptional energy” has paid off with increased propane sales due primarily to success in targeting a booming residential housing segment. A Virginia research firm says the campaign earned a 17.5 percent return on investment for 2001-03 advertising.

Energy and Environmental Analysis Inc. said the campaign generated about 29,500 new propane-heated households and 22 million gallons per year of incremental propane sales, which helped offset overall losses in a flat to declining residential market for those years.

The firm was unable to measure what – if any – success the campaign has had on the commercial and industrial market segments that were promoted in those same years because expenditures in those areas were too small to produce results that can be observed from consumption data.

“It is reasonable to assume there is a spillover to other sectors, although we cannot identify it,” said EEA Director Bruce Henning.

EEA was hired for $1 million to quantify the gain in propane sales since the Propane Education & Research Council launched its consumer education campaign almost five years ago. It also was charged with creating a statistical model to measure the net impact of the campaign considering other factors – such as weather, geographic region, the economy and competing fuel prices.

EEA, which has been working on the Market Metrics Initiative since October 2003, presented its findings at the June 3 PERC meeting.

The study measured propane sales growth during the years when campaign spending was at its lowest and Americans were being introduced to “the exceptional energy” with smiling babies, contented babysitters, stinky skunks and busy moms featured in advertisements on television, radio and print. In fact, advertising consultants who planned the campaign projected that the industry would not see any change in consumer buying habits until 2004 – after their awareness of and favorability to the product was prodded by the campaign’s initial messages.

Moreover, those consultants in late 2003 predicted that the propane campaign would generate only 3 or 3.5 percent return based on studies of financial return for other commodity check-off programs. Campaigns for beef, milk, citrus, apples, eggs, watermelon, flowers, cotton, soybeans, wool and orange juice had rates of return between 1.5 and 7 percent.

“The information we got today, in my opinion, was a home run,” beamed Daryl McClendon, chair of the advisory council that works with PERC staff to steer the campaign.

“(The report) exceeded any of our expectations. I am extremely encouraged, especially when you consider that we were just ramping up our campaign in the years that were being measured. This is what our industry has been clamoring for. We now have validation to build on and move forward now that we have a baseline to measure against.”

David Lugar, PERC chairman during the last two years of the campaign, agreed. “I am very impressed with the work of EEA as well as with a return on investment of 17.5 percent. I am very encouraged by that, especially considering the time frame for this study was before our campaign hit full stride. I think it’s really exceptional,” he said.

PERC President Roy Willis conceded that he was surprised by the findings. The nationwide, multi-media campaign was launched with just $4 million in 2001, $9 million in 2002 and $13 million in 2003. PERC now spends about $18 million annually as industry assessments have grown from one-tenth of a cent on each odorized gallon of propane to five-tenths.

“To be honest, I was concerned that we were spread so thin with our resources at the time that we would have to settle for a low end of return-on-investment. That was my fear and concern, and I had prepared the council for that result,” Willis said.

The council’s decision to target promotions at consumers who are buying, building or renovating their homes enabled the campaign to capitalize on a nationwide housing boom during that two-year period.

“I think we found a level of validation for our strategy to focus on the residential sector in order to get the biggest bang for our buck with the limited dollars we had at the time,” he said. “It was risky and it was controversial because it meant that we couldn’t fully serve all markets.”

But with new housing starts surging over 1 million per year, the total growth in propane households hit 327,886. EEA estimates that each propane-heated home consumes an average of 775 gallons annually.

“We were both smart and lucky. It turned out to be a very good strategy. The timing for the propane industry to have the PERC campaign match up with the housing boom couldn’t have been better. We would have missed a historic opportunity had we not done it,” Willis said.

Henning said the study does not carry the optimal “statistical significance” due to complexities of available data and the limited time frame of the study. He said analysts were conservative throughout their study to ensure the calculations were not overly optimistic.

“This is the number we are willing to stand behind with our professional reputation,” he said.

Willis admitted there was growing anxiety about future spending and strategy had the research shown a poor return. PERC council members ponied up another $17 million to run the campaign through 2005, but threatened to pull the plug without proof that the investment is generating more sales.

They now have that verification, but Willis said he is mindful that the report is just one data point. Similar analysis will need to be done annually – at an estimated cost of $250,000 per year – to establish patterns to verify the campaign’s impact and help guide future direction.

Not All Good News

Not all findings from the report were positive. Among others:

Even though the number of new placements is up, total consumption in U.S. households using propane as the primary heating fuel is down due to the number of units being retired from service and the increased efficiency of heating equipment that reduces propane consumption.

The residential market for primary home heating overall is a growing market, primarily driven by population and household growth. Propane’s market share growth prior to 2000 has come primarily at the expense of wood and heating oil; it has not done well competing with electricity or natural gas.

Changes in natural gas distribution technology (plastic pipe, “trenchless” technology, etc.) is making gas system expansion less expensive, while unmatched advances in air conditioning systems (heat pump) have given electricity a leg up in select regions.

Sales of propane units within the manufactured housing segment increased despite a down market overall.

Significant propane price increases since 2003 could further hinder consumer demand.

At the 2001-03 campaign spending level, the propane industry needs to add about 24,600 new households to generate a 10 percent ROI for its investment.

New Tool

Since the campaign launch in 2001, surveys used to measure public perception show that consumers increasingly agree with the key strategic messages being promoted in the ads – propane’s efficiency, reliability, good value and trustworthiness. They also show a significant improvement in propane’s favorability versus electricity.

But the statistical model built by EEA to weigh propane sales growth versus the cost of the campaign provides a new barometer going forward, according to Willis.

“It completely changes our measurement expectations. Increased recognition is great, yet every election has a loser who has 100 percent recognition. Our industry wants to see the return it is getting for its investment, and now we have that kind of baseline measurement,” he said.

Odorized Propane Sales

The Market Metrics Initiative also provides detailed research data and analysis never before made available to the propane industry. Untapped, upgraded data sources (American Petroleum Institute, U.S. Energy Information Administration, Gas Research Institute, American Housing Survey, U.S. Census, Manufactured Housing Association) from 1998 to present were culled to identify residential consumption patterns in greater depth, including:

• Breakout of site-built vs. manufactured housing starts
• Breakout of primary space heating, secondary space heating, water heating and cooking applications
• Geographical breakout for propane consumption, number of households, consumption per household, new households and monthly consumption
• Forecasts of variables that drive industry performance, including weather, price, housing starts, efficiency trends and natural gas expansion

The report also identifies market share gains and losses for all fuels broken down by counties, as well as underlying competitive trends in the residential space heating market. That data was used to project future propane consumption in 2004-06.

What Now?

Information gleaned from the EEA report virtually guarantees that the campaign will continue on course. The 2005 strategy aims public relations and advertising messages at current and prospective homeowners, homebuilders, the manufactured housing market, engine fuel/fleet users and the rural hospitality industry. A new round of TV spots featuring the popular Energy Guys was just filmed for use this fall, and propane’s Exceptional Energy brand is being tagged across the NASCAR racing circuit.

Kate Caskin, PERC senior vice president, said this year’s campaign has three main strategies:

• Concentrate on seasonal advertising. Broadcast advertising was scheduled in two phases – one last spring and another this fall. The strategy to run at higher levels of frequency by running fewer weeks in each phase will continue.
• Coordinate media outreach. Campaign organizers want to complement the ads with public relations efforts by developing and pitching propane stories to get the kind of media endorsements that reinforce the message and maintain visibility during off-air time.
• Marketing partnerships. Sponsorships of popular shows like the Country Music Television’s Flameworthy awards or NASCAR will again be sought to leverage national ad placements to create partnerships and get opportunities to extend the brand and message.

TV advertising will continue in a mix of home planning programs such as HGTV and shows popular to the rural viewer – like NASCAR and country music. The Weather Channel will continue to be used, since temperature-driven programming is particularly relevant to heating and outdoor living themes, Caskin said.

Growth in Site-Built Propane Households 2001 – 2003

Radio spots also will continue on network radio because it enables the message to run on a variety of programs like Paul Harvey, Rush Limbaugh, Country Music and ESPN radio.

Print and online advertising will be used to target consumers looking to buy or build year-round. Special interest publications that contain home plans are the most likely targets for those messages.

Caskin said the new challenge is to find ways to make the Market Metrics data useful to propane retailers nationwide. The Consumer Education Advisory Committee chaired by McClendon already is incorporating that task into its five-year strategic plan, she said.

“This important, new data needs to be shared with and used by the entire industry to meet the threats and capitalize on the opportunities identified in the report,” Willis said. “The days of marketers realizing 2 to 3 percent annual growth just by showing up are over. These are much more competitive times, and we are now prepared to meet those challenges.”