Getting heat pumps right

Latitude Media, podcast at the frontier of climate technology. I'm Shea Kahn, and this is Catalyst. 다음 영상에서 만나요.

I actually did go to try to get one installed and then the whole, you know, classic story around heat pump adoption on that side really hit me where I had to talk to multiple people to even find a contractor would sell me one. Like most people wouldn't even wouldn't even sell me a heat pump when I wanted it. This week, figuring out the right way to do heat pumps.

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All right. So bit of a personal story is a segue into this episode. So I live in Berkeley, as many of you know. I moved into this house in twenty eighteen. We bought the house. And when we were looking at the house. We learned that there is no central heating or air conditioning. In fact, there's basically no heating or air conditioning at all. And we moved into it. The house was built in 1910.

And we were still pretty new to the area. And so my wife and I thought, wow, maybe Berkeley is the only climate in the country that requires neither heating nor air conditioning at any time. So we bought the house. We of course pretty quickly learned that's not true, even in Berkeley, California. You definitely need heating and it's nice to have air conditioning as well.

So for a while we made do with like, you know, room heaters and things like that. And then my wife got pregnant and we were expecting a child and we realized that that's not really gonna work in a baby's room. And so we need to actually get mini splits. And so we went through the process. This is now in 2021.

of getting heat pumps installed. We got a a heat pump um made by an unnamed uh Asian manufacturer, large company. I won't name them for the sake of what I'm about to tell you. Um and two mini splits. And got it all installed in twenty twenty one. And I gotta tell you, that experience explained very well to me why the heat pump market has not taken off more than it has. Now, of course, it is growing, but It's not really in that inflection point of growth yet. And

At least from my N of one personal experience, I understand why. It was more expensive than I expected it to be. It was a really poor sales experience. The installation was kind of messy. And then of course the unit itself kind of sucked. The controls were difficult. It broke all the time. We just, it was not a good experience for me. And despite the fact that I was excited that I had a heat pump finally, um, it has always made me a little bit more skeptical of this market.

So fast forward and my firm, Energy Impact Partners, invested in a company called Quilt. Which is trying to basically change that entire process. Everything from how you buy heat bumps to the actual product itself and the user experience thereof. It's a vertically integrated

strategy. It's a big swing at heat pump world. So when we invested in quilt, I realized this was an opportunity for me to see if it really could be done different. Um and so as of a couple of weeks ago, I am customer, I believe, number seven.

of quilt. I got my quilt installed. It replaced the other unit that I already had. And without giving you a sales pitch for it, it was a dramatically different experience. And every step along the way, including through to today when they're just running in my house. And I think it is easy to underappreciate. How much room there is to innovate in sectors like HVAC. Um, and this is important, obviously, because.

You know, heat pumps are a big lever in building decarbonization. Residential heat pumps in particular. There's not not a lot you can do that's bigger in decarbonizing homes, other than maybe installing solar or maybe buying yourself an electric vehicle and and charging. So I wanted to have Paul Lambert, who's the the CEO and co-founder of Quilt on, not to talk to me so much about my experience, but rather to talk about what he learned about the HVAC market, about the heat pump market.

and how those lessons are getting adopted in trying to build a different version of a customer experience. All right, here's Paul. Paul, welcome. Thank you.

All right. So I want to talk about so actually let me ask you this. When did you start like looking into e-pump world? How long ago was that? Very end of twenty twenty one. I was on paternity leave and I was trying to figure out how I was gonna get into climate tech and I saw this tweet that was about how heat pumps are the sort of unsung hero uh sleeper hit climate solution and I just went down the rabbit hole and I haven't come back.

Okay, so you're still relatively fresh eyes on this, three years in now, more or less, to thinking about this sector. I guess I'm interested as you started digging in, going down that rabbit hole in the first place, like What were your observations at that time around the eat bump market? Either the products that you were seeing out there or like how they were getting installed and sold, adopted?

Yeah, it did start with the product. So I started Googling heat pumps, probably the same thing as everyone else, and I found um these, you know, mini splits. I didn't know what that was. I had to look it up. That's a new concept for people who haven't Either had it as an AC before or new to heat pumps,'cause you you can't make a fossil fuel mini split. It just doesn't make sense.

And um it kinda struck me right away that these things could potentially be really cool, but they were really ugly. And and it m being really cool, like you could could control each temperature in every room and that was something I was struggling with.

Um, we had a we had a newborn at home and we were honestly stressing about the temperature in in that room. You know, you're not allowed allowed to put blankets in the in the room uh or in the crib with the the the baby, so you're always really controlling the temperature of that room and the whole rest of the house will suffer. And um And you know, I spent most of my career making consumer technology and it just kinda jumped out at me as something that had kind of been

not really looked at in a c in a couple of decades. It kinda felt like a relic of the late twentieth century product design. Um, so that's what first jumped out at me. And then I actually did go to try to get one installed and then the h the whole you know, classic story around heat pump adoption on that side really hit me, where I had to talk to multiple people to even find a contractor would sell me one. Like most people w wouldn't even wouldn't even sell me a heat pump when I wanted it.

Right. So I think you're getting to the I don't know, two of the common complaints about heat pumps. market as it stands today, which is both the product is like for various reasons kind of mediocre. And the second is that it's actually hard to get it installed.

And installers, HVAC tacticians generally don't want to give you a heat pump, even if you want one for for a variety of reasons. So okay, you you spend a bunch of time, you learn about this market. I guess I want to talk about how it is structured today, and that'll segue into how it could be better. But

Maybe let's step back at the high level. Like, can you walk me through the value chain of the heat pump market as it exists today? Like who are the big players and how do they interact in the ecosystem? Yeah, so I'll also focus on residential heat pumps because for fre freeding and cooling'cause

I think most people on the pod know that heat pumps are technically just everywhere, right? They're in cars, they're in fridges, they're um in l tons of commercial applications. So for residential heat pumps, um they are m there there's sort of the central AC and there's kind of the the large American brands people will know there that that they've been producing them for a while, you know, carrier and train and companies like that.

Um with the mini split market, it tends to be pretty dominated by Asian brands. So a lot of Japanese companies, Mitsubishi, Daiken, Fujitsu are all quite popular. LG, Samsung all make them as well. So there's also some Chinese companies, Gri and Medea. Those are those are sort of the the the big Players. And yeah, the way it works is they have factories in Asia that produce these products at very, very high volume for a global market.

And then they're sold to uh distributors in in each country. Uh very large ones in the US. And so there's there's kind of a markup there that happens. And then the distributor will go on and sell it to end contractors who will hold the inventory, and then the contractors will go in.

uh sell that on to the end homeowner. And and at each stage of that chain, of course, there's there's a markup on the pricing. And the final, you know, package of goods and services that the homeowner is buying is this is the labor, the hardware, and the materials.

So there's the hardware that might have the brand on it, there's materials, line set covers, like all this stuff that isn't you don't think about but is actually a big part of it. And then and then the labor is labor pretty significant as well. Um so that's kind of the that's the full value chain today in kind of the standard industry.

That's a good segue actually into the question of the the cost stack. Like for a for a typical homeowner today who wants to get, I don't know, I mean it obviously depends how many units you're getting and so on, but say you're getting a couple mini splits or three or four mini splits, you pick your amount. Um getting installed from scratch. Like

Uh to a first order, how much of the cost is the heat pump versus all the other stuff? This is one thing people I remember in the early days of residential solar, people often did not appreciate and that has like reared its ugly head in a substantial fashion over time, which is people would look at the

trajectory of the cost of solar panels. They'd be like, oh, solar is getting really cheap. And it turns out it's not. In fact, in the US in particular, solar residential solar is so ridiculously expensive. despite the fact that panels have gotten very cheap, because most of the cost is outside the panel. It's either other hardware or more importantly, it's the soft cost, the permitting, the installation, labor, all that kind of stuff. So how does that is that a similar dynamic in in heat pumps?

It is. It's a very similar dynamic and uh It's not quite as dramatic because the the costs are not dropping at the same pace they were on the panels. But when I look at the three big cost drivers to our final costs, so labor, materials, like non hardware materials and our our hardware.

They're actually in that order in terms of size. So we spend the most on labor, the second most on materials. So I'm talking about like line sets and mounting brackets and things. And then the third on our actual hardware, the thing that says quilt on it, the stuff that says quilt on it, the dial, the indoor unit, the outdoor unit. And that was really surprising for me as well. Um, so that yeah, that's the same structure of the industry. The relative cost of the heat pump itself.

is it's small. It's probably twenty percent or so of the overall cost. And and this is uh there's actually a mistake I think some people make where they Google mini split and they'll find uh They go to HVAC Direct or something online and they're like, Oh, I can buy this Mitsubishi for fifteen hundred bucks for um the indoor and the outdoor unit. Like why is this guy trying to sell it to me for seven K? Well it turns out seven K is actually a fair price because

That's actually those, you know, you have to add the materials and labor and then everything else associated with it. So I mean, to be honest with you, I'm not that surprised that labor is number one. I am surprised that materials are number two. Is that just because so it's it's line sets and stuff like that? Is that just because

That's like commodity I I'm trying to think what that entails and what if it could be high margin for somebody. Or is it just that, you know, people's houses are big and so you the line sets are a bunch of I d you tell me what they're made out of, but like a bunch of aluminum or whatever that like you you have to buy enough of it that there's no no way to drive those costs down or something.

Yeah, it's both those things. So there are certain pieces that are extremely high margins and the distributors are just making a lot of money on. And there are other parts that are literally just got really expensive, like copper in particular. Copper is expensive. The line sets are mostly copper. And You know, one of the downsides, I guess, of the Duckless architecture is you are piping every room to an outdoor unit versus uh a central system, you have one.

central system that's being piped out to the outdoor unit. So you do use uh more copper. And that that is the biggest one of the materials. But there's a lot of others as well. Um the line hide cover. So this means you have the line set on the side of the house. It's kind of this bundle of Copper wires and data and power and stuff. You hide it with the thing that looks like a gutter. It's a literally like a plastic gutter.

Uh is the typical distributors today. If you go at kind of retail, if you're if you're a contractor and you go buy it from one of the big distributors, you're paying about$25 a foot for that line high. We've been able to source it from China for less than a dollar a foot. The exact same product. So there are certain items like that that are just kind of crazy expensive and then there's there's these others that are just legitimately costly.

Okay, that's interesting'cause that my reaction was going to be that I assume there's probably a lot you can do to reduce labor costs. And I wanna talk about what some of those things might be'cause this was also a uh uh has been a big focus in in solar and other spaces, like what can you do to leverage modern technology to drive down those costs?

Um, but the question from a cost perspective is really how much can you drive down those other two categories of cost? And if you had asked me, I would have said, well, probably there's a fair bit you could do on the heat pump itself. But actually not much on those other materials. But sounds like you think actually there is a bunch of headroom in the other materials.

I do. And I think it's one of the advantages of of, you know, m my company is vertically integrated in that we have those relationships overseas and we can um play the role of the distributor in certain cases and then get those cost advantages and bring them through to the contracting side of the business.

um or our contractor partners, we can help them source lower cost supplies. But yeah, if you were to look at those three buckets, those cost drivers and which ones we're gonna have the biggest improvement on over the next two, three years, it's the materials.

What about labor? To to a first order, my assumption would be that the cost of labor is mostly dictated by the number of truck rolls that you're doing out to a given house. Am I am I right about that or is it more um how much time it takes to do the installation once everybody's on site. Uh both. Uh so you know some some jobs are a lot larger than others. Um and it it does motivate us to do larger larger jobs.

Um the other component is also the site visit. So there's the installation, but there's also the visit that usually happens before the installation happens. And there's a lot of people working on trying to make that more virtual, including us in certain scenarios, but we're not there yet. Uh and I mean as an industry, not just as a company, where we can do virtual site visits and then not, you know, ha have it be good enough quality that you're not paying the price when with with the one. Yeah.

Totally. I think this is one thing that like people assume is going to be easier than it actually is. And not to over-reference solar, but it did work in solar mostly. But in solar, you have a pretty easy like the thing that had to be invented, Sungevity was really the company was like the first to pioneer this, right? Was was use. Uh Use geospatial imagery, use satellite imagery to map out the roof.

Look at whether there are trees blocking and providing shade, and you can get a pretty good approximation based on the square footage of the home, what the power demand is going to be, and based on the roof from above, how much solar you're going to be able to put there.

That's relatively straightforward. Having gone through the experience now twice with heat pumps, I can tell you there's a variety of things that are way more complicated about the heat pumps than than solar that I I can't quite picture how you could solve. without a truck roll to my house. There's a questionnaire you could ask me, but it would be kind of a annoying c process for me and I wouldn't trust my answers anyway. So I mean, I guess

I I can see why we're not there yet on a totally virtual quote that is trustworthy on heat pumps. It's not clear to me whether we can ever get there. Do you think there's a way we get there ultimately, or is this just like a folly of a thing.'Cause there are a lot of people trying to do it or talking about it anyway. Yeah, I mean I wouldn't be a good Silicon Valley tech entrepreneur if I could say that it's impossible, right? Like there's gotta be some tech that could be invented, but

The way we're thinking about it is you know, you c you get a classification of sort of difficulty of jobs. So um if it's a a home that maybe it maybe was built um as part of development housing we've actually already installed on that house. So we can r um the the same sort of plan, but it's just a different version of that plan.

Um and maybe it was an easy install and it's just all external walls. And we have these sort of confidence drivers that could make it kind of a class one. And then we're gonna we feel like there's a class error that we will be able to get to virtual installs pretty quickly. Um another if it's a single room

out uh or yeah, single single zone, one one heat pump, exterior wall, those are usually pretty easy. Um but the difficulty level can get really, really high. Like we've seen some crazy installs with San Francisco. you know, Victorians, row houses that you're going through a hundred year old structure, multiple levels, neighbors on both sides. There I do not see how you're ever gonna do that virtually, unless at least not with some pretty good robots and and you know, X-ray vision.

What about the so that's like how do you reduce the number of truck rolls before you install the thing? Um what is there, where is there headroom in the installation labor itself? Like what can you do to drive that down? Yeah, I think that there is going to be um so we've actually already done some in that we made the unit quite light. So you can one one person can do it as opposed to two. And that's that's a huge deal. Uh we have also um if you look at like where a lot of the cost is, it's um

Uh when it comes to kinda like in wall installations, that's a very complicated one. So meaning like you have to run the line set through the wall versus on the outside of the building. And um there might just be smarter design things we can do there. Like um either create a line hide that doesn't bother people in any way and is actually pretty invisible. So more people are willing to do the outside wall.

Or we just talk to the homeowner at a time where they're already gonna be doing some renovation or have their walls open. Um, I don't see any silver bullet there to be honest. I think it is uh

a series of iterations of like looking at the pain points, where are the hot spots, solving them. It's almost like optimizing software in a way, right? You just kind of look at the whole process and figure out where you can make the biggest impact. And luckily we're early enough in our journey that I think there's still a lot of headroom on the table. Um so we I am expecting to see improvements there, but it will start to plateau eventually.

Unl unless there's some radical technology change that we can bring to the table. Like um, for example, w not having a pipe refrigerant at all, imagine that was that was something we could do. That would be a huge production driver. Are you tired of overpaying for big name PR firms but not really knowing what they're delivering? Is your comms team wasting time reviewing lengthy messaging briefs and decks?

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All right. So we talked a little bit about what you could do on the cost side. I guess I want to talk about the customer experience side. That's where I think I mean you you already mentioned that like what you identified early on the was the product could have a better customer experience and I want to come back to that. But before we do, let's continue on this like sales process part that clearly

can generate a better customer experience. I mean, certainly relative to your experience and actually my experience as well, originally trying to get a heat bump of like calling around to local HVAC technicians who were like reticent to sell you one in the first place. So

We should probably explain why that is. So maybe start with like why do traditional HVAC technicians not want to sell heat pumps often. And then second, just generally speaking, what has been your thesis on like how do you deliver a really good customer experience? Or maybe the other way to put it in in more financial terms, like, How do you reduce the pipeline fallout rate? How do you make sure that people who start the process finish the process?

Yeah, so we'll start start with the beginning one which is like where why is it the way it is today? And I have a bunch of theories. I don't know if anyone knows exactly why, but I'm gonna start with the assumption that contractors are good people who wanna do right by their customers and they wanna grow their business, but they're n there's no sort of like

malicious intent out there. Um people uh okay, so contractors are generally representing a few brands. And some brands have made more investments in certain product categories than others. For example, the the sort of more American brands like the carriers of the world have been very into the the central systems and those um do work a little bit better with uh um

I I think the the furnaces uh are more inherent to the central system because you can't get a a duckless furnace, as I said earlier. When if you're carrying a Mitsubishi or Fujitsu brand you might be more willing to sort of say you should go that way if you're doing the duckless. That's one thing.

Um there is the the cost is a real thing. So like essential heat pumps, if we're just gonna say compared with a furnace, um are still generally more expensive up front. And we haven't done a good job of capturing or or um communicating energy saving introductions. And the reality is it's a super complex story, especially in a summer like California, where, you know, electricity prices are high and it's not that cold.

Right. I mean the savings, yeah. There's I want to come back to that question of like what the actual economics to customers look like. But I guess what you're saying at this point is like. The communication mostly if you just call an HVAC technician is they're like, Well, okay, I could get you this thing or I can get you this heat pump, but the heat pump's gonna be twice as expensive. And they don't really there's not like a clean way to say, but over ten years you're gonna save some money.

And then I think that's the most common one in California that you hear is like, well, why would you pay more for this thing? Like I you know, I'll I'll c I'll save you way more money. There's also just the the maturity of the the distribution system and like a like this these the furnaces on the back of my truck. I'm gonna have to order you a heat pump. I'll get a few in two months. Just kind of the availability thing if they're not carrying it.

Um and there's also I think just the the industry catch catching up with both the state of technology and and consumer demand. So Um, some people might still say things like the heat pump don't don't work well in the cold. I've had people um in California, so again, very, very mild climate. I don't know how cold it gets in Berkeley, but it never gets below uh forty in Redwood City. And being told here that they need to have a dual fuel system for when it gets cold, which is just kind of absurd.

I mean my my my retired parents in Wisconsin were told that, but that makes a little more sense. Yeah, f for sure. I think if you're somewhere anyway, yes, there are parts of the country that make sense. They're getting fewer and fewer, but uh but they do exist. It's certainly not the west coast of California or really any coastal city in America at this point, my view. Um And and then there's uh you know the additional thing of just

Yeah, the inertia. Sort of you know, people if you've been installing and doing something for twenty years and you built your business doing that, you're probably gonna keep doing it. So and that's true for anyone.

Okay, so that's maybe why it's sort of still hard, a little hard for a lot of people to get a unit sold to them, surprisingly enough. Um, but what's your What was your what's been your thesis on like what is a what's an ideal customer experience, sales experience look like for a heat pump?

Yeah. Well and I'll also say that um the whole industry here is feels kind of stuck in the twentieth century to me. And what I mean by that is that it hasn't had the internet be a fundamental building block in how it thinks about you the sales process and distribution system. So the reason that everything is has so many steps, the the value chain I described before, is that it wasn't possible for a consumer to just talk to a manufacturer and order a product.

And you saw the same thing happen in cars, of course, right? With um really Tesla being the made major first brand to skip the dealership because they could get build that direct-to-consumer relationship. And because the internet allows you to do that. It also allows you to skip travel agents and lots of other examples, right? Where uh once you bu bake it in you can you can simplify the the the value chain.

Um, so I think the ideal customer experience probably for a lot of people does start on the internet where you do some research, you're probably Googling it anyways to figure out what a heat pump is and what what what's a good product to buy, what's good for my house.

Uh you can get a f a fair quote. You can actually see what it's gonna cost for your home, or at least get a pretty good sense, uh something that that a company will stand behind. You get a sense of the product, so you actually know what it might look like in your home. You

uh get a sense of something you want or not, w which is funny to say, but actually a lot of these contractors, you actually don't even see the product you're gonna get until it's installed. Right? There they're that you might you might see picture online, um, but it's really not a big part of the pro the experience. Um and and I really think like if you think of the best buying experiences someone has in their life, the sort of lowest friction, highest trust.

Uh journeys from other parts of their own. life, uh what would that be applied to heat pumps? So I think, you know, for low cost purchases, there's kind of these like Amazon type things. But for higher cost purchases, I do think the audio industry is a is a pretty good one on the consumer side to mirror. And and that's so that's what we've tried to do with COVID.

Is there a distinction? I guess the other thing that people talk about and one of the challenges for heat pumps relative to something like solar. So solar you can kind of do anytime. The only real constraint on that is like is your roof nearly at the end of life and you're gonna need to do a roof replacement soon anyway. But otherwise like you could just add solar. Same thing with an E V, right? There's no time specific constraint on it except I guess if you're

you you know, you need a new vehicle immediately. Um, but HVAC is a little different because at least central units, you think, okay, yes, you can rip and replace your existing boiler or whatever, but most of the time, My understanding is that purchase behavior occurs when you it's a replacement cycle thing. So it only comes up once every ten years or whatever it is. And even more so, sometimes it comes when something breaks and then you need something immediately. Is that

Is that as true with mini splits as it is with central units? I I could imagine it not being quite as true there. What why why d what's your hypothesis there? What are you imagining? Uh, I don't know the well, maybe I'm just like reflecting my own personal experience. That's an interesting question, which is we didn't you know, we were in this old house that didn't have central HVAC and and we just needed to add it, but it wasn't like an immediate overnight thing.

But we didn't need to do it. And actually it was exactly the same situation as you where we we did it in we we bought this house. We had a few years with no HVAC whatsoever, other than some like room units. And then my wife got pregnant and we were like, Oh, we're gonna have a newborn? We probably should.

figure out a way to keep his room the right temperature. And that was what caused us to do it. And admittedly, then we did have a time constraint. So maybe I'm arguing against my own thing. But uh but no, I could imagine, I don't know why, that maybe like mini splits are less of a uh episodic purchase behavior. Yeah they are there's another way in, right? Because some people will look to just solve it.

a part of the room or a part of the home, sorry. So you can progressively adopt mini splits, which is not something you do with a central system. You can start with the office, you can start with just the baby's room, see how you like it. And then when the furnace goes out in two years, you already have these two or three mini splits you like, and you're like, let's just put three more in and I've got the whole house covered.

So that's that is a entrance and angle to to to adoption that doesn't exist for essential systems. Um I also it's it's an so this kind of emergency replacement of card a distressed uh HVAC purchase. On the heating side, it's roughly fifty percent of the market today. So it's like people will their furnace dies, that's where they'll they'll get it. On the cooling side, it's less than a quarter. And that's because cooling is still more of a luxury to people. And

If your AC goes out, usually unless you're in the middle of a heat wave in a somewhere like Arizona, but usually it's something you can kinda get by with and you're willing to do a little bit more of a considered shopping journey around. And

In the markets that you're going after, in the markets that are higher penetration heat pump markets, is it predominantly cooling or heating? I guess I hadn't thought about the purchase behavior as being different for heating versus cooling because these units do both.

Yeah, they are. And in fact, the cooling is a really great um kind of Trojan horse in for the heating side. So a lot of people, especially on the west coast, maybe not so much Southern California, but really Northern California all the way up to Seattle, um, are adding cooling. the world is getting warmer and uh there's a lot of people out there shopping for cooling and

when they learn that these systems can then also do heating, they'll either turn off their central system or just when they get, you know, whenever the furnace dies, they'll just stop using it. But for us it's um Yeah, it's actually primarily cooling right where we are right now, which is the Bay Area. Is that part of the vision for you to ultimately have mini splits replace central units? Like you maybe these are customers who do have.

a central HVAC system that provides heating. You are the Trojan horse with cooling, with mini splits, and then but then ultimately they just say, okay, like I'm not gonna replace my boiler whatsoever. I'm gonna I'm just add a bunch more it window units or I mean sorry room units.

Yes. Well I should I should s I should say that I think sixty percent we actually just pulled the stat. It's about sixty percent of our customers are uh coming from a central ducted system. So it's over half of all our customers are abandoning uh a central heating and cooling system. And by abandoning I should say upgrading to um to a di a duckless system. But um a lot of the rebates are predicated on removing the fossil system.

And so we actually have to take photos of it, you know, the furnace is there and then the furnace not being there and the nameplate and uh in order to get the rebates. So what often happens is someone comes to us for cooling and they're like, Oh, well, actually, yeah, I guess my furnace is like

Nine years old, 12 years old, whatever, it's gonna go pretty soon. You're saying I get an extra two two grand off the price if we just pull it out, let's do that. And that's usually what happens. And so one of our top company metrics that we literally report every Tuesday and we report to the board is Dead furnaces. We have a furnace graveyard, and we are very proud of every time that we pull a fossil system out of uh out of a home. And it's one of our key metrics.

Let's talk a little bit more about the product side. Um Obviously, I'm gonna I'm gonna list a bunch of things that you can, the levers that you can pull on the product. Obviously, you want to make all of them amazing, but I'm interested in sort of your rank order of like what you think really matters to customers. So there's upfront cost, there's CapEx. Um, there's efficiency, the efficiency of the unit.

There's the the visual UI, I guess the product design is the way to put that. And then there's the user experience of it, which includes, in your case, you have a dial and an app and so on. I which of these do you think, I mean, do you have a sense yet as to what is really cause the goal here is ultimately to dramatically expand the heat pump market? So like what is going to drive, if you have to rank order, what's going to drive sales through the roof?

Which of those things do you think is is what really drives behavior? Yeah. So I I'd like to go back to just what are the problems? Like what are the problems that people are struggling with and then how do we solve those problems? And then uh at the top what kind of what drives into the funnel and then once they're in the funnel, what are the other problems they're encountering? So the things that driving people in are

They want to be comfortable in their home, which is obvious to say that's why people are going out and buying cooling, right? And if their furnace goes out or whatever or they have the baby coming, they need to get um heating. And um and then a cost, of course, as well, right? So when th that's kind of the next step in it. But if they're if they need to buy something they generally don't want to spend as they wanna spend as little money as possible to get as much value as possible.

Um and and of course that that does vary a fair bit by um market segment. Some people are more cost conscious than others. Uh and what we have focused on is trying to drive those two those two value drivers as as much as we can. So and the way we do that is um less on the CapEx side, but more on the opex side. So um really focusing on efficiency and trying to build an extremely efficient system.

Um and and I'm very, you know, proud to say that I think we've done that. And then um on the comfort side, uh that's where a lot of those other things you c you you mentioned come into it. So Um just the deckless system inherently is more comfortable because you get this room by room control, right? You can control it at a baby's temperature room different than the room you're in.

And um by having low frictions ways for people to express their intent. So set setting schedules, having a dial interface that they're comfortable using, and it's not like this. you know, uh Byzantine remote with 80 buttons on it. Just like those little product design things actually increase the realization of the um efficiency and comfort because you're lowering the friction to use the product. Um and then once you get in so but then the other thing is like why we focus on project design is

We just did a bunch of research earlier, given that we we know that these duckless systems inherently have all these great attributes of efficiency and comfort, why aren't people buying them? The aesthetics were a big, big part of it. People don't want the big white, uh kind of cheap looking appliance boxes all over their houses. So we needed to find a way to create a project uh an object that people would actually be like proud of. So

Right now people are s assigning almost like negative value to so like it's gonna lower the cost of my house by having these all over the place'cause they're kinda ugly. We wanna create something that's gonna add positive value. It's gonna increase the value people are gonna get excited to show it to their friends and family when they come over. Um so these status are a really big part of it uh because of this kind of

squishy world of brand experience and pride and pride of ownership, which is very real. And especially when it comes to someone's home.

All right. So you mentioned the OpEx benefit and and getting a really high efficiency system, which I guess is a good segue for me into this this topic of like actual customer economics. Um Do customers, I mean, this is very location specific, but let's just say in in Northern California and the places you're installing, do customers save money ultimately? I mean, is it an economic value proposition yet?

It certainly will be over time. I think well, I guess it depends where electricity prices relative to natural gas prices go, but Yeah. Yeah, without knowing the prices of electricity and natural gas today.

And exactly where we're we're we're we're installing and honestly even the the home itself, like how it's how it's structured, like does it have a highly inefficient central central system that uses a ton of gas to keep the the house warm? Um, it's just really, really hard to answer. But in general, uh, places where the electricity is Yeah. It's the spark spread. It's the the delta between electricity and natural gas.

Yeah, it's partially exactly. Yeah. Thank you. You're better at this thing. You talk about this a lot more than I do. But that's that that is gonna be the biggest single driver. Um but but that said, we've just hung our hat on knowing that like within the heat pump category, if we can create it, make it more efficient.

that is just good. Everywhere. Everywhere it's gonna be good. In some places it'll cross the margin and actually make it economically beneficial to get one. In places where it already is economically beneficial, just make it even broader.

And we need to do a better job of being able to capture that and it is hard to do for all the reasons we were just mentioning, but we're gonna need to be able to get there so that we can start to uh bring that forward. And eventually, you know, I could you of course can imagine financing products. Something like you know, there's a company um called Sealed that was was was or is doing a lot of this. But I think ultimately, if there is a real OpEx reduction,

That's essentially a finance product, right? That th that's a problem that you can build some solution to uh to bridge those two things. That's right. But it is about it is about that spark spread. Um, which is tricky. And and Northern California where you guys are starting, where where you and I both live. Is a place where the price of electricity has gone up. I I think maybe more than anywhere in the country. It's not clear to me, but it's a lot, is the point. Is it

a barrier to price of electricity at this point? Or are we still in the kind of early adopter-ish segment of customers where look, like maybe it it's hard to tell over the long term, am I going to save money on this or not? But I care about this because of XYZ. It's a better customer experience, no fossil fuels, et cetera.

Yeah, I think this is something where that uh consumer bias to look at the CapEx more than the OpEx is actually in our favor because people see the rebates available and they're like, Yeah, I want I want that money. I want that five thousand dollars, two thousand dollars, whatever it is, that comes off the purchase price. And that is usually tied to removing a fossil system and in some cases it's capping the gas of the home overall.

And so that is driving people on the economic side. Um and and it and just speaking from my personal experience, yeah, we are still in the early adopter segment, right? So at some point we'll be doing millions and millions of homes. We're not there yet. So we get to sell s you know, sell to people who already at some level bought into a heat pump and they want a product that they want to feel like they're getting the best product possible. Right. Maybe early model.

A lot of less. Okay. That's fine. Yeah. Fair enough. Yeah. Um all right. So final topic for you is this is this topic of vertical integration, which which quilt, as you said, is pursuing, right? So you

are the OEM of the heat pump. You are the installer of the heat pump. You sell the heat pump. You do all the things. And so you're cutting out all these steps in the value chain. That allows you to deliver this like very seamless customer experience and cut out margin. There's all these benefits of that. Historically that has that has also been true in other sectors. The cost of that, of course, is that like the infrastructure to you to stand up a new market is not insubstantial.

So what does that look like for you? Do you need to if you wanna if you wanna install in Chicago or whatever your next market's gonna be, you need to build a workforce there and you need to hire technicians and train them and trucks and all that kind of stuff. You need distribution warehouse. Um, how are you gonna do that? Yeah, it's a great question. And and there is like I say like an inherent speed limit if we're to just roll out nationally as fast as say we had you know

infinite capital in the bank. We still could only go so fast. How fast you can hire uh hire contractors that you're also are confident gonna represent the brand and and and do the kind of customer experience that we we wanna see and stock the warehouses and build the infrastructure and all that. So um I'll start off by saying that Uh, the reason we did the vertical integration to start with is because of customer experience, but it doesn't have to be the be all end all forever. In in That

You have to know what great looks like before you can hold someone else accountable to it. But there's no reason we can't bring other people into the fold now that we have a good sense of what great looks like. And I often think of it as like franchise restaurants. So if you

had envision for a new fast food burger restaurant and you had a new kind of sandwich you wanted to sell. On day one, you wouldn't go franchise that to a bunch of people just out of an idea. You would build a restaurant. You'd own your own restaurant and you would run it until you really knew that you could deliver that that product and then that the brand experience.

And then you could take that system and bring it to other people and and give them both the support they needed to deliver it and the the management to to ensure that they were reaching those bars that you were hoping they will. And um that is the vision here. So We will continue to do the vertical integrated thing.

Um and we're gonna do that in probably a lot of the major metros in the US. But I want everybody to be able to get a quality pump. Um we we want to accelerate the energy transition. We want to bring a a great quality product to everybody. And there's gonna be people in rural parts of the country, tier three cities. We're probably realistically not gonna stand up warehouses there. But we can build systems where we partner with local contractors are excited about what we're doing.

and and really deliver a differentiated experience through them. And and that is kind of the next big challenge. So, um that is something that we're working on. We're very excited about. But it does it does take time. I mean, even that takes time, right? You have to build the systems, you have to sign the contractors, you have to train them. Um so

Yeah. Unfortunately, this isn't like a pure software world where you can just kind of build the best product, put it on the internet, and have your chat GPT moment and be a billion users in a few weeks. Yeah. Few of us can. Yeah. Paul, this is great. Thank you so much for taking the time and for the heat pump. Yeah, of course. Thank you for uh for having me on and and for and and also for picking quilts. I appreciate it.

Paul Lambert is the CEO and co-founder of Quilt. This show is a production of Latitude Media. You can head over to latitudemedia.com for links to today's topics. Latitude is supported by Prelude Ventures. Prelude backs visionaries accelerating climate innovation that will reshape the global economy for the betterment of people and planet.

Learn more at Praludventures.com. This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquan, theme song by Sean Marquon. I'm Shail Khan, and this is Catalyst.