Creating Customer Value

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1 Creating Customer Value How energy retailers can move beyond transactional customer relationships through enhancing value APRIL 2014 AUTHORS: David Mackay & Hugh Vickers-Willis

2 Creating Customer Value How energy retailers can move beyond transactional customer relationships through enhancing value An innovative approach needs to be taken to provide value to customers The future of energy retailing will not rely on increasing energy demand or customer numbers. Innovative strategies must be used to redefine customer offerings and increase the share of customers wallets. Customers want to have ownership of their energy choices and be incentivised to control and reduce their usage without the need for arduous or lengthy interactions. The energy retail model is price-driven and transactional The energy retail market has traditionally operated on a transactional basis, characterised by low-touch interactions and price-driven offerings. These characteristics are magnified by the homogenous nature of electricity where retailers act as the intermediary between the customers and the electricity market, effectively managing price risks. Retailers currently operate by bundling up products and services provided via the distribution network, entering into contracts with customers and ultimately billing them for the service. The current structure has created an environment where retailers are inherently unable to build long term satisfaction, engagement and loyalty, and customers are highly susceptible to price incentives offered by competing retailers. Retailers have a long-run inability to engage and retain their customers - interactions are limited, of fleeting duration, and usually concern price and service complaints. The inherent lack of understanding of customer needs and absence of tailored services results in high churn rates. Customer s perceived value is predominately driven by price customers continually seek price discounts because it is the only value difference that they are aware of. Retailers have successfully managed price risk in a market where price swings are steep - customers have been provided with predictable pricing outcomes by retailers. Retailers are increasingly incentivised to focus on demand side management during peak energy periods to mitigate their risks. This environment provides limited opportunities for customer interaction, thus retailers are increasingly required to review their customer strategies with an innovative approach. As the energy retail market continues to evolve, future challenges will be centred around: Changing consumer behaviours; Justifying to consumers the increased cost arising from grid upgrades; and moving from a price-driven dynamic to a valuedriven proposition. Source: <insert>. 2

3 Energy retailers are required to deliver reliable products and services There are many stakeholders in the energy supply chain: generators, distributors and retailers, each providing their own service to ensure the reliable delivery of energy. Retailers are unique however. In the customer s eyes, they are responsible for, and bear the risk of, the delivery of energy services to the end user, despite having relatively little control over the process. Delivery is predominately controlled by energy generators and distributors. The timely and reliable delivery of energy is only one expectation of energy retailers (Figure 1.) The energy retail environment is inherently different to other industries Brands are not strongly perceived by customers rather than building strong brand recognition and awareness, retailers have traditionally differentiated themselves on price in line with the desires of customers. Consequently, following deregulation, the door was open to small and mid-sized market entrants who have successfully taken market share from the three largest retailers: Origin Energy, AGL and Energy Australia. In an environment where most retailer energy prices are competitive, the historic lack of brand emphasis requires that customer value be built through innovative products and services, strategic communications, and loyalty programs. Retailers bear much of the risk that is out of their control - the risks associated with the delivery and generation of a reliable energy source in a timely manner is disproportionately borne by the retailers themselves. Consequently, as generation technologies and the distribution networks evolve, there will be an increasing need for customer expectation management and communication. Interactions are low-touch energy retailers do not typically have a shop front, providing limited opportunities to provide personable interactions or to display product tangibility. This low visibility approach inhibits the development of long term satisfaction and customer loyalty. The increasing use of digital provides many opportunities to differentiate between simple and complex engagements with low and high-touch interactions. The large retailers have combatted these threats primarily through acquisition; taking back their lost market shares. Figure 1: Expectations of Energy Retailers Product related Offer the right mix of products and services Timely and reliable delivery Energy management tools Service related Customer service Security of information Accurate billing Source: <insert>. 3

4 Retailers risk being left flat footed and unable to respond to changing customer needs Trends of increasing energy efficiency measures and independent electricity generation amongst residences and businesses indicate a rapidly changing landscape for energy retailers. Energy retailers can no longer rely on increasing energy demand and competitor acquisition to guide growth, they require innovative solutions to refresh their value proposition and grow retail revenues. As consumer behaviours change, new opportunities arise for retailers. Currently, 38% of customers receive a single product (gas or electricity) from their energy retailer, however research suggests that 57% are interested in receiving additional energy related products (e.g. do-it-yourself energy saving products) and 52% expressed interests in additional services such as home improvement and telecommunications. This indicates scope for retailers to broaden their product offerings and partner with complimentary services to provide an improved customer experience. Maintaining customer engagement and an ability to leverage existing customer servicing infrastructure investments will be critical to success. Providing customers with the tools to educate themselves on their energy usage and a sense of control through demand management tools, encourages them to have a vested interest in their own energy needs. These tools enhance the value of choice and allow retailers to better deliver and communicate value to their customers. Customers value attributes in multiple, and different ways Customer satisfaction is predominately determined by the value that customers derive from their energy choices. This value not only differs from customer to customer, but the benefit can be of a different nature depending on the expectation and needs of the individual. The value proposition of retailers therefore needs to accommodate the needs of individual customers through a tailored package approach, combining basic services with motivating services, as outlined in Figure 2. Retailers who remain stuck in a transactional model risk being unable to respond to changing consumer behaviours and demands as customers increasingly require an interactive approach and customised service to meet their needs. Figure 2: Energy Retailer Attributes High Reliable supply Loyalty program Perceived Value Accurate billing Reputable brand Good customer service Energy saving incentives Green energy choices Customised products Energy management tools Competitive prices Low Basic Degree of Influence Motivating 4

5 Monetary costs are compared up-front, but nonmonetary costs accumulate over time Customers incur monetary costs for the payment of products and services throughout their contract. These include energy fees, ancillary product costs, connection fees and relocation fees. Although historically a major driver in consumer choice, the importance of monetary costs are likely to decrease relative to that of non-monetary costs as the competitive landscape flattens. Non-monetary costs are incurred intermittently throughout the customer s contract with a customer. These include costs arising from the time spent on registration, bill payments, dealing with customer services/rectifying problems and the inherent inconvenience cost (or worse) of power outages. Attractive monetary costs are important to customer acquisition however play a relatively smaller role in customer retention. The nature of these costs mean that they are predefined, easy to control and negotiable. Non-monetary costs however, are harder to monitor and are much more likely to compound over time to provide a poor customer experience. It is therefore important that both costs are managed simultaneously, whilst particular focus is put on managing non-monetary costs and communicating the value delivered to customers to ensure high customer retention rates. Delivering stronger engagement The following four key elements will enable energy retailers to better engage with customers, increase satisfaction and consequently improve both customer acquisition and retention rates. Choice Current offerings by energy retailers fail to effectively communicate value to customers, instead they often promote generic % off discount offers, leaving customers confused as to what price they are paying and the value they are receiving. When structuring packages, retailers should ensure that base packages include all of the must haves and some satisfiers. Customers can then be provided with the opportunity to add exciters such as green power and energy management tools, into their package. Providing customers with options to personally tailor their energy package to meet their specific needs, enables them to discard value-neutral products and services, thus maximising perceived value. Increased value perception enables customers to realise the superior value of their tailored package through like for like comparisons. Additionally, it provides greater opportunities for retailers to offer ancillary products and services as add-ons, and to build brand value reducing price sensitivity and susceptibility to switching. Control Give customers the tools to identify, monitor and benefit from their energy usage. Providing customers with a sense of ownership and influence of their energy usage, initiates positive engagement and is likely to increase customer satisfaction over time. Retailers should embrace new digital capabilities and provide customers with tools and live information that enables them to track and monitor their energy usage. In addition, customers should be equipped with tools and incentives to build and implement their own energy saving action plans. Each successive positive interaction that customers have with their products and services, will strengthen their awareness and responsiveness to subsequent retailer offerings. This positive sentiment can also be leveraged to increase prices and promote premium energy saving products and services. 5

6 Communication Develop multi-faceted customer relationships by strategically interacting with customers through low cost, low-touch channels for simple transactions and by providing valued services through high-touch channels for complex interactions. Low-touch (self-service) channels are often efficient yet less effective as they do not involve any personal interaction between the retailer and the customer (i.e. Online energy billing) High-touch channels are typically highly effective yet less efficient and involve a lot of personal interaction between the retailer and the customer (i.e. energy package selection over the phone) Building strong relationships with customers can be achieved in a number of different ways that are specific to the customer s needs and preferences. Customers are likely to have a preferred level of interaction for specific situations, of which variations may create a negative experience. It is therefore important that retailers segment their customer base so that the most appropriate communication mechanisms can be used for each segment. Initially this may be difficult, however experimentation over time can generate customer behaviour insights which can be used to continually improve the effectiveness of communication mechanisms. Social media will play an increasingly important role in communicating with customers and can be effectively used to notify them of any unplanned changes to their energy contracts and/or services. Social media could also be used as a demand side management tool by notifying customers when prices are peaking and providing incentives to reduce their energy usage. The rollout of Smart Meters throughout Victoria and other parts of the country will aid in the development of demand side management tools. Loyalty Rewards can be used to incentivise customers to remain with their energy retailer for a longer period of time. Encouraging customers to remain loyal to their brand is vital to the long-term growth of energy retailers. In a competitive market such as retail energy, where customer switching behaviour is largely determined by prices, loyalty programs can be an effective way to increase customer retention and reduce the reliance on discounting to acquire customers. A loyalty program, if successfully implemented, will drive increased retention and provide better long-term satisfaction that can be leveraged to increase the share of customers wallets. Internal loyalty schemes reward customers for their spend on the retailer s products and services by providing discounts either on their energy bills or additional products and services. These incentives can therefore be provided at a limited additional cost to the retailer whilst providing considerable additional value to the customer. The scheme may involve points that can be accumulated over time and redeemed at a later point. External loyalty schemes reward customers for their spend on the retailer s products and services by providing discounts or the ability to redeem points for products and services offered by a 3rd party. The advantage of this scheme is that customers are provided with loyalty incentives, whilst the need to discount as a reward mechanism is removed. In the future, it is likely that there will be some cross-industry convergence between energy retailers and other home service providers such as telecommunications, security, or online supermarkets, indicating an opportunity to implement a loyalty program that includes multiple retailers operating within this converging market. 6

7 Next steps to creating value for your customers The opportunity to be a step ahead of the pack in customer engagement, satisfaction and loyalty should be a priority for energy retailers. SPP s knowledge and experience can help clients make strategic decisions focused on customer choice, control, communication and loyalty, including: Understanding the customer customer segmentation and determining customer value drivers Value proposition development identifying the value proposition, structuring it, communicating it and delivering it Price and value management developing the pricing strategy, assessing the impacts of price adjustments, measuring, delivering and communicating customer value Multi-channel delivery strategy developing and implementing traditional and digital channel strategies to deliver a consistent customer experience Done effectively, this can deliver sustainable advantages for retailers in the long-run. If you are interested in discussing these issues further, please don t hesitate to contact David Mackay on , or to david.mackay@spp.com.au. 7

8 About SPP We are a general management consultant firm focussed on ensuring our clients and partner organisations gain the benefit of a structured, tailored, and evidence-based approach to solving complex business problems. Established in 2005, SPP has delivered successful outcomes for a broad range of commercial and government sector clients. As a result, we have strong relationships with many businesses, from Top 50 listed companies through to small enterprises. About the authors David Mackay Associate David leads SPP s Utilities practice. He assists organisations in developing and realising business growth strategies from early stage new ventures to major corporations. Prior to SPP, David has held responsibilities encompassing business development and bid management, project and operational management, and strategy development and implementation for organisations such as Atos, Fujitsu and Toll Holdings. Hugh Vickers-Willis Analyst Hugh brings experience in social business, strategic partnerships and customer strategy with a focus in the Energy and Natural Resources sector. In particular, his experiences include the development of an expansion strategy for an international not for profit. Prior to SPP he gained experience at PPB Advisory and KPMG in corporate finance and audit. Hugh has a Bachelor of Commerce and a Masters of Energy Systems. Strategic Project Partners Level 41, 120 Collins Street Melbourne, Victoria 3000 David Mackay m t e david.mackay@spp.com.au Insig ht Influen ce Impa ct 8

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