Customer Retention In A Competitive Market

Customer switching is a key challenge facing utilities in unbundled markets, for which they need to prepare.
Published: Thu 23 Oct 2014

For those who bemoan the fact that consumers don’t regard their energy use as ‘sexy’ as their mobile use, take pause – it isn’t yet but your time is coming, with energy solutions becoming increasingly innovative, especially with the merging of mobile solutions and energy in the Internet of Things, believes Mike Ballard, Senior Director Utilities Strategy at Oracle EMEA.

But whether you are a utility in a newly unbundled market or in one of the more established markets, the extent you will be able to benefit from this will depend on the actions for your customers that you are taking today – and whether as a consequence you are gaining or losing them.

Role of the customer

In a conversation with Ballard ahead of an Engerati webinar on ‘Customer retention in a competitive market’, he said that as markets in Europe unbundle and become increasingly competitive, retailers will need to focus more on their retail strategy and issues such as customer acquisition and retention, and it is these issues the webinar will explore. The webinar takes place Tuesday October 28 at 15h00 UTC.

In both more mature retail markets, such as the UK and Germany, as well as newly unbundled markets, such as some of those in Eastern Europe, the customer is the “key driver” of activities, be it around business growth and development or the buying and selling of energy.

Customer switching

Customer churn or switching is a major challenge, and something of a double-edged sword, for utilities in competitive markets. On the one hand it forces utilities to focus on their business processes, but on the other it offers the potential to increase the customer base.

“Customers want low energy prices,” says Ballard. “If customers only have a retail relationship with their utility, the key factors are about price and customer service. If the price is ok and the customer service excellent the customer is unlikely to switch, but if the price is low and customers service poor then the customer may switch even to a slightly more expensive retailer if they are going to get better customer service.”

A good level of switching points to a healthy market, as it indicates there is enough choice and differentiation to enable customers to take control and make their own energy purchasing decisions, explains Ballard.

Customer retention or acquisition?

In reality in some countries, the trend is increasing, but in others it is decreasing. In the UK for example, switching levels are down currently to around 10% from a peak about 20% of customers switching at any one time. “This lacklustre activity is caused by a number of factors – a sense of lack of differentiation between retailers in terms of prices and services, a switching process that is complex, and that the value the customers sees from switching combined with the effort to do so just doesn’t balance.”

Conversely rates have increased in Belgium and Norway “And further afield in Australia and New Zealand, switching rates are high as these markets have invested a lot in marketing and customer engagement.”

Nevertheless, and regardless of whether rates are increasing or decreasing, the bottom line issues for utilities are how they manage the switching and the balance they place between retention of existing customers – a customer lost is unlikely to be won back – or acquisition of new customers.

Customer relationships in young markets

In newly unbundled markets where there isn’t a culture of switching and rates are erratic, utilities nevertheless need to prepare for it.

Ballard explains: “New retailers face a number of challenges. These include loss of insight into customers, growing demands from customers and how to respond to them, buying and selling of energy, and competition from new entrants.”

Of these the procurement of energy is perhaps the most significant from a market perspective, with long term contracts involved based on supply and demand modelling and potentially significant penalties for not meeting these. “A key skill for these retailers is the forecasting of supply and demand. And the forecasting needs to be redone continually over time as customers switch in order to improve it.”

Just how significant switching will be will depend on the market itself. “Several factors are involved. One is the level of engagement with consumers prior to the market opening. Another is the perceived benefits of switching, and a third is the level of dissatisfaction with incumbent retailers. There may also be a cultural element.”

And it is this same process that is driving the innovation in today’s market and moving energy away from billing towards technology. As an example, Ballard cites electric vehicles: “With these your choice of energy becomes as important as is your choice of petrol. The choices you make about when and where to fill up your petrol vehicle are based on issues such as convenience, price, rewards. Electric vehicles are going to drive similar choices, such as when and where can I charge and who is cheaper.

“So we will see a more technological and consumer-driven market – that’s for sure.”