HomeWorld RegionsEuropeA single market with multiple choice

A single market with multiple choice

Zak Meziane
Datamonitor, UK

Energy utilities can reduce costs and improve customer service by offering telecoms products. Such synergies provide good growth opportunities, but can be hard to identify in the market.

Despite the collapse of the technology market, leading energy suppliers such as Centrica and Powergen keep pushing their telecoms offering to residential and business customers. The secret behind their confidence comes from their multi-product strategy, which is focused on milking their existing customer bases by selling non-energy products as well. Research conducted by independent market analysts, Datamonitor, into the small and medium-sized business sector shows that careful segmentation is required to identify and target customer groups that offer the best synergies between energy and telecoms.

Figure 1. Energy and telecoms spend in the UK mid-market, 2002
Click here to enlarge image

Since deregulation of the European telecoms market in the late 1980s, a large number of European energy utilities looked to claim a share of this fast growing market both at wholesale and retail level. Energy network owners, such as Austria’s OMV and Belgium’s Tractebel, who managed to find the necessary finances or backing, started building their own network. This allowed them to sell bandwidth on the wholesale market or even supply end-users directly.

Existing assets

Why would utilities whose main business is energy get involved with a highly competitive market like telecoms? First of all, for energy network owners it is a good opportunity to capitalize on existing assets by running telecoms cables alongside energy networks. Companies who have done this quickly recouped part of their investment by leasing their networks at relatively low risk. The second incentive is the potential for synergies on existing customer bases, as illustrated by the acquisition of One.Tel by the UK’s Centrica. The latter had already developed a reputation for being able to sell non-energy products to residential and commercial customers before it acquired the UK’s largest provider of indirect telecoms services One.Tel in July 2001. In the same month, One.Tel, which was until then focused on the residential market, launched its business offering targeting customers that spend over à‚£1000 ($1574) per month on their telephone bill. This threshold was later reduced to include micro business spending up to à‚£500/month as the company looked to increase it presence in the SME market. In Powergen’s case, the company has taken an important step in integrating its energy and telecoms products in the commercial market by introducing a single bill for electricity, gas and fixed telephony. So what is the financial reward of selling telecoms to existing commercial customers?

According to research, energy suppliers could double their revenues by selling fixed line and mobile telephony to some of their commercial customers. The average monthly electricity and gas bill for small and medium-sized enterprises in the UK is g821 ($822), which is almost equal to the average bill for fixed-line and mobile telephony in this sector. Considering that energy suppliers already have the back and front office infrastructure to serve and sell to commercial customers, they could generate revenues and achieve good synergies by selling telecoms to their existing energy customers. Energy utilities have a clear advantage over potential new entrants in the telecoms market: because of the existing relationships they have with small and medium-sized businesses they only need to identify areas where synergies are the greatest. They can use existing marketing, billing and payment structures to target the most profitable customers and reduce commercial risk.


If the telecoms market is so promising, why are many energy suppliers reluctant to enter it? Well, there are many reasons and they tend to differ from country to country but can be summarised in two mains areas of concern. First of all, most of the smaller suppliers prefer to concentrate on their core activities to retain their customers rather than look for growth opportunities. The second, and most important reason is that synergies are not that easy to identify. In Germany, many local and regional suppliers have set up telecoms subsidiaries but are yet to fully integrate their front and back office operations. The lack of homogeneity in some parts of the mid-market between energy and telecoms is seen as the main hurdle to a single approach for marketing, billing and customer services. In some instances the expenditure can vary greatly, which affects the level of service required and the marketing channels used, and in other cases the person responsible for purchasing energy is different from the one purchasing telecoms. This makes it difficult to capitalise on existing relationships and achieve marketing synergies.

For example, a medium-sized manufacturer with a small management office could have an energy bill of around g70 000/year against a telecoms bill of g10 000/year. This difference will have a direct effect on the choice of marketing and service channel, as the higher the bill the more possible it is for the supplier to use expensive channels such as dedicated account management teams. As a result, our research shows that energy suppliers looking to sell telecoms to small and medium-sized enterprises need to carefully segment their customer bases and identify the customer groups that offer the best fit between energy and telecoms. Generally speaking, they would be looking for similarities in the size of the bill, point of sale and service level requirements.

The micro business segment (employing less than ten people) is where utilities can achieve the greatest synergies between energy and telecoms. This sector is dominated by the business services and retail sector. With around 64 per cent of all enterprises in the UK, they typically have comparable energy and telecoms costs of around g200-300 per month. Synergies can be achieved not only from a cost perspective but also from a marketing perspective, as such customers tend to have one person involved, which allows utilities to capitalize on existing relationships. As far as energy is concerned, micro-sized customers are the least likely to switch supplier and offer gross profit usually below g200 per annum. Whether it is energy or telecoms, the relatively low share of expenditure of the whole cost base makes convenience and service quality more important to the micro-sized customer than the meagre savings they can make by switching to a new supplier (in electricity, a first-time switcher would probably save up to g100 in the first year).

Figure 2. Customer dynamics in the UK micro and small business segments, 2002
Click here to enlarge image

In most cases, they would rather rely on a supplier they know and can trust, which is good news for the incumbent energy suppliers, especially those with strong brands, such as RWE and British Gas. As a result, the recommended marketing for this type of customer is low-cost mass marketing, such as direct mail and in some instances telesales. The best communication medium remains the bill, as they tend to pay little attention to any other material sent to them. The use of telesales is particularly recommended to encourage customers to take additional products and services, especially when using mass advertising to raise product awareness.


It should, however, be noted that sales and marketing efforts also need to be coordinated with customer services, for two main reasons. First of all, the experience of UK suppliers shows that only satisfied customers are likely to trust their utility in supplying them with non-energy products. Secondly, customer services teams can also have a promotional role by ensuring that contact with customers is used to inform them about new product offerings and promotions. This allows the utility to leverage existing communication channels and gain access to a customer that is typically difficult to get hold of.

Synergies among small customers (employing 10-49 people) are not as high, mainly due to the relatively high share of this market accounted for by manufacturing customers (26 per cent), who tend to have much higher energy bills than telecoms, as well as different people dealing with energy and telecoms purchasing. Utilities should still be able to develop a single proposal for energy and telecoms to other types of customers. Average monthly energy and telecoms bills are around g1000-1500 per month.

Unlike energy services, where the greater opportunities lie with the larger customers, selling telecoms in the mid-market should be done from the bottom up. It is not surprising that successful enterprises started in the residential market, where product diversification is most accepted, and then moved onto the business sector. Centrica’s case is a good illustration of this. There are clear synergies between energy and telecoms among the micro-sized customers and potential suppliers can also look to leverage brand equity in their residential market. The ability to make customers aware of new product offerings and getting them to take a step towards switching their fixed line and/or mobile purchasing to their energy supplier is where the challenge lies. As a rule a thumb, a happy energy customer is more likely to buy non-energy products from their supplier than an unhappy one. That’s why customer services need to be integrated into sales and marketing to maximize customer acquisition efforts.