The role played by customer loyalty in utilities’ profits means that customer service is gaining in importance. But can utilities turn themselves into the perfect, long-term partner?

Alex Patient and Martin Yuill
Datamonitor, London, UK

Gaining customers used to be the focal point of competitive strategy for residential utilities, with sales and marketing managers holding budgetary sway. However, failing billing, metering and customer service functions – exacerbated by widespread market consolidation – have seen the role of the customer service manager gain increasing influence as cost savings become the paramount concern for Europe’s utilities. Resolving inefficiencies in the acquisition process is critical to delivering the customer service successes that utilities desire. Creating value-driven practices in both the sales and service functions are not mutually exclusive, indeed for utilities to retain profitable and loyal customers, they must go hand-in-hand.

Utilities must retain customers for the long-term to make a return
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As the competitive markets of Europe have matured, emphasis upon ambitious bundled service strategies and expensive brand development initiatives have been replaced with an inward looking cost saving culture, focussed upon improving customer servicing processes and functions. Yet, achieving cost returns within a competitive environment rests not only on delivering service-led efficiency, but on resolving the sales-led inefficiency which has characterized customer acquisition to date. Utilities are failing to address the inefficiencies which make customer acquisition such a costly process.

A prime example of this cost inefficiency lies in the customer approach as, in effect, every wasted contact takes away from the bottom line. Utilities do not have an easy task in persuading customers to switch. Offering energy bill savings to time-pressed, sales-aware consumers is never going to be an easy sell. However, the target-driven, generic approach that utilities have taken has delivered customer inertia and rising costs.

A foot in the door

The approach used by utilities has historically been characterised by the aggressive nature taken by sales agents. This has led to highly publicised incidents of mis-selling, reaching a nadir in October 2002 when the UK’s London Electricity, now EDF Energy, was fined g2.9 million by the regulator. More recently, companies have striven to clean up their performance on the doorstep, employing sales agents in-house, relying less on agencies, improving training and seeking external accreditation.

However, the customer perception of the utility salesman has been badly damaged. Energywatch, the UK’s energy watchdog, continues to report that “only 37 per cent of consumers were happy with their contact with the energy sales agent”. Furthermore, “53 per cent of consumers felt some degree of pressure during the sales contact”. In addition, utilities are competing in an increasingly saturated market – customers willing to be contacted by rival utilities to switch supply will already have done so. Persistent calls by utilities do nothing but annoy customers who have not already switched.

These developments have had a dramatic impact upon the typical cost by sales channel. When the UK market first fully opened to competition, the door-to-door channel was the primary channel for acquiring customers. However, as competition developed, outbound telesales became increasingly prominent due to the high contact rate that it afforded – thereby lessening the cost to the utility. This was largely dependent on converting the targeted customer, as increasing customer reluctance to switch has badly affected the cost efficiency of the telesales channel – it is much easier for the customer to say “no” in response to a telephone based sales pitch than it is in a face-to-face situation. As a result, there has been a fall in the customer conversion rate.

Tellingly, the most talented sales agents are seeking employment in alternative mass-market industries which offer a better rate of return. This has created a “talent drain” which only exacerbates the situation. The result has been that the typical cost associated with an outbound telesales acquisition has doubled since 2001 – it now stands at around g112.

Door-to-door selling, however, continues to be prominently used by UK utilities, accounting for around 50 per cent of all acquisitions. The cost associated with this channel has not been affected in such a dramatic manner by this shift in customer perceptions. Datamonitor believes that the typical costing associated with each acquisition through the door-to-door channel stands at g59. This still represents an expensive outlay for the utility to make. British Gas has recently halved its direct sales force citing a falling switching rate and rising costs.

Even satisfied customers can still be switched by a direct sales team
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Acquisition costs

Process inefficiencies do not simply stop when the propositioned customer decides to switch. The transfer process is also riddled with inefficiency which drives up the typical cost to acquire for the utility. Datamonitor believes that managing the customer transfer – from the verbal consent obtained by the customer to switch to the completion of the process, is a key source of cost for the supplier. More importantly, it is also an area in which valuable efficiencies can be made. Gemserv (a service company specializing in governance management issues related to the UK electricity market) reported that only 65 per cent of electricity customer transfers proceed without complications. Some 35 per cent of transfers are therefore an additional cost burden to the utility. Of this, Energywatch states that around one in three transfers needs a manual intervention from the supplier to resolve the problem, whilst three per cent of all switches fail. Ofgem comments that over one third of complaints made by customers are derived from the transfer process.

Therefore, an inefficiently managed transfer process leads to customer unrest as expectations of the switch are not fulfilled. This causes a high level of churn. In February 2000, churn as a proportion of overall cumulative switching stood at 22 per cent. This had increased to 33 per cent by February 2002, rising to around 45 per cent of total switching by August 2003. This has a damaging impact upon the returns a utility can expect to make on its acquisition outlay. A basic examination of lifetime value illustrates this. Without taking upsell factors into account, let us assume that a single-fuel electricity customer has been acquired on the doorstep, with an annual consumption of g363. With the typical cost of acquisition at the doorstep standing at g59, the utility needs to retain the customer for four years before profitability is reached.

Targeting loyalty

Must utilities now fundamentally readdress their strategies? The key point will be that if utilities are to deliver on acquisition potential they must retain the customer by concentrating on service. Churn must be replaced by loyalty if customer value is not to be continually eroded. Can loyalty ever be a target? We believe that a fundamental re-appraisal can achieve at least partial loyalty, thereby strengthening the utility bond with the customer.

An optimistic one in ten customers are loyal to their utility, with the majority staying with their supplier out of apathy rather than support. However, what tools does the utility have to drive loyalty? Datamonitor believes that suppliers have repeatedly failed the customer through confusing bills, estimated meter readings, and by not managing customer expectations in what is essentially a difficult market for most consumers to comprehend. Whilst few utilities can claim to have won the hearts and minds of their customers, Datamonitor believes that several utilities have demonstrated best practice in at least small parts of their customer proposition. By moulding these individual components of best practice into a complete service chain, the engineering-led proposition of today could be replaced to triple customer loyalty by 2006.

The basics of utility supply can be boiled down to reliability of supply, adequate call centre service through well-trained staff, and a complaint management team that can help customers in distress while identifying the root causes of problems. At present, complaint management is lagging behind, with registered complaints only the tip of the iceberg of customer dissatisfaction.

Mastering the basics

Nevertheless, several utilities have now begun to succeed in providing at least certain elements of basic supply. Two years ago just 40 per cent of calls were answered in 20 seconds at Scottish Power, improving to 70 per cent by December 2002. Most utilities have also empowered their service agents to provide compensatory credits without lengthy written correspondence, while npower even sends flowers to certain customers that it has wronged. However, mastering the basics will at best lead to the elimination of dissatisfaction rather than the development of customer loyalty. Customer loyalty requires the utility to go beyond consistently meeting the functional requirements of the customer.

While ‘raising the bar’ may be clichéd, utilities must concentrate on the areas of their propositions that can remove the confusion that prevents the development of trusting relationships. Many utilities, however, still only ‘communicate’ with their customers through a bill, adding little if anything to customer loyalty. Even the bill itself remains confusing with estimated meter readings accounting for at least 15 per cent of queries at the call centre.

Most utility communication tends to be sales and marketing driven, but the Dutch utility Nuon uses a lifestyle magazine that is genuinely customer-centric, writing about yoga and ice-skating rather than power stations and carbon emissions to build its brand values. US utility Bangor Hydro provides quarterly and annual electricity consumption comparisons as part of its bill to educate the customer and remove confusion over changing bill amounts.

Surprisingly, only a small minority of utilities have attempted to directly address the question of estimated meter readings. Many utilities offer ‘self-service’ for customers to provide their own meter readings, but Seeboard Energy has been a step ahead by passing on savings from customer self-service of up to £21.56 (g30.64) for both fuels for doing so. Likewise, Eneco in Holland rewards customers with AirMiles for this mutually-rewarding practice.

Unfortunately, Datamonitor was unable to identify a single utility that displayed best practices in serving the customer from the meter reading through to customer service. The vast majority of utilities still cling to engineering-led consumption tariffs such as ‘Economy 7’ or ‘Standard’ that fail to relate to lifestyles. DEW Dortmund’s ‘Family Man’ and ‘Alone and Happy’ tariffs are a notable exception.

The state of the proposition today: ten per cent loyalty
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Brand trust

Having addressed these basics, utilities must work to combat customers’ perceptions and expectations of services if they are to win loyalty. Datamonitor’s research has found that customers do not have the time to find the best possible utility in the market to meet their needs. Instead, customers want to know that they are getting a fair deal, and look for indicators to this effect.

At present, these hints and indicators are largely focused upon price and will continue to be until customers are offered another means of comparison. Green Mountain Power has provided a non-price attraction by offering customers rebates if service promises are not met, with these promises becoming increasingly stricter as service levels improve. What better way to improve trust in a service brand than by putting your money where your mouth is? A further benefit for sales efficiencies will be that such a service proposition provides the means to escape the hackneyed price message that customers have heard countless times, and have become less responsive to.

In particular, utility call centres are still perceived as providing a low level of service by those who have not used them. This impression is the association of electricity and gas suppliers with other industries’ call centre practices that have yet to reach such high levels of satisfaction. While it would be dangerous to promise call answering in a set time due to fluctuations in call volume, utilities should be working hard to educate their customers about the ongoing efforts to speed services up.

Datamonitor believes that it will take utilities at least three years before they can deliver an end-to-end customer-friendly proposition that will be clear and easy, putting the customer in control. As utilities work towards this goal, the foundations for brand development should become stronger so that brand can overtake price in importance in customer decision-making. Of course, only an estimated 30 per cent of customers by this time will be loyal as price-seekers will inevitably remain, and there will always be a large number of customers who simply cannot be motivated to be loyal about what they perceive to be a commodity service.

Nevertheless, the creation of customer loyalty will bring a turning point in utility supply. Longer relationships will improve lifetime values and profits, making the sales channels more economically viable. Furthermore, customers can expect at least some of these profits to be re-invested to further improve the level of service that they receive.

While customers should not hope for improvements immediately, the signs are that suppliers are now learning that the status quo of service is insufficient to drive loyalty and profit. A radical reappraisal of the proposition is required, but utilities can remain optimistic as best practices for emulation are evident across most elements of service. Applying this strategic reappraisal to the selling function is the route to achieving greater returns, with happy and loyal customers providing a platform for greater up-selling opportunities and therefore greater profit potential. It will certainly be a long and difficulty journey to loyalty, but one that both customer and utility will find rewarding.