Britain's top energy suppliers compete on price but offer their own unique benefits and incentives.

In addition to the effects of regulatory reform and policy, certain consumer, environmental and technological shifts in the United Kingdom are effecting significant changes in the manner in which electric and gas companies competing for customers in the mass market. The U.K. residential market was opened to electric retail competition between September 1998 to May 1999. As of September 1999, about 10 percent of all U.K. residential customers had changed electricity suppliers. Furthermore, since 1996, about a quarter of all residential gas customers in Britain had switched from British Gas, the former monopoly supplier.

These customer losses are indicative of the changes taking place in the U.K. electric and gas industries. Several important factors appear to be shaping the structure of the U.K. utility markets.

Branding is playing an important role. To this point, a recent U.K. survey revealed that the brand identity of the electricity supplier was the leading factor in consumer purchasing decisions.[Fn.1] Customer segmentation is proving important in determining those customers with whom top utility retailers attempt to develop long-standing relationships. For instance, several U.K. utility retailers have successfully segmented their customers based on the method by which they pay their bills (e.g., prepayment or direct debit). Identifying profitable new sales channels is significantly affecting the basis for competing in the mass market. In fact, up to 55 percent of utility-related products and services sold in the United Kingdom may be routed through non-traditional sales channels by 2005, including e-tailers and affiliate (e.g., affinity group) channels.[Fn.2]

Another important factor shaping the U.K. utility industry is related to utility retailers' forming strategic alliances and partnerships, and entering into outsourcing arrangements in order to tap into specialized capabilities. Highlighting this trend, a recent survey covering both the United States and Europe indicates that more than one-third of telecommunications companies say they will be part of strategic alliances, in particular with energy and water utilities, during the next five years.[Fn.3]

In this evolving market, U.K. utilities are transforming themselves into a new breed of retailers offering innovative propositions to their target customers. The emergence of the utility retailer seems to have several implications on competitive retailing to mass market customers in the utility industry, with highly customer-focused utility retailers seeking unique ways to differentiate themselves from competitors. In fact, a 1998 survey of European businesses revealed seven potential sources of competitive differentiation, with respondents indicating that service levels and enhanced customer propositions were the most important.[Fn.4]

Utility retailers, therefore, are developing or seeking to get access to a wide range of "key capabilities" that provide a basis for a competitive advantage in the mass market. The capabilities needed to be a top utility retailer appear to be quite different from those of a traditional integrated utility, and are primarily related to making it possible for utility retailers to broaden their relationships with target customers. Such capabilities might include (1) customer information management, (2) brand management, (3) customer relationship management (including customer segmentation, sales channel management and delivering