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 customer benefits), (4) trading and risk management, (5) product and service development, (6) alliance, partnership and outsourcing management, and (7) billing and revenue-cycle management.
In the U.K., electric suppliers appear to have initially chosen four basic strategies to differentiate themselves from the competition in the mass market:
* Broaden product and service offerings;
* Compete on price;
* Tie service offers to special incentives; and
* Improve service and convenience.
Centrica is among U.K. utility retailers that have broadened their product and service offerings as a way of enhancing customer propositions. This retailer has evolved from a gas supplier to a provider of a range of consumer products and services, including energy, credit cards, home insurance, central heating and plumbing. Centrica is expanding its prospects further through its recent acquisition of the Automobile Association, which provides roadside breakdown services.
As a result of competition, the best prices available to residential electric customers are as much as 6 percent to 12 percent below those offered by the incumbent suppliers, depending on usage and payment method. That compares with the best prices available to residential gas customers following the introduction of competition in that sector. Competitive suppliers offered rates of up to 7 percent to 21 percent below those offered by British Gas, depending on the payment method. Furthermore, of the 15 U.K. suppliers offering dual fuel propositions, five offer customer discounts of about £10 to £15 ($16 to $24) annually for taking both products bundled.
As another strategy, utility retailers provide specific incentives tied to the core energy product as a way to enhance overall customer propositions. Some examples follow.
* Eastern Electricity joined forces with Barclaycard to offer customers a discount when they pay for their combined gas and electricity bills with their credit card.
* Through an arrangement between Norweb and TESCO, the U.K. supermarket chain, every £1 a Norweb customer spends on gas and electricity is worth one TESCO Clubcard point. Customers can redeem the points for groceries or gasoline.
* Goldfish credit card customers get a point for every £1 spent using the card. Customers can use these points to get annual discounts of up to £75, or about $122, off their Centrica bills.
In the last of the four strategies, U.K. utilities have increased customer service, convenience and functionality of their products and services. For instance, PowerGen encourages new customers to sign up at their leisure via the Internet by offering them £30 (about $49). Another example is United Utilities, which significantly upgraded its call center by making it more interactive.
John L. Domagalski is a principal consultant in PricewaterhouseCoopers' Business Strategy & Policy Centre of Excellence, based in London, England. He has over six years of experience in developing and implementing competitive strategies for clients in network industries. Domagalski received his B.S. in commerce with a concentration in finance magna cum laude from De Paul University.
1 "Electric Lead: Dynamism and change in an openly competitive electricity market," PricewaterhouseCoopers, 1998.
2 "Open Sky Retailing The Future of the U.K. Utility Retail Market," PricewaterhouseCoopers, 1999, p. 11.
3 "Telecos will seek energy alliances," Utility Week, March 5, 1999, p. 11.
4 Survey participants were asked to identify how businesses could most effectively differentiate themselves from competitors. The survey was conducted in 1998 and involved more than 200 of Europe's leading businesses across several sectors. "Shaping the Value Chain for Outstanding Performance," PricewaterhouseCoopers, 1998.
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