Utilities are charting their role and next steps as they determine just how (or whether) they should move into new home-based energy services or transition beyond the meter to achieve new operational benefits. Utilities are looking beyond the meter to enable new revenue opportunities, and improve performance in time-of-use, critical-peak, real-time pricing and demand response programs. In these early stages much of that discussion has focused on the technology side of the debate, with numerous questions gaining attention. Should we be using public networks (e.g., Verizon, ATT) or private networks (e.g., Silver Spring, Sensus, Elster, L&G, Itron OpenWay, etc.) for our advanced metering infrastructure (AMI) deployments? What should be used for home energy management (HEM) connectivity—i.e., the AMI network or consumer broadband? What are the emerging standards going to look like—i.e., Zigbee, Z-Wave, Wi-Fi—for HEM communications? What features should the meter have—i.e., 15-minute increment storage, remote connect and disconnect, etc.?
While both the operational and technology considerations are very important, utilities must engage and satisfy customers’ interest to ultimately drive adoption of new beyond-the-meter models and services. In-home service delivery models are a vastly different ballgame from the standard operational model in the utility industry. Utilities are accustomed to a very clean point of service demarcation—the meter. Anything upstream is the utility’s problem, anything downstream, call an electrician.
There are challenges and opportunities posed by new service models once we cross the threshold into the consumer’s home, where utilities face new customer economics and shifting financial realities. Utilities need an economic rationale that balances the lifetime cost of providing the in-home product or service against the value returned over the life of the product or service. These new realities demand new economic models across the entire customer engagement support structure: marketing, sales, provisioning, installation and customer support. For utilities to be major players in this ecosystem, they will require a careful understanding of the full service delivery model, and an analysis of which combination of customer engagement models, processes and technologies to invest in, develop, or to partner in, to deploy this new structure.
Looking across the full framework of customer lifecycle management (see Figure 1) raises a series of key questions that must be answered if an in-home product or service is to succeed. For example: How do we select and craft the right set of products or services that align with the use cases of our customers? How do we educate a varied group of consumers about the benefits that matter most to each of them, so that we drive sufficient adoption and acceptance? What’s required to ensure that the installation and provisioning experience is a positive one? How do we continue a positive customer experience over the life of the program or product to sustain active participation? What new protocols and business functions do we need to build internally or outsource? How do we do all of this in the most cost effective manner possible? Is it still too expensive to be justifiable?
These service model considerations have long been the marketing and service focuses of many of the entrants now being drawn to this attractive new ecosystem—e.g., consumer electronics makers like Sony and Control4; home appliance manufacturers like LG and Samsung; retailers like Best Buy; and communication service providers like Comcast and Verizon.
These alternative hybrid and direct-to-consumer players (see Figure 2) offer well-differentiated products and services and have collectively spent billions of dollars refining product marketing, sales and service models that have become the de-facto standard experience for consumers. In competitive markets, utilities will have to compete against this model. In traditional markets, utilities will have to compete against the expectations that this model has set. What’s more, these new market entrants might offer use cases for customers that might not align well with utilities’ interests. The key decision makers for many of these new products and services ultimately will be consumers, not utilities.
For example, solutions offered by these new entrants that promote efficient and high use of distributed generation might reduce user consumption during low-cost off-peak periods—potentially eroding a utility’s revenue base—but they provide no significant mitigation during peaking events. The success of these new entrants threatens utilities’ ability to achieve value from this market. If utilities are going to successfully cross beyond the meter and compete in the in-home energy product and service markets, they’ll need to consider the full service model and the financial realities of what’s achievable.
While there are obvious differences between the electric utility industry and other industries such as broadband or home security, there are also many parallels. Comparing in-home services and the economics from those more mature industries can help utilities to identify areas in the service model that will pose the greatest challenges as in-home product and service markets develop (see Figure 3).
Successfully crossing beyond the meter into the home will require robust go-to-market strategies including advanced marketing and intelligence, customer segmentation, pricing strategies and customer-based product development. These requirements significantly change the dynamics for the utility’s offering in home products and services.
The utility will no longer enjoy an incumbent position and will need to ensure its product and service offerings are as compelling as those of its competitors. While utilities do have significant advantages as energy providers, other market entrants will also bring unique capabilities to the table.
An in-home product or service won’t be a commodity, where the only differentiator is price and where the use case is transparent. Utilities will need to acknowledge a variety of customers, preferences and use cases and create flexible options. Targeting the better customers for a given product or service, rather than taking a one-size-fits-all approach, will be crucial.
The in-home product and service market will evolve faster than existing utility businesses do. Utilities can’t assume that an in-home product or service will be sufficient for a sustained period; it might look more like traditional consumer electronics with rapid development cycles. Most mobile phone, television and computer models, for example, are refreshed each year with significant new technology and capabilities. As with other consumer-facing products, constant R&D investments are required as consumers’ perspectives, behaviors and in-home technologies evolve.
In other industries where these dynamics already exist, go-to-market strategies involve constant application of advanced marketing techniques such as:
• People: Focus groups, surveys, channels for customer feedback and other customer intelligence gathering methods. Deep market segmentation and custom analytics to structure the characteristics, preferences and behaviors of identifiable groups that can be targeted with marketing messages, pricing models and product features and functionality.
• Product: Product development and packaging of offers that explicitly appeal to customer preferences and use cases—not exclusively to the operational goals of the company selling the product.
• Pricing: Sophisticated and varied pricing models that can be used to improve penetration and yield for different segments.
• Promote, Placement: Crafting the marketing messages that best convey the value propositions that align with customer preferences and are delivered consistently and clearly through the appropriate media.
As an example, consider an existing customer-facing service delivered by utilities: demand-side management (DSM). A DSM program that offers a $5 per-month rebate to curtail load for a specific period of time is not atypical. Assume through this program that the utility would like to attract enough customers to aggregate 15 MW of peak capacity for the year with a wholesale value of $750,000. If the customer base is segmented as illustrated in Figure 4—which charts consumers’ “likelihood to participate” against peak energy use—a clear target audience emerges (top right): high-energy consumers who are also highly likely to participate in the program.
While all the consumers in this top-right quadrant are good candidates for DSM programs, there are likely identifiable sub-segment clusters such as the “interested middle” and “big green” groups. Additionally, there are a large number of high-usage customers, the “non-interested majority,” who, while not interested in the program, are of high value to the utility. Each segment requires a different sign-up incentive, which implies different effort and varied pay-back levels for the utility. However, the vast majority of DSM programs today provide the same or very similar incentives. This causes a sub-optimal outcome with the utility spending more than required to achieve the target 15 MW capacity from the program. Using this segmentation example, utilities could attract 10,000 participants at a lower cost, instead of 15,000 people, by targeting higher peak-usage customers, or could convert the lowest-cost 12,500 users by targeting customers that are most likely to participate.
If we examine the customer acquisition costs of other mature in-home services we find that marketing is the single largest cost and can range from $100 up to $450 per customer. Utilities might have a marketing advantage because all potential customers of in-home products or services are existing energy account holders. Yet most utilities also have smaller market footprints than most major providers of mature in-home services. For example, the largest investor-owned utility is PG&E with 5 million electric customers and 4.3 million gas customers. AT&T had 95.5 million wireless subscribers in 2010. Utilities ultimately will need to greatly enhance their marketing capabilities as they are among the most important drivers and costs of customer acquisition.
With the exception of the 16 U.S. markets with retail competition, most utilities are true monopoly incumbents that typically don’t employ multi-channel customer acquisition strategies. Moving beyond the meter into a competitive in-home energy product and service market requires greatly expanding the breadth of the sales strategy. To compete effectively, utilities need to consider a varied set of sales channels including direct, online, retail, and resellers, each of which brings a unique set of economics, reach and advantages.
Determining the correct sales strategy and channel mix for utility entry into the in-home energy products and services market will largely depend on the goals of the services and the receptivity of the various consumer segments comprising each utility footprint. If goals for market penetration are modest and consumers within a given market are highly receptive to the product or service, then augmenting the call-center direct sales channel might be all that’s required. As goals become more aggressive, reach might need to be extended using retail channels and resellers. However, in all cases utilities will need to build capabilities and organizations to support their sales efforts.
For example, if a utility decides to go direct to the consumer, clear changes need to occur to existing call centers. Right now a utility’s call center receives calls for four main reasons—new service sign-ups, disconnects, billing questions and outage reporting. In a beyond-the-meter world, time and money is required to convert customer-service reps into sales consultants so they know how to engage with customers to identify the correct products and services for a given customer and to help up-sell them if the call was inbound. This is a completely different cost model in terms of training, support and sales incentives.
However, if we think that a direct sales strategy won’t yield the desired customer participation, leveraging big box retailers, such as home improvement stores or electronics stores, is another viable option. In retail environments, customers are expecting to learn about and potentially purchase new products and services, making them much more receptive than when they’re calling in for a billing or care concern, or being pulled from some other activity to receive a sales call. And resale channels—while expensive because a commission is paid for each new customer—are also viable for high-value target customers. For example, targeting the top 7 to 18 percent of electricity consuming homes (see Figure 5, three columns on right) could be ideal for reseller channels that have existing access to those segments.
For both retail and reseller channels, the utility doesn’t need to build a customer-facing sales organization. However, account management and product marketing capabilities and organizations are needed to ensure these channels present correct messaging, properly educate new customers, set realistic expectations and provide cost-effective yields.
Examining other mature markets also reveals that sales costs per new customer are significantly less than marketing, ranging anywhere from a negligible spend up to $125. With the exception of direct retail—i.e., brick-and-mortar stores—sales costs generally are highly variable and incurred only for successful sales. However, account management can be impacted by utilities’ relative lack of scale, as most prominent retailers operate on a national or regional level.
Utilities today are responsible for provisioning and installing their own field equipment, and the clear point of demarcation is the meter. The vast majority of these installations require a crew and truck to be dispatched, where the bulk of the work is done on-site. This approach, while perfectly appropriate for traditional utility owned properties, isn’t well suited for the beyond-the-meter market.
When utilities venture beyond the meter, installing home-based connections, appliances and software, new service models must include provisioning software and operational methods and procedures (M&P) that minimize the time—and therefore cost—of provisioning and installation. If provisioning and installation aren’t optimized, the economics of providing in-home services are greatly impaired, requiring many months or even years to pay back the costs.
DSL broadband service from telcos in the early days is a good example of the not-so-hidden costs of provisioning and installation. In 2001, when broadband demand was beginning to take off, the telco DSL offer was notoriously difficult to provision with an average installation time of 2 hours 10 minutes, and a cost of anywhere from $600 to $1,500 per subscriber.1 With a per-subscriber revenue between $40 and 60 per month and a gross margin of approximately 80 percent, the payback period ranged from 13 to 47 months—quite a wide range and not competitive with cable modem service at the high end.
Identifying this disadvantage early, telcos such as Qwest, SBC and Bellsouth (the latter two now merged as AT&T) took several steps to reduce costs and ensure a positive customer experience, including aggressively promoting customer self-installation; putting in place M&P standards, such as technical prequalification, to ensure self-install had a high success rate; and optimizing DSL modem technology with protocol standards to minimize configuration and compatibility hurdles.
These changes lowered installation costs enough to make DSL a consistently competitive market option while also improving the customer provisioning and installation experience.
While self-installation might not be feasible for some in-home solutions, minimizing the burden of provisioning and installation will be imperative, especially given that in-home energy services will be focused on just a fraction of consumer usage or demand. These services will produce a lower dollar value per month—about a $10 to 15 value is typical—compared to other in-home services, such as broadband (about $50 revenue), or security (about $30 revenue). Before utilities contemplate crossing beyond the meter into the home, we must be well prepared with the service infrastructure in place to ensure a low-cost and positive customer experience.
Utilities have excellent support and care capabilities for the core business of providing reliable electricity and generally are very responsive to service calls and outages. However, there are significant new requirements beyond the meter that aren’t being fully considered by most of the industry and need to be addressed to successfully provide in-home products and services.
Support isn’t simply fielding service calls, diagnosing the issue and dispatching the right crew with the right equipment to the right spot—all things that utilities do a very good job of upstream of the meter. A support model is an essential part of the overall service delivery model, without which utilities will be ill-prepared for the deluge of service calls and issues that will arrive once service extends into the home. A minimum level of these service calls is inevitable when services become less transparent and more intertwined with customers’ day-to-day activities. Utilities need to adopt a corresponding support model that can efficiently and effectively field these calls, quickly filter out the many false positives that result from user error, and then conduct meaningful and deep preliminary remote diagnostics and troubleshooting. Without these capabilities utilities will be at risk of overburdening their field services force and will incur significantly higher costs than is necessary.
In more mature in-home services, such as security, high-speed Internet or cable television, customer service reps can troubleshoot a remarkable number of problems remotely, including settings on the customer’s in-home equipment, rebooting the equipment, etc. These capabilities didn’t happen overnight, nor did they happen without a well thought-out service delivery model. These companies have spent significant time and money with the vendor community putting the right tools and processes into the equipment so these services can be performed remotely.
Crossing the threshold into the home isn’t an easy path for any utility. Yet this market has been navigated by others who, through a combination of targeted service offerings, segmentation, pricing, and support models, have successfully addressed the hurdles that utilities now face. Home energy anagement programs and services might be challenging for utilities, but they are potentially important and lucrative. The models for capturing this opportunity are ready to be examined, retooled and applied.
1. Alan Stewart, “America’s Network,” 2001