Energy Strategy
Customers for Life: A Thing of the Past?
October
15, 2000
By Regina
R. Johnson
Long-term
relationships are possible, but it's a matter of matching the right customers
with your cost structure.
Customer
churn in deregulating U.S. energy markets has been modest compared
to that seen, say, in telecom markets, or even in the United Kingdom's
liberalized energy market, where switching was active from the start.
But customer retention clearly is not the given it once was. Energy companies
have been quick to recognize that creating long-term customer relationships
must be central to their corporate strategy if they are to be competitive.
Pulling that off
requires a shift in culture and business processes, and huge investments
in the supporting technology. But it starts with deciding which customers
are worth keeping.
"I believe that's
primarily an economic question that causes one to wonder what segment
of the existing marketplace is truly profitable at the level of service
being offered," says Rob McCoy, president of retail business at Dallas-based
TXU.
Experts agree
that it's not enough to have the goal of retaining customers. Given the
high costs of acquiring and servicing customers, energy companies-and
all competitive businesses, for that matter-must focus on the potential
profitability of any customer relationship in their strategies.
"We're talking
about creating a business model that defines the group of customers you're
going to go after [based on] understanding the cost of acquiring them
and understanding the value proposition you give them, so you have a good
understanding of the margins they're going to give you," says Etienne
Deffarges, global managing partner for utility strategy at Andersen Consulting,
San Francisco. "So it's a question of matching your customer segmentation
with your value proposition and the expectation of a reasonable period
of time in which this relationship will last."
Designing a strategy
for customer retention, then, becomes a matter of segmenting customers
in great detail, and then matching them with offers that respond to their
needs and desires, according to the company's cost structure.
"I think given
the right cost structure, which we intend to have, every potential customer
who pays their bill can be profitable," says McCoy. "The question, then,
is does your cost structure allow you to define a service level that's
appropriate to that customer, that attracts them, and sustains a relationship
with them that is also profitable?"
In that answer
lies the very reason for cultivating long-term customers: to keep profitable
relationships and generate the new sources of revenue that will ensure
profitability over the long haul.
Technology
is the Enabler
How should energy
companies approach the challenge of cultivating customer loyalty? McCoy
says they must quickly and effectively transform themselves into customer
service companies that have "sticky" relationships with customers.
"Fundamental to
that is the segmentation and juxtaposed-offer design," he says. "That's
the job of sorting through customers and understanding the economics of
different types of customers, and matching up the right level of service
and offer to them to ensure a long-term relationship."
Ideally, he adds,
it eventually will be possible for his company to segment every customer
into a market of one, and design a profitable service arrangement according
to that customer's particular needs and the company's cost structure.
"You're talking
about a pretty big sea change in the marketing philosophy of the utility,"
notes Drew Child, president and COO of Orcom Solutions in Bend, Ore. "So
it's not any one thing. It's going to be a combination of the three legs
of the stool: people, processes, and technology."
The people leg,
according to Child, refers primarily to corporate culture, which must
be focused on competing effectively. Related processes and technology
must support the cultural shift.
"If you put the
customer at the center of the business model and you focus your organization
that way, you drive your programs that way, you will get loyalty," he
asserts.
This comprehensive
approach is known as customer relationship management, or CRM.
Changing the culture
of an organization is a major shift that must begin at the top. Revamping
retail processes and supporting technologies is perhaps even more daunting,
and requires tremendous investments of time, money, and effort. The technology
underlying CRM is vitally important, says Deffarges, "because it's the
enabler. Without technology, you can never make [strategic goals] happen."
What companies
deploying CRM strive for is the integration of all customer management
and workflow systems, to provide a seamless customer experience. In this
way, a customer transaction through any touch point, whether phone, fax,
or email, feeds into a database where it is recorded. Using a web-based
browser, a customer service rep has access to real-time information about
that customer, including a history of service, energy usage, and payments.
The customer service rep can respond effectively based on this information,
maybe even dispatching service calls while still in contact with the customer.
Later, the marketing department can use gathered information to track
needs or identify potential customers to match with new offerings.
e-Billing:
Could Incentives Get You in Trouble?
Let good segmentation lead, and you won't go wrong.
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The energy bill often
is said to be the best route to establishing a relationship with
the customer. After all, it's the only piece of direct marketing
that the customer almost certainly will read. Electronic bill payment
and presentment, or EBPP, has the added benefits of being cheaper
and, for some customers, more convenient than paper bills.
Customers have been slow
to adopt e-billing, but large investments in EBPP by Fortune 1,000
companies are expected to turn the tide soon. In the meantime, some
energy companies may decide associated cost savings make it worth
giving customers incentives to use e-billing. The approach has been
successful for telecom companies, says Ted Morgan, vice president
of product marketing at edocs Inc., in Natick, Mass.
"People offer discounts
of 9 cents per minute vs. 10 cents per minute if customers do their
account management over the web instead of over the phone or paper.
Those [companies have seen] tremendous adoption in a very short
period of time."
But some experts suggest
that the practice may be viewed as discriminating against customers
who don't have web access. "It's a perception problem, one that
utilities have to face more because they're such a regulated industry,"
explains Morgan. "But the reality is you're trying to encourage
people to a more efficient way of communicating."
He says energy companies
will need to craft strategies that they're comfortable with, but
adds, "We haven't seen any resistance to it to date."
According to Drew Child,
president and COO of Orcom Solutions, such decisions must be based
on customer segmentation. A marketer should determine which customers
both have access to the web and might be interested in e-billing,
and offer incentives only to that segment.
"That's a commercial
decision," adds Etienne Deffarges, global managing partner for utility
strategy at Andersen Consulting. He says energy firms have to assess
how many customers will be enticed by incentives against how many
customers will become so angry they might switch suppliers.
"Given the amount of
loyalty people have to utility brands, I think the second part is
rather unlikely."
The proper operation
of the e-billing system may be an issue of greater consequence.
Says Deffarges, "That's the important thing, because if you entice
somebody and they go online and they have to spend five hours, they'll
never come back." -R.R.J.
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"A typical CRM
strategy allows them to leverage software and technology so that they
can acquire specific data on their customers that they can mine to drive
new marketing and sales programs to gain additional revenue," says Wayne
Pettit, vice president of North American utilities at DST Innovis, Rancho
Cordova, Calif.
A single depository
of information about every customer interface also helps the energy company
provide better service. That's especially important for retaining the
largest customers, which may comprise 80 percent of the firm's profits,
notes Pettit. Customer service will be a differentiating factor among
energy companies as competition takes hold.
"Whether you're
an incumbent utility or a new retail player, you want to drive loyalty
so that the customer is not going to switch on you," says Child. "There
are a number of ways to do that, in terms of managing the touch points
incredibly well." These may include giving customers access to whatever
communication channel they prefer to use, or by having the flexibility
to send a bill at a customer-specified date in the cycle. "The customer
feels they're cared for, their needs are understood, and the energy company
is responding."
"That can all
be handled in a seamless, circular way, so that everything is dealt with
thoroughly and quickly, and [the energy firm's] brand values are stamped
on every customer-facing transaction," adds Martyn Whittaker, director
of strategic marketing communications at DST Innovis.
CRM technology
also is essential for its ability to streamline processes and reduce service
costs.
Notes McCoy, "Not
only does web-based technology serve to enhance the relationship with
customers, it also serves to make you far more efficient in your internal
processes and interfaces." He adds that the reluctance to replace expensive
legacy systems with web-based technology is among the biggest pitfalls
an energy firm can make with regard to CRM.
"If you're not
in a position to execute around those technologies, you're simply not
going to be cost-effective and you're not going to be service-effective."
Those who have
implemented CRM strategy and technology agree that the process is difficult
for an energy firm unless it has help from experts.
"They have to
recognize that they're probably not going to be able to build the capabilities
I've described here without some outside help, whether they hire outside
help or they just get the right kind of consultation," says McCoy. A good
approach, he says, is to assign a senior executive to lead a small nucleus
of what McCoy calls "seed" people; that is, CRM-skilled staff who can
"seed" the organization and begin the process.
"If you don't,
it may take forever and ever and ever-and you may never get there, frankly."
Where
Does E-Business Fit In?
Energy firms in
droves are rushing to implement the means for conducting business via
the Internet, with electronic billing and payment leading the list of
hot initiatives. E-business makes sense for many reasons, not the least
of which is that it's cheaper than using the postal system or call centers
to interact.
"We run customer
service centers for utilities," says Child. "There is a tremendous cost
advantage in driving some of that service into an online, self-care environment.
So from the cost side, there's a win. From the brand and image side, there's
a win, because it's simpler and more convenient for customers to use and
it leverages the utility's brand at the same time-that's if they've executed
it well. So you get a win in every category."
Although the best
practices in energy e-business are taking place in B2B, or business-to-business
programs, Deffarges maintains that business-to-consumer programs can be
successful in instilling loyalty. And the cost of the typical B2C venture
for a utility is relatively moderate, he says-in the range of $50 million
to $100 million.
"Overall in the
industry, what is happening is the bar is being raised very significantly,
very quickly," he says. "A year ago, all the utilities needed to have
was a so-so website. Today, a lot of utilities are looking at [real-time
customer self-service via the website]."
Deffarges sees
B2C e-business evolving in four stages.
(1) Companies
have websites, which they use as a marketing vehicle to target the public.
This is the level the energy industry was at a year ago.
(2) Companies use their websites to facilitate communications with customers.
(3) Companies use their websites to enable economic transactions, and
provide products and services to customers directly. Examples are websites
like virtual energy suppliers Utility.com and Essential.com, or the home-management
platform at myHomekey.com.
(4) Companies use the web as a tool for marketing, partnering, and interacting
with customers in a personalized way, and also leveraging that capability
to build virtual communities of customers that share the same interests.
The energy industry
is between levels two and three today, says Deffarges, with level two
being the minimum they need to do to be competitive.
Susan Winslow,
product manager, e-commerce, at Excelergy Corp. in Lexington, Mass., sees
energy companies taking action at these levels. "We have some clients
who have done focus groups, they know exactly what they want to offer
to their customers. ... Other clients want to get a presence out there
very quickly and add certain content now, and then as the market and consumer
behavior dictate, they'll add more later."
Deffarges compares
the personalization of level four to the profiles Amazon.com generates
to recommend book or CD selections to returning customers. But community-building
also will occur at level four.
Community building,
he explains, is where "a community of folks basically transit to your
site to interact among each other and create a powerful network." These
may be virtual communities of large industrial customers, medium-sized
commercials, residential customers, or some other group.
"The company that
has done that across industries is, of course, Cisco Systems," says Deffarges.
"People who do business with Cisco literally get so used to having everything
they want on their business interests in this community that they're always
there. It would never occur to them to deal with any other company. You've
reached the ultimate loyalty when you have that networking and community-building
effect."
Closer
Ties Are An Ace in the Hole
It won't be long
before energy prices drop to the lowest levels at which service can be
provided profitably. Once price no longer is the differentiating feature,
energy suppliers will compete on factors like customer service and value-added
offerings. That's when enduring customer relationships will be most valuable.
Whittaker of DST
recalls when the retail electric market was first opened in the United
Kingdom. "What we found was that a lot of the initial churn was driven
by price cuts, but of course, you very quickly get to a common pricing
level where it no longer becomes viable for people to [switch]. At that
point, some of these other issues that we've been talking about become
very, very important."
Ultimately, says
Pettit, greater, richer information about customers is the fundamental
reward of lasting relationships with them. Using the knowledge and understanding
acquired, the service provider can tailor all kinds of offerings, perhaps
bundling the commodity with other services. Doing so, he says, puts competitors
at a disadvantage, gives the customer more reasons to stay with his supplier,
and may even attract new customers based on word of mouth.
"Information is
the key. The guy who has the most knowledge about his customers and understands
his customers' needs, wins."
Regina R. Johnson
is editor-in-chief of Fortnightly's Energy Customer Management.
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