The utilities market has done a full pendulum swing since its deregulation more than five years ago. The market has seen massive consolidation in the past three years, being dominated by six major suppliers. However, this is changing due to the rise in affinity deals between suppliers and a variety of different companies.
The average UK consumer is faced with a choice between 16 electricity suppliers, 22 gas suppliers and seven telecoms suppliers. Consumers are as likely to buy their energy through a supermarket or high street bank as from some of the more familiar names, such as British Gas, Powergen and npower.
This explosion in choice puts consumers in the driving seat, as the market is highly price driven. There is increasing pressure on suppliers to find that elusive point of difference that will help them build greater customer loyalty and stem the flow of customer accounts into the hands of their rivals.
The churn of consumers is one of the most significant issues facing the utilities industry, and research from consumer information firm Claritas UK has identified the number and type of consumers who are considering making the switch.
Of course, for most companies the main concern is not just the number of lost accounts each quarter, but also the value of those accounts. A high billing customer on direct debit can be worth five times as much as other customers. Losing a lot of direct debit business can make a serious difference to the balance sheet.
According to Claritas, between 20.3 per cent and 26.8 per cent of gas and electricity customers have switched supplier at least once. In the telecoms market, about 10.6 per cent of consumers have made the move. The research also shows a correlation between the decision to switch and the average value of a quarterly bill.
The gas market has experienced the highest levels of switching, but suppliers have also invested a lot of time and money on trying to convince customers to do just that. The most churn has occurred among those who spend between &£76 and &£99 a quarter, with 26.8 per cent of customers in this bracket switching supplier. This figure drops to 25.5 per cent for customers that spend less than &£75 or between &£100 to &£150 a quarter. The least movement is among the highest spending customers (more than &£151), where 23 per cent of customers have made the move.
It is therefore not surprising that utility giant British Gas is pushing its Doing the Right Thing strategy, part of this year’s &£30m brand campaign, in a bid to trade on more emotive attributes such as trust and reliability.
An interesting picture of changes in the market also emerges from consumers who are considering switching suppliers. Although just 6.4 per cent of low-spending gas customers are planning to switch brands, a significant 11.5 per cent of top-end customers are poised to take the plunge.
A similar pattern emerges in the electricity market. Again, the highest churn rate is among consumers who spend between &£76 to &£99 a quarter, with 24.1 per cent choosing to switch. This figure falls to 20.3 per cent for high-value customers.
The division between low- and high-spending customers becomes more apparent among potential brand switchers. Just 5.3 per cent of the lowest-spending customers are thinking of changing suppliers, while twice as many high spenders are considering a move.
The major players are also encouraging consumers to change through their affinity deals, with many clearly aimed at the energy consuming family market. These include Powergen’s venture with Tesco Clubcard, which gives customers one point for every &£1 spent on gas or electricity, and EDF Energy’s deal with Nectar.
Customer churn in the telecoms market is a different story. Deregulation came much later to this market and switching levels are less than half of those for other utilities. However, it is the high-value customers who have been most promiscuous. Claritas’ research shows that 10.6 per cent of customers who spend more than &£151 a quarter have already changed supplier. This is compared with eight per cent of customers who spend less than &£75 a quarter.
However, churn rates are likely to continue to rise due to increased competition across the telecoms market. BT now has 20 fixed-line rivals, notably Carphone Warehouse, Sainsbury’s, Tesco and Swedish operator Tele2. Each promises to slash the price of home phone bills, and this trend may have already begun, with BT reporting the loss of 40,000 customers in the last quarter.
Now that the choice explosion has begun, churn rates will continue to grow. There is even an independent gas and electricity consumer advice service, Simple Energy, that offers customers impartial advice about the best-priced supplier in their postcode. As the utility sector grows, so does the challenge of maintaining loyalty. Understanding how and why customers move around this market is vital and it will be the innovators in this industry who win through.