Two houses within half a mile of each other – one is affluent, detached and distinctively upmarket. The other is a poorly maintained council property in a low-income part of town. The occupants of each house have a very different socio-economic characteristics, yet how does an energy supplier set about recruiting the best customers in every area without being seen to cherry pick?
The first step is to identify the target market. This involves dividing the UK’s 19 million domestic customers into three main categories. First are the “preferable” households that represent about 5 million homes. These householders have the highest propensity to switch, are affluent homeowners in blue or white collar employment, have above average energy consumption, will happily sign a direct debit mandate and therefore represent low credit risk.
The second group are the 10 million or so “resistant” householders who don’t like change or cannot be persuaded early enough to switch supplier. The cost of achieving conversions in this category of customers outweighs the financial rewards. It is possible that these people might be satisfied with their existing supplier, disapprove of privatisation or think that there is little financial incentive for them to make the effort to alter existing arrangements.
The remainder are less desirable. These are usually late payers, live less stable lives, in rented or shared accommodation, have low energy consumption and present high credit risk. This segment also tends to be more responsive to promotional material, which can be a problem.
Suppliers use a variety of customer segmentation systems to find out where these people live. Both Mosaic and Acorn are being used extensively to highlight neighbourhood characteristics. From the residential postcode, the attributes, lifestyle, readership and buying behaviour can be reasonably well assessed. More sophisticated systems such as Gems and Fruits use individual level data derived from mass market surveys to determine behavioural characteristics.
Some players devise their own bespoke segmentation systems. Mostly these are RECs with the benefit of the experience of their electricity supply customers. Non-RECs, such as Amerada Hess, Calortex and British Fuels, have the additional challenge of gathering customer data from scratch before they can segment and define the target market.
In addition to using a customer segmentation system, utilities are buying spending data from consumer lifestyle survey providers. This may even involve sponsoring questions that ask about the customer’s propensity to switch, whether they have gas, what their level of consumption is, numbers in the household and income.
Having identified the market segments, the next challenge is one of persuasion. The prime objective for new suppliers will be to maximise the speed of market entry, ensure a low customer acquisition cost (on average this means a cost per contract of between 80 – 120) and finally to achieve critical mass with a minimum ten per cent market penetration.
There are various marketing and sales channels available to suppliers seeking to secure a foothold in the market. These are both above- and below-the-line activities.
Above-the-line here refers to branding activity like corporate advertising that cannot be directly cost allocated to specific sales campaigns. Like the current PowerGen TV ads, it is useful in building up general public awareness for the brand. It is also very costly, particularly in such a low-margin business as electricity supply, and the return is unquantifiable.
By contrast, below-the-line marketing activity – such as direct mail – can be directly costed to specific localised sales campaigns. The table right provides a summary of marketing activity for the first four phases of the gas trial.
Some suppliers are trying more aggressive ground-level marketing tactics such as doorstep selling. This can be highly effective in building up a customer base, but it does attract a certain type – normally cash oriented, low income and higher risk – and so the costs of servicing such a customer base needs to be carefully considered.
Experian and other bureaux still advocate direct mail, as it is the lowest cost mechanism to generate response and measurable return. Access to highly targeted prospects is readily available through off-the-shelf databases such as Gems or GB Address. In the absence of market research surveys, electoral roll based mailings are most common place. Subject to the dynamics and creative treatment, response rates have tended to range from 0.5 per cent to as high as 14 per cent. Typical conversion rates tend to hover around 20 per cent.
The successful players will be those that devise the best combination of targeting tools to develop their strategies for both customer acquisition and customer retention. The key players will continue to optimise the marketing mix in relation to the media channels available.
The typical tool box contains:
Data on prospects, areas and markets
Segmentation systems to identify prospects across areas and to quantify and qualify the target market.
Analysis using micromarketing skills given the low level of market penetration.
Software. In-house database systems are crucial to ensure full integration with sales & marketing and billing capabilities.
National prospect lists using electoral roll and lifestyle survey information.
Marketing database and modelling systems – both optional extras.
The major players will continue to jostle for position using a raft of tactical promotional campaigns; invariably contained by cost, timing and regulatory intervention. Having invested heavily for the past two years, it makes sense to ensure a return and see the commitment through.
Future marketing strategies will result in even more aggressive recruitment campaigns. This could bring reductions in price discounting with more emphasis on benefits selling. There could be a reduction in marketing and sales channels, which means a probable decrease in the use of direct mail and an increase in direct sales.
Strategic alliances will continue as they offer players rapid market penetration and nationwide coverage. In the case of retail operators, the use of loyalty cards and club schemes is by no means new, but has a successful track record. The primary concern for suppliers will not be who to partner, but how to control costs in a low margin business.
There are only 19 players active in the market today – by next year that number could be significantly different. Only those prepared to last the course, invest for the future and build up their prospects through careful selection of customers, are likely to yield profit in this highly competitive new world of energy supply.
Alan Mitchell, page 26