Home Creating competitive advantage in retail energy

In this article, which supplements our recent webinar, we set out to explore how energy suppliers can leverage proven strategies to create competitive advantage, illustrated by case studies of digital transformation from within and outside of the industry.

Running a successful energy retail business has always been hard. Power and gas selling are commoditising at light speed, in a market which is hyper-competitive, making it challenging for the supplier to differentiate their offering to the customer.

Increasing customer switching rates and thinner margins are directly impacting a host of incumbent retailers, who are already struggling to make money.

Building a business quickly, to a size where economies of scale can be leveraged, has been a focus for many suppliers in recent years. However, to do this profitably has got harder, with events over the past ten months making it harder still.

A price-led marketplace

As we have seen the rise of new competition in the marketplace, the most common model for new entrants has been to grow quickly in order to get to scale and hopefully generate some profits. This model relies upon having a simple low cost-to-serve business model focusing on cost-effective acquisitions, primarily from price comparison websites. The model has almost always been a price-led proposition, which has effectively made the market incredibly one dimensional.

End of an era

It feels like we are coming to an end of a market cycle; the current market model has been effective in introducing new competition and generally reducing wastage in the market. However, it no longer feels like it is fully functioning. Everything is price and cost focused, resulting in commoditisation of the market and destroying profitability which in turn makes it difficult to invest in innovation.

Diversifying the proposition

The savvier suppliers are trying to compete on the proposition level, by diversifying into areas such as green energy, enhanced customer experience, electric vehicles and net-zero enabling offerings like demand side flexibility, heat pumps and domestic batteries.

Some suppliers, such as Octopus and OVO, are doing this as part of their wider offering. Others, like Social Energy, Good and Ecotricity, are segment targeting. However, not yet has a supplier managed to scale this proposition to really make money through diversification.

You may wish to read the following article: The effects of covid on the retail energy market

Software is critical

A large barrier for the suppliers is IT. Many of the mature suppliers are entrenched in massively complex legacy IT infrastructure and processes, which makes agile innovation very challenging, whilst other suppliers have never properly invested in a platform and capabilities that allows them to offer something truly differentiated.

Typically, investment in the energy sector has been focused on lowering costs in order to compete on price, enabling them to retain and grow their customer base. There has not been enough focus on acquiring and utilising customer data and using it to change customer behaviours.

Transactional relationships

If suppliers acquired customers through a price-comparison website and have done nothing with them apart from issuing a bill, then it’s not surprising that their offerings have become commoditised.

These challenges aren’t unique to energy and there are some good parallels to be drawn to adjacent sectors who have been trying to address the balance of commodity products, price, regulation, competition, aging architectures and business models and customer experience.

The banking sector

If you boil the banking sector down to its basics then, fundamentally, banks enable you to put money away or allow you to borrow when you need to.

From a retail banking perspective, much like the energy sector, most suppliers have tried to differentiate but have struggled to engage with customers on anything but price, unless of course something goes wrong. The products are generally all the same, so the race to market is about how a brand can package the products differently in order to retain the current market share or in order to attract a different demographic of customer.

This is why we’ve seen a rise of new banking brands such as Monzo, Marcus and Starling. These brands are born from new entrants as well as existing brands, doing something differently. For example, Monzo has entered the banking sector with a new and interesting experience, whilst established retailer Goldman Sachs has brought to market a new offering under the brand Marcus.

How has the banking sector started to evolve?

The first thing they’ve all started to focus on is understanding their customer base really well through research and understanding what will resonate with their target market.  Once this is understood, companies have wrapped a message around a proper product design capability so that they create a value proposition which really resonates Simply put, they market a product with an experience.

The key difference here is customer involvement and feedback – effectively the customer base is helping to design and build the proposition iteratively, as opposed to internal teams running big programmes to build solutions that you think customers want.

A good example of this is the way in which Monzo categorises and visualises a consumer’s credit and debit activity into different areas, through their app, providing a helpful and engaging customer experience.  This is a really simple service which helps customers, in particular the younger demographic, understand where their spend leakage is, enabling them to make informed decisions and adjustments in the way in which they manage their money.

Energy retailers can learn a lot from fashion retailers

Another example is the fast-moving fashion sector, where the objective is to drive brand awareness and desire through strong marketing; identifying and initiating trends and then amplifying these trends in order for the brand to pivot quickly.

Linked to this pivoting is the notion of micro segmentation, which involves really getting to know your customer – their interests, likes, dislikes, motivators and pain points. This enables a brand to provide a tailored experience, proposition and message that will resonate at the micro segment level.

Energy resellers can learn from this by creating more tailored user experiences. As the energy consumer is changing, adopting a green agenda and greener technology such as air source heat pumps to heat their home, the energy supplier needs to provide a service that is tailored to the specific need of the consumer. A one-size fits all approach is no longer compatible.

How do you do micro-segmentation at scale and cost effectively?

The answer to this is through a blend of data insights and a good software platform that can help companies to use this insight and turn it into ‘actionable insight’, to drive better user experiences. Successful energy organisations will blend and merge open data sets with their own internal data to complete segmentation and to target customers effectively.

Targeting techniques can include models such as factor analysis, retention and lifecycle modelling as well as performing look-alike modelling for spend and usage patterns.

Ryan Thomson and Ben Morgan are from Baringa Partners and have worked with a number of suppliers to help them segment their customer base, informed by customer behaviours and data insights. They’ve found the key challenge for businesses in energy is how to take this further into micro-segmentation in order to turn it into a personalised and automated proposition, at scale.  Getting customer insights is one thing, turning it into cost efficient actions is another altogether.

Ryan and Ben believe that the days of the homogenous customer are long gone. Energy suppliers must shift the focus away from price and be able to offer propositions that both the customer and the supplier values; then they need to be able to effectively, efficiently and compliantly target each of the micro-segments within their customer portfolio and the wider market.

Getting started

Getting started is often the hardest part and Baringa Partners have been looking at what it takes for an organisation to make a significant improvement in its competitive performance. You can discover their insights in a series of blog posts, which are on the Baringa website.

The research starts off with some interesting questions, challenging if the value is in your existing business model still holds true. They then go on to explore the ecosystems, the propositions and experiences, the platforms and data, and the underpinning people and organisational aspects of a transformation. If you work for Bulb Energy you’ll find you get a very complimentary mention in the report where you look at cultural alignment.

The series is called The Twelve Shifts of Digital and you can access it here.

 

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