Customer Acquisition Marketing for the Utilities Industry
Deregulation allows customers to choose their electricity and gas suppliers, an environment that has created many new challenges for the industry.
To meet the challenges, many utilities have formed new subsidiaries. Despite the deep pockets and established reputations of their parent companies, these companies are, in reality, acting much more like start-up companies, facing new and little-understood markets and doing so on very limited budgets.
So far, 13 states have enacted legislation mandating some form of deregulation. Five more have issued a comprehensive regulatory order; one has legislation or orders pending, and the remaining have some type of investigation in process. Although the final form is far from decided, it looks like there will be some federal mandate determined by Congress.
In a few states -- New Hampshire, Pennsylvania, Massachusetts and California -- where some form of deregulation has been carried out, companies have gotten their feet wet in customer choice pilot programs and they have learned some basic tenets of direct marketing. Utilities have set up energy services companies (ESCOs) for the sole purpose of capturing new business, developing new products, starting new businesses and allying themselves with other affiliates to create competitive advantages.
These companies have to start from scratch in the marketing arena, identifying target markets and customers, setting prices, developing and implementing creative strategies and determining appropriate use of media. Price, product, promotion, sales and distribution channels are all issues that these companies have not had to juggle before. They must create a marketing infrastructure that includes call centers, fulfillment centers, billing, analysis and reporting as well as a marketing database.
A study we recently conducted suggests a surprising but significant difference between customer satisfaction and customer loyalty. In one instance a utility, which enjoyed a 95 percent customer satisfaction rating, realized a 45 percent defection rate in a group of customers participating in the Pennsylvania pilot program. What does this prove? However satisfied a customer may be, price is the driving force -- at least in the residential marketplace.
This is a critical issue for utility marketers who, while they may have had some experience in relationship marketing in the commercial/industrial market, have not had experience in the residential market. In the residential market -- where margins are slim -- prudent spending of marketing dollars is required. In order to profitably compete, you must identify target markets that represent a higher-than-average profit potential. That is, the customers who are less likely to switch are more likely to use a higher-than-average amount of power and are also more likely to have an interest in additional products such as security systems, appliance contracts and service contracts.
Unlike markets that rely strictly on commodity products (such as power), loyalty among target groups can be enhanced by offering additional products and services. However, the ability to develop effective and profitable cross-selling and upselling opportunities is dependent on the ability to target and segment the potential market and to identify needs within these groups. Thus far, there have already been some significant winners in terms of marketshare. Most of these have learned that success in this market depends on their ability to target their customers with the right products and measure the results of these efforts by media, distribution channel, customer and product and to do so while maintaining tight controls on customer acquisition costs. Marketers will find -- as has been the case in many other industries -- that chances for success can be greatly enhanced through the use of a marketing database.
But the very nature of this new marketplace makes it essential that the database decision be made carefully. There are four essential characteristics that are particularly important. The database must be:
* Scalable. This is an essential feature for these start-up businesses with limited budgets and an unproved ability to project market penetration. Utilities must be able to establish an accurate and financially sound cost-benefit ratio.
* Flexible. The industry is changing rapidly, and marketers are in a true learning curve. Thus, any system must be characterized by the ability to make changes in an affordable and timely manner.
* Open. A marketing database must be structured to integrate with internal systems to be able to share data -- a critical key to the success of a marketing database. In addition, since many start-ups have a high reliance on outsourcing, the openness of the system is critical.
* Usable. This may sound basic but too often companies implement the technological end of the database with the appropriate infrastructure but do not have the right people involved who know what a database is used for and how to productively use the information it can provide.
Until the implementation of customer choice programs, there has been little or no incentive for utility companies to implement database marketing systems, but today that is changing. The ability to identify and segment specific market segments is a prerequisite to success in the residential market.
No one can predict the future of the utilities industry with certainty. Nevertheless, as marketers we know that success in this marketplace will depend on the accuracy and accessibility of actionable marketing information upon which sound and profitable decisions can be made.
Duane Dahlheimer is vice president of utilities marketing at DiMark, a Harte-Hanks company based in Langhorne, PA.