Precision Packaging and Targeting in Competitive Power Markets

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For nearly a century, the $300 billion U.S. electricity industry has given double meaning to the term "monopoly power," with most of its 3,100-plus utility suppliers comfortably immune from the challenges of competition.


However, this is changing state by state - and rapidly. By the end of next year, more than half of American households will be able to select their electricity provider from a variety of options, just like they choose their long-distance company, their bank and their favorite brand of coffee.


Though less than 1 percent of residential customers has switched electricity suppliers, momentum is building across the United States. Analysts estimate 50 percent of the available power market will have switched to an alternative supplier by 2003.


As dozens of additional states open their markets to competition during the next few years, direct marketing activity in the retail energy arena is projected to increase dramatically.


However, selling kilowatt hours to the mass market poses unique challenges for would-be energy competitors.


The profit margins on electricity are razor-thin, so while other "utility-like" companies such as AT&T, MCI and America Online can afford to spend up to $300 to attract a new customer, most energy retailers need to keep their average customer acquisition costs much less than $100 to survive.


In addition, there is no national market - each state has a different timeline and varying rules for competition. And finally, since shopping for electricity is a new experience for consumers, marketers must overcome apathy and confusion just to get people interested in making a switch from the utility they've known for decades (especially since they'll continue to get service whether they switch or not).


In looking at the competitive experience to date, one lesson stands out: The residential market is not a homogeneous mass of households, all equally interested in saving a few bucks a month on their utility bills.


A study released by Primen, Madison, WI, an affiliate of the Electric Power Research Institute and Gas Research Institute, found that many homeowners will pay a higher price for energy if it is packaged in such a way that it provides a legitimate value proposition.


Many innovative "new entrants" have validated this premise, differentiating their services (and enhancing profitability) through offers that appeal to narrow subsegments of the market.


For example, some companies focus on people interested in convenience, providing an Internet-based "one-stop shop," where customers can not only choose an energy supplier, but also their long-distance, cable television and Internet service provider vendors - and receive one combined bill for these services. Other start-ups have been successful by targeting environmentally concerned consumers with "green power," guaranteed to come from renewable sources such as wind and solar. Still other companies offer predictability, charging a fixed monthly fee no matter what the weather happens to do. And many firms have bundled other value-added services with commodity electricity, such as security systems, home appliance warranties and whole-house surge protection.


Unlike traditional one-size-fits-all electric service, each of these packages tends to appeal to a distinct customer niche, often characterized by variables that go well beyond standard demographics.


Fortunately, new tools and data sources are enabling energy providers to cost-effectively deliver their messages to a much more narrowly focused and qualified prospect universe than in the past. For example:


• Direct mail campaigns can use household-level transactional data on past buying behavior to better target the specific customers most likely to respond to a particular offer. In addition, sophisticated predictive modeling and collaborative filtering techniques can pinpoint new customers who statistically match the "profile" of respondents to similar offers. Just as the type of car someone drives or the type of restaurants a person frequents can be correlated with their overall purchasing patterns, behavioral data also can be used to reliably predict whether a consumer is likely to prefer fixed-rate, "green" or low-cost electricity (or is unlikely to switch at all).


Combining this data with demographic variables, energy providers can significantly improve the response rates to their direct mail promotions - generating more sign-ups with fewer mail pieces, or driving traffic to their Web sites more cost-effectively.


• E-mail advertising (to consumers who have opted in to receive periodic e-mail offers of interest to them) can now be targeted in much the same way as direct mail - taking into account both online and offline buying behavior, demographics and the results of predictive modeling. In addition, advertising banners can be inserted "on the fly" across broad networks of e-mail newsletters, targeted by where the recipient lives. And e-mail campaigns can be integrated with direct mail by using lists that link e-mail to street addresses.


• Internet advertising on high-traffic, "name-brand" sites can be targeted and customized to users based on where they live - such as by area code or ZIP code - and can also take into account Web sites they've visited. For example, an energy provider can now "re-market" its offer to customers who visited its own Web site within the past week and checked out pricing, but didn't sign up for service. Using new anonymous targeting technology, the advertiser can deliver a subsequent banner ad to these Internet users as they visit other Web sites, knowing that they are highly qualified leads.


• Customer relationship management systems can incorporate external behavioral and demographic data to segment customers based on their modeled propensity to buy specific value-added products and services. This information can then be used on a real-time basis for cross-selling and upselling efforts in call center applications, or to customize offers on bills (electronic or paper), helping build both revenue and loyalty.


During these early stages of market evolution, precise targeting of prospects has become increasingly important for energy retailers hoping to cost-effectively acquire and retain customers in this dynamic market segment. And, like other industries that have gone through deregulation in years past, the rewards will go to the swift - those companies that create unique value propositions and gain early experience in understanding precisely which customers are their best targets. These firms are likely to establish dominant market positions and enjoy a large and lasting competitive advantage in the new era of energy retailing.


Bradley Davids is associate vice president of utilities at Abacus Direct, Broomfield, CO, a division of DoubleClick Inc.
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