It's no longer news that consumers can now choose their energy supplier. What is news is what happens to the market when deregulation becomes a reality.
To date, approximately 16 states, encompassing about 40 percent of the U.S. population, have adopted plans to let consumers choose their electricity provider. Most of the remaining states are considering the option or are on the verge of initiating their own plan. All of a sudden, existing utilities that have always had a captive market need to learn how to recruit and retain customers. They need to build brand recognition and establish themselves as an option for service.
Some states are starting out with a pilot program, which means that the offer is only available to a pre-selected group of end users. Other states can open up the competition to the entire market. Whether there's a pilot program or not, companies that are waiting for deregulation to happen are already behind schedule. This is a race, and the company that takes the most aggressive approach will win.
Companies need to establish their brand in the market before anything else. Existing utilities often market under a subsidiary's name so they are in the same situation as their competition. With no one having brand recognition, everyone starts on equal footing. It's the company that makes the largest impact and the first offer that has the best chance of winning.
When the pilot program was initiated in the Philadelphia market, the Public Utility Commission did not allow providers to seek a response prior to the market's opening. However, that did not stop Conectiv, the new energy provider in the market, from making its grand entrance. For three months, they honed in on creating brand recognition in a market that only knew the PECO Energy name. They spent significant dollars on television, radio and print advertising. It had hundreds of vans on the road touting its arrival. When people were able to choose, a significant number went with Conectiv.
At the same time, the existing utility, PECO Energy, was busy marketing under two different names: PECO Energy/Energy One and Horizon Energy. Because of the strength of the PECO name, PECO Energy/Energy One was able to claim a substantial market share. Horizon Energy, however, because of its lack of brand recognition and brand spending, never got a real start. With the rollout, PECO consolidated its program by marketing under the PECO Energy name as a strong incumbent (with newly lowered PUC approved rates) and created its own competition with Exelon Energy (a hybrid of Energy One and Horizon).
Companies soon realized that the customers gained during the pilot program were not necessarily going to be around long term. There is a significantly higher churn rate with customers who switched during the pilot program. Early adapters usually switch because of a price concern or disillusionment with their current supplier. Consequently, they are more likely to elect another supplier based on price or be disillusioned with the new supplier because the circumstance of their power delivery or billing hasn't changed. The search for a better price or better service is more likely to continue.
People who take more time to make a decision are more likely to stay with their first choice. Companies need to recognize this and take preventive measures to keep the churn rate to a minimum. And that comes down to implementing retention-focused offers that reward long-term commitments. It also requires promoting customer retention programs to help sustain market share.
This is the time to educate the public. Up until now, most people didn't have to think about their energy supplier — all they cared about was that their lights worked when they flipped the switch. Now, the utilities need to explain what deregulation is and how it affects the consumer. The fact is the existing utility still bills the customer no matter who is the provider and the energy still gets to the residence or business via the same poles and wires. It's that simple — the goal is to make it sound that simple for the end user.
Pilot programs can be a windfall or a complete nonevent. In California, nearly everyone opted to stay with the incumbent. The Philadelphia market was another story. The hype about deregulation was so huge that the market was oversold. The pilot program was only available to 5 percent of the Philadelphia market, approximately 78,000 end users. The combination of PUC, PECO Energy and Conectiv advertising created a tremendous interest in the program with nearly 400,000 people responding. When more than 300,000 of these people were turned away, they became skeptical about deregulation. This significantly contributed to the lack of interest during rollout. When PECO Energy was allowed to cut its rates by 8 percent, energy users decided to stay with the tried and true provider they've known all along. Why trade the devil you know for the devil you don't?
So after all is said and done, the size of the marketing campaign does make a difference. Brand recognition is a key to capturing the market. But maintaining market share is the tricky part.
Thomas Pitcherella is executive vice president of client services at DMW Worldwide, Philadelphia.