The July 11 release of the British government's widely anticipated comprehensive energy review prompted debate on a number of heated political issues: security of supply in an unstable world, rising fuel prices, and the commitment to build new nuclear power plants as a part of Britain's energy mix. But these issues, while important, mask another crucial consideration as Britain and, indeed, all of Europe considers its energy future.
The problem: Power companies are failing badly when it comes to meeting the needs of their customers. Too many utilities are winning customers based on price, only to lose them later because of poor service. Recent figures from British energy regulator Ofgem show that 900,000 customers switched suppliers in March alone. No business can succeed for long with that model.
Until utilities figure out how to improve service and hold onto their customers, their ability to earn reasonable returns, invest in new technologies and infrastructure, and even stay in business will be seriously impaired. That puts a damper on even the soundest energy policy.
RETENTION, RETENTION, RETENTION. Most energy companies in Britain have focused their resources on the battle for residential market share, using price as their main competitive weapon. Yet even under the most favorable business models, companies don't usually break even on the cost of acquiring new customers for several years—sometimes up to nine years. Thus, the difference between profit and loss for most energy companies depends on how well they are able retain their most profitable customers.
How can energy firms hang onto customers they win through aggressive pricing? First they must understand how well they are serving their customers today. They can start by asking the question: How likely is it that you would recommend us to a friend or a colleague? A one-question survey can get response rates of 70% or higher and can be conducted often enough to provide managers with clear, timely, and accurate feedback. Even more important, it provides a hard-nosed, no-nonsense measurement that can focus an entire company on earning customer loyalty.
Businesses such as Aggreko, Microsoft (MSFT), Intuit (INTU), and GE (GE) have improved customer loyalty by focusing on a single, revealing statistic known as the Net Promoter Score, or NPS. It's calculated by subtracting the percentage of customers who are unhappy (scoring 0 to 6 out of 10 on the survey) from the percentage who are loyal promoters (scoring 9 or 10).
SCORING BADLY. The NPS provides a benchmark as clear and actionable as net profit or net worth. If 70% of customers are loyal promoters and just 10% unhappy—an NPS of 60—you're in great shape. But if only 30% are loyalists and 20% are unhappy (meaning 50% fall in the middle), your NPS of 10 says you've got work to do.
For British energy companies, the news is disastrous. A recent Bain & Company survey of customers of seven power companies found an average NPS of negative 51%. In other words, more than half of these companies' customers are actively campaigning against them. Indeed, utilities rate below most other service industries, including British supermarkets, mobile-phone services, and insurers in terms of customer advocacy.
Cutting prices is not the solution. Utilities should focus on improving service so they can create and retain more loyal customers. The elements of an effective service strategy are not at all surprising, but getting all of them right is difficult to do.
WHAT CUSTOMERS WANT. First, a utility must have a single IT platform for customer service. Most energy companies are overburdened with many legacy systems, built up during the waves of consolidation that have washed through the industry in the last decade and a half. The accumulation of so many patchwork systems leads to poor data quality, drags down performance, and lets customers fall through the cracks.
Systems and the business processes that run through them have to reflect what customers want: Smooth sign-up procedures, accurate and timely billing information, and simple explanations of new pricing or payment models.
Second, great service requires quality at the front line. The person who answers a customer's phone call should be able to answer 80% or 90% of the questions. That takes training, but also a system that provides a detailed view of customer records and the right tools to solve problems.
COMPLEX PROBLEM. More important, it takes a culture that emphasizes solving customers' problems. When Powergen couldn't achieve the levels of service it needed to handle customer issues efficiently through a call center in India, the company moved the operation back to Britain.
Third, a utility has to recognize that all customers are not alike. Utilities tend to take a simplistic view: large accounts, small businesses, and residential. But residential customers have different needs based on their behavior and their demographic profile. Their value to the supplier also differs across a range, based mostly on the amount of energy consumed and the number of products purchased.
Utilities should take this into consideration when building customer-service strategies. A retired couple, for instance, has very different power usage patterns and service expectations from a young, single, affluent city dweller. Most of the latter will probably accept higher prices if the supplier is able to maintain a hassle-free service—extended call-center hours, for instance, or a dedicated customer-service team. And he or she is more likely to buy additional products such as home emergency services.
HUGE STAKES. The situation in Britain has major implications for energy companies across Europe. Although the British energy market is furthest along in meeting EU targets for liberalization of energy markets, the other European markets are moving in the same direction. Moreover, many of the key British suppliers are now owned by other European energy companies, so customer strategies that succeed there are likely to be replicated in other European markets.
As governments across Europe try to sort out their energy policies, from the role of nuclear and renewables to the security of energy supplies in an increasingly uncertain geopolitical world, utilities have stepped into the spotlight. However, if they want to be around long enough to play a role in the debate, Europe's energy companies will have to take care of business first—and that means finding and keeping loyal customers.