Retaining and attracting customers in a changing Energy market

Tom Bromwich 10 Mar 2023
Written by Tom Bromwich
Energy Market Strategy

In recent weeks, wholesale energy prices have started to fall, and Ofgem have announced a reduction in the energy price cap. If wholesale trends continue, we’re likely to see a renewed increase in sales activity and customer switching.

This will only occur when customers believe that available fixed deals are of good value, and prices are unlikely to fall further.

To prepare you for this potential shift, we’ve provided insight below on managing growth, with a focus on retaining and attracting customers.

The importance of customer retention

Alongside planning for the sales channel switch-on, it’s also critical to remain focussed on retention. After all, it’s your customers who will be targeted by the sales and marketing activities of competitors!

Targeted retention activity within the current regulatory landscape is challenging, however, I would encourage suppliers to prioritise customers who are rolling off from previous long-term fixed contracts.

This segment will see a high degree of price shock, so consider targeting them based on their preference for price security, with further long-term fixed price deals.

Targeting is even more complex for the broader customer base, who are on default (price cap) tariffs. In this case, churn propensity and value modelling can be leveraged to identify the high value, high churn risk groups. These customers can then be targeted with fixed price tariffs, which offer value for money.

If these models aren’t available, value proxies such as a combination of consumption and debt risk, can be leveraged alongside operational triggers. This may indicate whether customers have checked their consumption figures, unit prices, or tariff details – all of which are inputs for price comparison websites.

Using challenger brands for segmentation

As the number of challenger brands in the market has reduced, we are unlikely to see pricing, relative to wholesale prices, hitting the extremes reached previously.

In normal times, suppliers pricing at or below gross margin break-even point would be highly likely but, for existing established suppliers, this is complicated by Ofgem’s decision to ban acquisition-only tariffs (which has recently been extended to 31 March 2024).

Before the energy crisis, price comparison websites played a dominant role in the energy market, with 2/3 of customers using them when switching energy supplier. Now, with wholesale prices hinting at a market re-opening, we expect price comparison websites to be gearing up to support customers in energy once again.

One potential approach to best leverage digital switching, is to embrace it and make use of a challenger brand to segment customers; but diversifying the channel mix is also key.

Price comparison websites offer limited scope to differentiate your offering, other than on price, and it can become a race to the bottom in terms of margin. Some suppliers were highly successful with a referral model, rewarding friends and family for signing up new customers.

This acts as a retention tool by allowing existing customers to benefit from acquisition costs, which would otherwise be spent on commissions for price comparison websites.

Digital marketing can also help drive customers to your website and encourage them to switch. However, this must be supported by a strong call to action, to keep acquisition costs at a minimum.

Leveraging EVs for special tariffs

There is, of course, space for innovation. EV-specific tariffs have become widespread since the rise of smart meters and electric vehicles. However, I’d suggest further segmentation of customers is critical here.

Daily commuters, who might be charging 50+ miles a day, have a very different consumption profile to someone who travels less regularly. One size fits all does not work in this space, as customers could well end up paying more for their day rate, and therefore more overall. I know I fell into this group when recently reviewing EV tariffs.

In summary, use of data and targeting is critical for retention. Although competitive pricing will drive volumes through price comparison websites, considering other options to diversify the channel mix is crucial. The key question is, how low will prices go?

For more insight on retention, attraction, and how they can be managed in your organisation, contact Tom Bromwich or Ian Barker.

Tom Bromwich

Director

Tom leads client engagements with a particular focus on commercial strategy, pricing, customer acquisition and retention.

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