The utilities industry is not one without its complexities - especially in the UK. Power and gas suppliers like nPower, British Gas and e.on have more than just their customers to consider.
Above them sit transmission network operators that differ by region. In gas, so do gas distribution networks, while electricity suppliers must consider distribution network owners and operators.
Things differ slightly in water, where suppliers are responsible for everything from the extraction of water to its distribution. That said, this process is as (if not even more) complicated than delivering energy, thanks to added complications such as having to meet DEFRA (Department for Environment, Food and Rural Affairs) policy or meeting Drinking Water Inspectorate standards. Whatever the utility supplied, it's clear that nobody gets too smooth a ride.
As if that wasn't enough, there are also a couple of organisations who exist to ensure our utility suppliers don't get things their own way. Far from being evil overlords though, Ofgem and Ofwat encourage fairness, responsibility and ultimately improvement from our utilities sector.
Ofwat protects consumer interest wherever appropriate by promoting competition, efficiency and sustainability. Ofgem meanwhile uses price controls to limit charges to suppliers, set targets for reliability, customer service and environmental performance, as well as encouraging innovation that benefits customers via reduced cost and improved ability to meet demand.
Disloyal or disengaged?
In the energy market, competition has intensified. A rise in companies has caused something of a price war. In 2017, a record 5.5m British homes switched their provider. In February 2018 alone, 660,000 households changed supplier, another record high.
Price comparison sites are making it more convenient than ever to find the best deal available. With competition reducing costs and greater consumer awareness promoted from as high up as the government, it is little wonder we're seeing buyer behaviour shift.
And yet, despite raises in switches, suppliers and the ease of access to better deals, the industry's 'big six' continue to build their profit margins. Formed of the energy giants mentioned earlier along with EDF Energy, Scottish Power and SSE, the sector's dominant brands made a collective profit of £1bn in the 2016 financial year, in spite of losing millions of customers.
Why? Well, it's easy to hide behind the margins. The reality is that while they did rise, cumulative profit fell from £1.2bn, and the market share of these six has also dropped to 80%. The government is criticising suppliers for finding 'workarounds' to new price caps, allowing them to continue hiking rates.
One question these brands must ask themselves though, is whether this is sustainable? Ultimately, increasing profit margins will mean a lot less for these companies unless they can't find a way to improve retention.
Doom or boom?
Profit margins may well be growing, but as new and perhaps more conscious energy brands evolve, there is an argument that consumer demands are too. A study from Opinium confirmed the biggest motivator for switching supplier to be saving money.
However, the survey also revealed motives for leaving a supplier. Amongst the reasons which scored highly were poor customer service, feeling undervalued as a customer, poor management of accounts, major account errors and unresolved complaints.
Recent developments in the industry then have not only created a more competitive pricing landscape but also highlighted weaknesses of the sector's biggest players. For so long, energy providers have had it relatively easy. Where their most significant concerns were formerly more regulatory or logistical (such as those mentioned in the first section of this blog), they are now customer-focused. In hindsight, it seems obvious it should have been this way all along.
The issue for these companies is that because they haven't been forced to think about the customer much previously, they aren't very good at it. In January, Which? Magazine rankings placed all of the six businesses in the bottom ten energy suppliers. For firms of such resources and size, that is pretty embarrassing.
So outside of leaner pricing, what can these organisations do to win customers over - or more likely, keep them around? As per the earlier list of reasons for leaving a supplier, there has been a failure in the provision of customer service by these companies. Resultantly, the answer is pretty clear.
Energy companies need to inspire drastic improvements in the engagement of their customers. Elemental enhancements in the handling of renewals, resolving of complaints or management of accounts won't be enough to prevent customers from choosing a more desirable financial offer.
Another company can always undercut your offering. Accordingly, price drops are not a perpetual answer. Instead, it is now the responsibility of larger energy suppliers to make their service more than a bill for their customers. It is time to put some of their plentiful resources towards innovation, to form, design and create solutions that engage customers on another level.
With more consumers becoming wise to the benefits of switching, things are at a critical stage for the big six. Such innovation should leverage rising technologies to deliver a 'wow-factor' to consumers to have any real impact and help stop the rot.
How to future-proof:
Those that fail to adapt could well be putting their future at risk. Younger energy companies tend to be more open to innovation. They also have a stronger identity. For example, many leverage their approach to environmentalism within their marketing efforts. With their profits growing, it feels like it is only a matter of time before they too can dedicate resources to the creation of unique customer experiences.
In Summer 2017, hedgehog lab worked with EDF Energy to conceptualise such a solution, as shown in this case study. Suggestions within the proposal included the creation of a content-based app, a reimagination of digital billing, an exploration of how augmented reality could be used to conduct energy audits and more.
Since sharing the case study, we have built our internal capabilities with additions such as a dedicated AI team. Elsewhere, we've begun forming strategic long-term innovation partnerships - including one with utility provider Northumbrian Water, who are wisely getting ahead of the curve.
No matter the size of the company, there is no better time to explore how technology could improve your offerings. If you'd like to learn more about our consultancy services, our conceptualisation processes or our capacity to turn ideas into solutions, get in touch.
Learn about our innovation partnership with Utility of the Year award-winners, Northumbrian Water