Customer loyalty and energy marketing

Despite extensive marketing efforts related to customer acquisition, substantial price saving opportunities and a lack of barriers to change, surprisingly few customers opt to change their utilities suppliers in most deregulated markets.

In fact the most expensive companies as well as companies with mediocre service and few additional services can, in some cases, keep most if not nearly all of their customers in the medium-to-long term. Conversely, it is not necessary to have the cheapest prices or best services in order to win new customers. 

The explanation behind such odd findings can be found through the study of the psychology behind loyalty (and acquisition). After 5 years of research into consumer behaviour in deregulated energy markets, much of it at VaasaEmg and involving over 100,000 customers, a lot has been learnt about such psychology. 

Based on various evidence, it appears that satisfaction has a conditional impact on customer loyalty. Of course, customers who are very dissatisfied are more likely to leave and those with excellent experiences are likely to remain, but such extremes are very rare in all markets. In fact dissatisfied customers tend to remain loyal to their electricity supplier as long as they perceive that the cost of remaining loyal is less than the cost of changing. Conversely, satisfied customers tend to become disloyal only if they perceive that the benefit from changing supplier is clearly greater than the cost of changing. These costs and benefits are of course many and complex. The perceived changing benefits include an array of feelings relating to, for example, expected value improvements and the resolution of ideological conflicts. Perceived changing costs on the other hand include mental effort, the opportunity costs of decision-making time, fees, uncertainty and other risks. The perceived cost of loyalty includes various feelings relating to, for example, value and ideological considerations. Altogether it is a delicate balance and one that is difficult to manage through marketing.

Concerning the issue of prices, it appears that customers’ response to price discounts is not greatly determined by their income level or other demographics. Furthermore, the amount of the saving matters more than the percentage, and unless the savings are clearly greater than the costs (effort and risks of changing) then customers will mostly stay where they are. They seem to care little about whether their company is the cheapest and more about whether it is sufficiently competitive as a whole. 

Concerning additional offerings, customers are usually reasonably aware shoppers. They do not need to buy, for example, insurance or even electrical items from an electricity company, nor do they put much emphasis on web sites or overly friendly customer services. Dual fuel has often been a success, but what they want most is a good value, safe, reliable, environmental energy supply; clear, accurate and reliable bills; flexible service and no service problems. Additional offerings only work if they are competitive in their own right.

Offerings which research has shown as being of good potential include a variety of green products (ranging from simple green energy to home-based wind turbines to solar panels) as well as billing-related services via the Internet and 3rd generation mobile technology, and even some intelligent home devices and services. However, the estimated success of such offerings depends greatly on a clear research-based understanding of what customers really want from the offering and under which conditions and packaging they will purchase them.

Finally there is the issue of direct marketing. Most customers’ reasons for not changing electricity utility relate in some way to effort. Most customers are interested in changing (although may not feel likely to) and they are interested in comparing prices. However, they are sufficiently busy, stressed, satisfied and even lazy to prevent them from acting further. They would generally prefer to be approached by electricity marketing. Under such circumstances, clear and intensive direct marketing is a key to success, as has been shown in the UK. Conversely, in the Nordic region, the lack of direct marketing is arguably a key reason for low switching rates.