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Utility Pricing Models


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Conference presentation on pricing options for utility services

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Utility Pricing Models

  1. 1. An Evaluation of Alternative Pricing Models for Utilities Convergence Matthew Rees Principal Consultant Charteris plc
  2. 2. I’ll start by establishing a few ground rules for this session <ul><li>Ignore current regulations as these are likely to change due to pressure from the industry to allow innovation </li></ul><ul><li>All the ideas are possible today, e.g. there is no need for new technologies such as real-time metering </li></ul><ul><li>All of these suggestions are either in use by some utilities today or have been discussed with them </li></ul>
  3. 3. I’ll try and answer these questions <ul><li>What is a Pricing Model and why is it important? </li></ul><ul><li>What are the products? </li></ul><ul><li>Who are the customers? </li></ul><ul><li>How are they billed? </li></ul><ul><li>How much do they pay? </li></ul>These areas overlap and they all need to be considered together
  4. 4. A Pricing Model defines all aspects of the offering, apart from the underlying utility <ul><li>Products </li></ul><ul><ul><li>bundled or unbundled </li></ul></ul><ul><li>Customers </li></ul><ul><ul><li>single or multiple </li></ul></ul><ul><ul><li>relationships between customers </li></ul></ul><ul><li>Billing and Payment </li></ul><ul><ul><li>billing/payment method </li></ul></ul><ul><ul><li>billing/payment frequency </li></ul></ul><ul><li>Price </li></ul><ul><ul><li>unit and standing charges </li></ul></ul><ul><ul><li>discounts and special offers </li></ul></ul>
  5. 5. Pricing Models are important as they determine the customer proposition <ul><li>The underlying product, electricity, gas or water, is virtually indistinguishable between suppliers </li></ul><ul><li>What differs is the price, billing process and payment options </li></ul><ul><li>Different customers have different needs and so are attracted to different Pricing Models </li></ul>The Pricing Model is not an add-on to the product, it is part of it
  6. 6. This example shows one bank’s use of Pricing Models on current accounts All of these are current accounts with roughly the same facilities What varies is who they are aimed at and the fees and charges The Pricing Model defines the product
  7. 7. Alternative Pricing Models also help to improve profitability <ul><li>Costs can be reduced through higher customer retention derived from meeting customers’ needs for price, billing and payment options </li></ul><ul><li>Revenue can be maximised by, for example, linking the payment frequency to customers’ wages/salary dates to improve collection rates </li></ul><ul><li>They can even be used to charge a higher price than other customers for the same service </li></ul>The correct Pricing Model aids the Utility and the Customer
  8. 8. The financial services sector is a good reference for utilities <ul><li>The underlying products, e.g. current accounts, are very similar between all financial institutions </li></ul><ul><li>The products are intangible, the real money is recorded on a computer </li></ul><ul><li>Financial products are used and understood by most people </li></ul><ul><li>The competitive nature of the financial services market is similar to utilities </li></ul><ul><li>Other sectors, e.g. telecoms, also share some of these characteristics </li></ul>Utilities can learn from other sectors such as financial services and telecoms
  9. 9. Similarly, utilities can learn from their colleagues in other countries Pricing Models have evolved in other countries to meet local needs Some of these can be translated to the UK, especially for well-defined customer segments
  10. 10. Agenda <ul><li>What is a Pricing Model and why is it important? </li></ul><ul><li>What are the products? </li></ul><ul><li>Who are the customers? </li></ul><ul><li>How are they billed? </li></ul><ul><li>How much do they pay? </li></ul>
  11. 11. A recent trend has been the introduction of single accounts for multiple purposes Bundling financial services in this way delivers clear customer value, e.g. reduce mortgage payments Bundling also helps the banks by locking-in customers to multiple products
  12. 12. The move to home services enables utilities to bundled multiple products “ Dual Fuel” has become a standard offering Some utilities, like Centrica, offer a wide range of products However, the degree of bundling is usually limited
  13. 13. Prepay phones enable customers to buy the phone and the calls at the same time Here prepay is used for the benefit of the consumer Generally, in utilities prepay is used by the company as a way of managing debt
  14. 14. Utilities could bundle their products with the things they are used for Customers could see the real life-time cost of an appliance if they bought the necessary energy at the same time Some cookers could have gas, electricity and water; you cook with all three
  15. 15. Powergen’s “Surf & Save” is an innovative product bundling Customers who use Surf & Save, Powergen’s internet service, get discounts on Powergen energy bills for every minute spent on-line
  16. 16. Agenda <ul><li>What is a Pricing Model and why is it important? </li></ul><ul><li>What are the products? </li></ul><ul><li>Who are the customers? </li></ul><ul><li>How are they billed? </li></ul><ul><li>How much do they pay? </li></ul>
  17. 17. Open Plan Together allows parents to help with their children’s mortgages <ul><li>The Woolwich’s Open Plan Offset mortgage enables a customer to offset the interest earned on their savings against the interest due on their borrowings </li></ul><ul><li>Open Plan Together takes this one step further by allowing the offset to be between accounts held by two different customers </li></ul>Open Plan Together has multiple customers
  18. 18. Utilities could allow one customer to pay all, or part, of the bill of another <ul><li>The most likely use of this would be for semi-dependent relatives, either new home owners or pensioners </li></ul><ul><li>The bill could be split in many ways with one person paying: </li></ul><ul><ul><li>a fixed amount </li></ul></ul><ul><ul><li>a percentage of the usage, or standing charge or total bill </li></ul></ul><ul><ul><li>any amount above a predefined value </li></ul></ul><ul><ul><li>specific bills during the year, e.g. during long-term absence </li></ul></ul>This would allow one customer to help another regularly, easily and almost invisibly
  19. 19. Individual customers can combine to increase their collective strength Investment and Savings Clubs are very common For the supplier, e.g. the stockbroker, they lock-in many people to one relationship
  20. 20. Utilities can naturally group customers by location <ul><li>Historically, utilities owned all the customers in their area </li></ul><ul><li>Now they are losing previous customers to the new competitors </li></ul><ul><li>Offering location based products could be a way to retain customers </li></ul><ul><li>Products could be developed for all flats in a block or all houses in a street </li></ul>Customers get economy of scale, the utility gets customer loyalty
  21. 21. Agenda <ul><li>What is a Pricing Model and why is it important? </li></ul><ul><li>What are the products? </li></ul><ul><li>Who are the customers? </li></ul><ul><li>How are they billed? </li></ul><ul><li>How much do they pay? </li></ul>
  22. 22. Traditional banks and building societies are introducing internet only products Telephone products have been common for some years Internet only products is the next logical step The aim is to reduce costs and, through this, offer lower prices
  23. 23. There are also several internet banks Internet only banks differ from internet only products primarily through branding which implies a different user experience
  24. 24. Electronic Bill Presentment and Payment (EBPP) enables internet only products Sutton and East Surrey Water were the first UK utility to offer e-billing
  25. 25. EBPP uses internet technologies to deliver, pay and query bills Presentment Payment Bill sent electronically May be full or summary bill Customer may be notified of a new bill by email or SMS Customer makes payment by direct credit, card, etc. If paying by direct debit then may need to do nothing Customer can query bill or seek more information by going to the biller’s web-site EBPP simply uses new technologies to support the common business process of issuing bills and collecting payments Customer Service
  26. 26. Utilities are interested in EBPP because there are significant benefits to them Reduced bill production cost Enhanced image Fewer payments by cash and cheque Fewer unreconciled payments Opportunities to market new services Fewer service calls to handle Service calls handled faster and more accurately It costs around £20 per year to service a utility customer and can cost as much as £1 to send one bill Presentment Payment Customer Service
  27. 27. There are some internet utilities is the most prominent internet-only utility in the UK American and Scandinavian utilities are leading the way, as they are in most things to do with the internet
  28. 28. Billers offer a wide range of billing frequencies to suit their customers’ needs <ul><li>The most common billing frequencies are quarterly and monthly but customers do not always have a choice </li></ul><ul><li>Other frequencies, such as 4 weekly, are sometimes used </li></ul><ul><li>The date within the billing cycle is also important, e.g. just after pay day </li></ul><ul><li>This could be an absolute or a relative date, e.g. 17 th or last Wednesday </li></ul><ul><li>Must be able to change payment date easily as circumstances change </li></ul>Billing the customer when he/she wants improves the chance of being paid
  29. 29. Budget plans enable the billing and payment cycles to be separated <ul><li>The biller normally defines the billing cycle and the customer chooses the payment cycle </li></ul><ul><li>Separating the two allows both parties’ objectives to be met </li></ul><ul><li>Annual billing with monthly payments is common </li></ul><ul><li>However, a fixed monthly payment may be a poor compromise </li></ul><ul><li>In an extreme example, some Australian tariffs allow customers to pay any amount of money at any time </li></ul>Recognising that the billing and payment cycles are different enables both to be designed better
  30. 30. Agenda <ul><li>What is a Pricing Model and why is it important? </li></ul><ul><li>What are the products? </li></ul><ul><li>Who are the customers? </li></ul><ul><li>How are they billed? </li></ul><ul><li>How much do they pay? </li></ul>
  31. 31. Unmetered/fixed-price products are becoming common in telephony Unmetered services reduce costs by removing meter reads and reducing the number of bills sent Unmetered (i.e. fixed-price) services also help customers to budget
  32. 32. Unmetered products could also be considered by utilities <ul><li>Unmetered services reduce utilities’ costs be removing meter reads and reducing the number of bills sent </li></ul><ul><li>For utilities, the risk is higher because, unlike telephony, there is the generation/production cost to pay </li></ul><ul><li>On the other hand, some customers will pay more through fixed price than through metered usage </li></ul><ul><li>Water has a long history of unmetered billing; which it is now moving away from </li></ul>The “who owns the meter” debate could be ended by getting rid of the meter!
  33. 33. Unmetered products do not have to cost the same each month <ul><li>An annual consumption pattern, month by month, can match billing to expected usage without reading meters </li></ul><ul><li>Useful where there is an obvious pattern of usage, e.g. holiday homes </li></ul><ul><li>Also useful where there is an annual cycle of income, e.g. builders who work more in the summer </li></ul><ul><li>Annual consumption patterns are common in Denmark where bills are sent annually with payments made every month </li></ul>By matching annual cycles of usage and/or income, annual consumption patterns can help both the utility and the customer
  34. 34. Profit is enhanced by getting customers to pay for something that they do not use The most common example of this is sports and health clubs that make money from the people who do not attend very frequently
  35. 35. Utilities can also charge for unused services <ul><li>As discussed earlier, unmetered/fixed-price products will have both winners and losers </li></ul><ul><li>Utilities can also encourage customers to use energy off-profile, e.g. to use off-peak power when the assumption is that they will be using peak power </li></ul><ul><li>For example, many professionals go to work too early and get home too late to impact the morning and evening peaks! </li></ul>Matching estimated usage more closely to actual usage benefits both utilities and their customers
  36. 36. Late payers can be charged substantial fees and/or interest <ul><li>Late payments fees are complimentary to discounts for early payment, the customer is paying for the additional costs incurred by the utility </li></ul><ul><li>As with credit cards, customers could see this as a legitimate form of short-term financing for which they are happy to pay </li></ul><ul><li>The penalty could take the form of fees triggered by specific dates and/or interest payments which could also be tiered </li></ul>Finance can be a key component of the product
  37. 37. Some customers have shown a willingness to pay more for green energy <ul><li>Most UK utilities offer some form of green energy, but not always to the domestic market </li></ul><ul><li>Powergen’s price calculator showed their GreenPlan as costing about 1% more than their standard tariff </li></ul><ul><li>In Denmark, consumers get a discount if they own a share of a windmill </li></ul>What other value add will utility customers pay for? No nuclear?
  38. 38. Many UK companies give discounts to shareholders ad call lists lots of companies that give discounts to shareholders, but none of them are utilities
  39. 39. Affinity products are common in the financial sector This is just some of the affinity cards issued by the Halifax
  40. 40. Some utilities offer near equivalents to affinity products Powergen has developed an offering for pensioners in conjunction with Age Concern While this does not work the same way as an affinity credit card, the joint branding is a key element
  41. 41. Eastern Energy customers can earn Tesco Clubcard points This form of discounting a business partner’s products is less common Utilities could also consider which of their business partners should be allowed to discount their products
  42. 42. I hope that I have answered these questions <ul><li>What is a Pricing Model and why is it important? </li></ul><ul><li>What are the products? </li></ul><ul><li>Who are the customers? </li></ul><ul><li>How are they billed? </li></ul><ul><li>How much do they pay? </li></ul>
  43. 43. And shown that an effective Pricing Model considers all of these factors <ul><li>Products </li></ul><ul><ul><li>bundled or unbundled </li></ul></ul><ul><li>Customers </li></ul><ul><ul><li>single or multiple </li></ul></ul><ul><ul><li>relationships between customers </li></ul></ul><ul><li>Billing and Payment </li></ul><ul><ul><li>billing/payment method </li></ul></ul><ul><ul><li>billing/payment frequency </li></ul></ul><ul><li>Price </li></ul><ul><ul><li>unit and standing charges </li></ul></ul><ul><ul><li>discounts and special offers </li></ul></ul>
  44. 44. And pointed to examples in other industries that utilities can copy or adapt SUMMER SALE 3 FOR THE PRICE OF 2 Cash Back Special offers of all kinds are common elsewhere in the retail sector Free Delivery Special price for pensioners
  45. 45. The final message <ul><li>A Pricing Models is aimed at a specific customer segment and meets a need of that segment, of which price is only a part </li></ul><ul><li>The need of the utility is also important, of course </li></ul><ul><li>The aim is to arrive at terms and conditions that both parties are happy with </li></ul><ul><li>But be cautious, people may take advantage of your generosity; remember Hoover! </li></ul>It’s a matter of hitting the nail on the head!