An Evaluation of Alternative Pricing Models for Utilities Convergence

Matthew ReesPrincipal ConsultantCharteris plc

I’ll start by establishing a few ground rules for this session

Ignore current regulations as these are likely to change due to pressure from the industry to allow innovation

All the ideas are possible today, e.g. there is no need for new technologies such as real-time metering

All of these suggestions are either in use by some utilities today or have been discussed with them

I’ll try and answer these questions What is a Pricing Model and

why is it important?

What are the products?

Who are the customers?

How are they billed?

How much do they pay?

These areas overlap and they all need to be considered together

A Pricing Model defines all aspects of the offering, apart from the underlying utility

Products bundled or unbundled

Customers single or multiple relationships between customers

Billing and Payment billing/payment method billing/payment frequency

Price unit and standing charges discounts and special offers

Pricing Models are important as they determine the customer proposition

The underlying product, electricity, gas or water, is virtually indistinguishable between suppliers

What differs is the price, billing process and payment options

Different customers have different needs and so are attracted to different Pricing Models

The Pricing Model is not an add-on to the product, it is part of it

This example shows one bank’s use of Pricing Models on current accountsAll 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

Alternative Pricing Models also help to improve profitability

Costs can be reduced through higher customer retention derived from meeting customers’ needs for price, billing and payment options

Revenue can be maximised by, for example, linking the payment frequency to customers’ wages/salary dates to improve collection rates

They can even be used to charge a higher price than other customers for the same service

The correct Pricing Model aids the Utility and the Customer

The financial services sector is a good reference for utilities

The underlying products, e.g. current accounts, are very similar between all financial institutions

The products are intangible, the real money is recorded on a computer

Financial products are used and understood by most people

The competitive nature of the financial services market is similar to utilities

Other sectors, e.g. telecoms, also share some of these characteristics

Utilities can learn from other sectors such as financial services and telecoms

Similarly, utilities can learn from their colleagues in other countriesPricing 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

Agenda What is a Pricing Model and

why is it important?

What are the products?

Who are the customers?

How are they billed?

How much do they pay?

A recent trend has been the introduction of single accounts for multiple purposesBundling 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

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

Prepay phones enable customers to buy the phone and the calls at the same timeHere prepay is used for the benefit of the consumer

Generally, in utilities prepay is used by the company as a way of managing debt

Utilities could bundle their products with the things they are used forCustomers 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

Powergen’s “Surf & Save” is an innovative product bundlingCustomers who use Surf & Save, Powergen’s internet service, get discounts on Powergen energy bills for every minute spent on-line

Agenda What is a Pricing Model and

why is it important?

What are the products?

Who are the customers?

How are they billed?

How much do they pay?

Open Plan Together allows parents to help with their children’s mortgages

Open Plan Together has multiple customers

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

Open Plan Together takes this one step further by allowing the offset to be between accounts held by two different customers

Utilities could allow one customer to pay all, or part, of the bill of another

The most likely use of this would be for semi-dependent relatives, either new home owners or pensioners

The bill could be split in many ways with one person paying: a fixed amount a percentage of the usage, or

standing charge or total bill any amount above a predefined value specific bills during the year, e.g.

during long-term absence

This would allow one customer to help another regularly, easily and almost invisibly

Individual customers can combine to increase their collective strengthInvestment and Savings Clubs are very common

For the supplier, e.g. the stockbroker, they lock-in many people to one relationship

Utilities can naturally group customers by location

Historically, utilities owned all the customers in their area

Now they are losing previous customers to the new competitors

Offering location based products could be a way to retain customers

Products could be developed for all flats in a block or all houses in a street

Customers get economy of scale, the utility gets customer loyalty

Agenda What is a Pricing Model and

why is it important?

What are the products?

Who are the customers?

How are they billed?

How much do they pay?

Traditional banks and building societies are introducing internet only productsTelephone 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

Internet only banks differ from internet only products primarily through branding which implies a different user experience

There are also several internet banks

Electronic Bill Presentment and Payment (EBPP) enables internet only productsSutton and East Surrey Water were the first UK utility to offer e-billing

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 uses internet technologies to deliver, pay and query bills

EBPP simply uses new technologies to support the common business process of issuing bills and collecting payments

CustomerService

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

Utilities are interested in EBPP because there are significant benefits to them

It costs around £20 per year to service a utility customer and can cost as much as £1 to send one bill

Presentment PaymentCustomerService

There are some internet utilitiesamerada.co.uk 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

Billers offer a wide range of billing frequencies to suit their customers’ needs

The most common billing frequencies are quarterly and monthly but customers do not always have a choice

Other frequencies, such as 4 weekly, are sometimes used

The date within the billing cycle is also important, e.g. just after pay day

This could be an absolute or a relative date, e.g. 17th or last Wednesday

Must be able to change payment date easily as circumstances change

Billing the customer when he/she wants improves the chance of being paid

Budget plans enable the billing and payment cycles to be separated

The biller normally defines the billing cycle and the customer chooses the payment cycle

Separating the two allows both parties’ objectives to be met

Annual billing with monthly payments is common

However, a fixed monthly payment may be a poor compromise

In an extreme example, some Australian tariffs allow customers to pay any amount of money at any time

Recognising that the billing and payment cycles are different enables both to be designed better

Agenda What is a Pricing Model and

why is it important?

What are the products?

Who are the customers?

How are they billed?

How much do they pay?

Unmetered/fixed-price products are becoming common in telephonyUnmetered 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

Unmetered products could also be considered by utilities

Unmetered services reduce utilities’ costs be removing meter reads and reducing the number of bills sent

For utilities, the risk is higher because, unlike telephony, there is the generation/production cost to pay

On the other hand, some customers will pay more through fixed price than through metered usage

Water has a long history of unmetered billing; which it is now moving away from

The “who owns the meter” debate could be ended by getting rid of the meter!

Unmetered products do not have to cost the same each month

An annual consumption pattern, month by month, can match billing to expected usage without reading meters

Useful where there is an obvious pattern of usage, e.g. holiday homes

Also useful where there is an annual cycle of income, e.g. builders who work more in the summer

Annual consumption patterns are common in Denmark where bills are sent annually with payments made every month

By matching annual cycles of usage and/or income, annual consumption patterns can help both the utility and the customer

Profit is enhanced by getting customers to pay for something that they do not useThe most common example of this is sports and health clubs that make money from the people who do not attend very frequently

Utilities can also charge for unused services

As discussed earlier, unmetered/fixed-price products will have both winners and losers

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

For example, many professionals go to work too early and get home too late to impact the morning and evening peaks!

Matching estimated usage more closely to actual usage benefits both utilities and their customers

Late payers can be charged substantial fees and/or interest

Late payments fees are complimentary to discounts for early payment, the customer is paying for the additional costs incurred by the utility

As with credit cards, customers could see this as a legitimate form of short-term financing for which they are happy to pay

The penalty could take the form of fees triggered by specific dates and/or interest payments which could also be tiered

Finance can be a key component of the product

Some customers have shown a willingness to pay more for green energy

Most UK utilities offer some form of green energy, but not always to the domestic market

Powergen’s price calculator showed their GreenPlan as costing about 1% more than their standard tariff

In Denmark, consumers get a discount if they own a share of a windmill

What other value add will utility customers pay for? No nuclear?

Many UK companies give discounts to shareholders adcall lists lots of companies that give discounts to shareholders, but none of them are utilities

Affinity products are common in the financial sectorThis is just some of the affinity cards issued by the Halifax

Some utilities offer near equivalents to affinity productsPowergen 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

Eastern Energy customers can earn Tesco Clubcard pointsThis 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

I hope that I have answered these questions

What is a Pricing Model and why is it important?

What are the products?

Who are the customers?

How are they billed?

How much do they pay?

And shown that an effective Pricing Model considers all of these factors

Products bundled or unbundled

Customers single or multiple relationships between customers

Billing and Payment billing/payment method billing/payment frequency

Price unit and standing charges discounts and special offers

And pointed to examples in other industries that utilities can copy or adaptSpecial offers of all kinds are common elsewhere in the retail sector

The final message A Pricing Models is aimed at a

specific customer segment and meets a need of that segment, of which price is only a part

The need of the utility is also important, of course

The aim is to arrive at terms and conditions that both parties are happy with

But be cautious, people may take advantage of your generosity; remember Hoover!

It’s a matter of hitting the nail on the head!