Differentiating on value rather than price
In a market dominated by customers making supplier switching decisions primarily on price, the key challenge facing all suppliers within any of the utility markets is to understand the customers’ perception of total value received, and not just the lowest price. Without this few companies will survive profitably in the long term with such a fixation on lowering prices. The approach that needs to be taken by suppliers is to recognise that price, reliability, service, trust, and many other attributes are typically brought together by customers into an overall expression of perceived value from their supplier which is then compared with the alternative offerings available.
Reliability and trust
We all recognise that drivers of customer attitude are often led by recent experiences, or by perceptions of others’ recent experiences, particularly where service or product reliability is at issue. Reliable supply features at the top of the list for water consumers after extended periods of hosepipe bans; and professional purchasers of energy and telecoms services are constantly aware of the critical importance to their businesses of consistent and reliable supplies.
So reliability of supply is clearly the essential basic component in building customer confidence – or trust – in the supplier relationship; but there are many other elements. What about the experience customers have when interacting with their supplier’s call centres? Are the bills easy to understand, and believable? And how do customers perceive their supplier’s reliability at corporate level? Over the years customers’ trust with their utility suppliers has been placed under pressure due to a wide variety of issues:
- Mergers and acquisitions can confuse, destabilise and lose trust from customers and investors
- Heavily publicised miss-selling scandals can create concern about future and past purchase decisions;
- Speed of response to fluctuations in wholesale prices being reflected in consumer rates;
- Reaction to variable weather patterns, whether they are droughts, floods, or cold weather;
- Severe cost-cutting pressures can lead to poor customer service as suppliers struggle on with legacy systems which are inadequate to support the 21st century customer interface they aspire to provide.
Price
Rapid change in the marketplace, and a plethora of competing brands, can lead to diverse and sometimes contradictory reactions from consumers. Some will “opt out” of any change decisions and stay rigidly with what they already have: apparently good news for their current supplier.
Others will become increasingly fickle and start to change suppliers according to one simple attribute only: price. Price differentiation is a straightforward and relatively effective means of gaining market share in the short term. However, those customers that have once demonstrated a propensity to move for price will do so again and again as they continue to chase the lowest price. Unless industry players can effectively differentiate their services through other means they are doomed to a market that operates on low margins, with a customer base that is constantly churning – switching to the lowest cost operator. It is a well-accepted maxim that there’s only room for one lowest cost operator in any market.
Price itself can be multi-faceted with consumes needing to understand such issues as:
- Dual fuel discount
- Direct debit discount
- Fixed and capped prices
- Variation in schedules when suppliers will implement their new pricing structure
- Pre payment meters
- Premium pricing for greener fuels
This high degree of disloyalty driven by a focus on price will also work against any strategy of cross and up selling of services to a loyal customer base.
Value
Value, a balance between the cost of receiving a service, and the quality of that service, is a proven driver in customer attitude and behaviour. Reliability, trust, service, price, and many other elements in the customer’s perception are brought together to form a judgement of the supplier and its service; and this judgement will inevitably involve a comparison with the perceived value available from competitor suppliers.
In this context, a player in an essentially commodity market can only differentiate successfully by focusing on that overall value perception and ensure that it is addressing all the elements in a way that matches, or exceeds, customer perceptions. The emergence of the ‘value conscious’ customer – both wary of overpricing but yet tantalisingly willing and able to pay a higher price when other benefits can be perceived – means there is the opportunity for value–add within the market place.
The growing abundance of comparison services is still very heavily focused on price comparison as the key driver for customers switching suppliers. However some of these sites are beginning to recognise that consumers will only go so far on price, and they need reinforcement of their decision to switch. So sites such as www.USwitch.com will allow customers to rank suppliers by both customer rating and green electricity, as well as by the default of price. Moneysupermarket.com goes a bit further with regards to customer ratings and further divides this into:
- Customer service
- Accuracy of charges
- Clarification of information on bill
- Payment options
The suppliers themselves are even attempting to find a balance between offering a competitive price whilst still supporting an augmented service, with some suppliers referring to third party surveys on customer satisfaction such as JD Power.
The management of customer value
So the challenge remains of how to understand where customers place the value of other aspects of the service than just price. This is where a technique called Customer Value Management (CVM) really comes into its own. It is a technique that has proven links to:
- Market Share
- Return on Investment
- Gaining Competitive Advantage
- Customer Retention and Loyalty
- Customer Referrals
The essential rationale of CVM is that customers base their purchasing decisions on Value and not on levels of satisfaction, and that customers do not assess suppliers in isolation but compare them with their competitors. CVM helps identify the elements of value which matter to customers, as well as assess the degree of significance each element holds within the overall value mix.
Associates of Customer Champions in the USA have utilised this technique within the US Energy market with great effect. Nicor Gas, a gas distribution company in Illinois, with a customer base of approximately 2 million covering both residential and commercial users, had historically focused on system integrity, customer safety, and cost management. The implementation of customer value management as an overall programme led them to identifying true value adds from the customer perspective. These highlighted the softer issues such as being kept informed, staff (accessibility, responsiveness and knowledgeable), as key drivers of value from a customer’s perspective.
Also identified was the relationship between customer value and the customer’s loyalty (willingness to stay). As the diagram below shows, when customers perceive they are getting high levels of value from their supplier their loyalty potential starts to rise exponentially.
Take the next step
If you want to find out more about how customer perception of value will drive your business please contact us.