Traditionally, utilities have been asset-based businesses with a fundamental value proposition centered on providing energy to customers to power their daily lives. As long as consumers have energy, business is good.
And, let’s be clear, utilities have been doing this business for over 100 years and know how to do it very well. Energy companies have created an extremely reliable network. In fact, it works so well that consumers take it for granted.
When it comes to fulfilling this basic value proposition, utilities aren’t in a position to exceed customer expectations – they can only detract from it with disruptions and outages. To provide some perspective, the average duration of outage per customer across the US is 1.36 hours per year. This amounts to just 82 minutes of outage out of a total 525,600. In terms of quality, this capability is well within five sigma ON AVERAGE for the industry, which would be an envious position for most service-based industries in terms of customer experience. This is all accomplished through a network of wires and equipment that are fully subject to the wrath of hurricanes, tornadoes, wildfires, and many other entropic forces.
Utilities are great at meeting this basic value proposition, but consumer expectations are changing. Traditionally, energy costs have been fairly regulated and consumers have lacked alternatives, but this is changing. In fact, change has already occurred in many states. The industry is evolving to advance the energy value proposition and provide offerings that are more in line with what consumers want and need. This includes the rapid advancements in smart and connected home technologies as well as distributed generation options.
With this wave of new technology and the rapid pace that other industries are advancing customer experiences, there has been a corresponding significant shift in expectations regarding the utility customer experience. Technology has enabled fast, convenient, near frictionless customer service – raising the bar across the board. Consumers want it all – cheap, fast, and high quality – and they want their experience to be personalized and always improving.
These shifts are placing pressure on utilities to become more service-based vs. purely asset-driven and to use technology in ways that provide additional value to consumers. Unfortunately, because of the traditional regulated, non-competitive model, utilities have become asset-centered. The focus has been on maximizing revenue within the regulated return-on-asset model – to make money by generating energy and capitalizing grid investments and then socializing those capital costs for economic returns. The business model that successfully encouraged electrification of the entire country in the 20th century is now failing to encourage innovation and adaptation to evolving consumer needs.
This may sound like accounting gobbledygook, but it has a significant impact on the business. Given that financial health is core to any business, the organization will only prioritize things that provide financial returns at minimum risk. When the financial reward of serving a customer becomes misaligned with the actual customer needs, the business will begin to suffer. Even when a business has full control of its own revenue model, it can be hard to pivot and adjust to disruptions. For utilities that are revenue and performance regulated, shifting business models can feel like an insurmountable challenge.
That said, we have no choice. We must adapt because consumers are demanding more value. While the energy that utilities provide is technically customer value, it is no longer enough. Over the decades, the value from utilities has become more and more commoditized and therefore consumers have a low perception of its value. And, coupled with growing consumer expectations, this has resulted in a wide gap between what consumers desire from their energy experience and what they receive from their utility. This is a growing problem because, increasingly, consumers will have the option to take their dollars elsewhere if the utility doesn’t deliver – regardless of the regulatory structure the utility is under.
Creating the New Consumer Energy Experience
This isn’t “business as usual,” and it is much more important than just getting high customer satisfaction rating. Utilities have to shift their value proposition and, subsequently, their business model. With flattening energy consumption and falling returns due to regulation, change will be required to simply retain existing customer revenue. The good news is that there is also the opportunity to capitalize on new revenue streams by offering additional value to customers. In other words, while there is a significant risk to not taking action, there is also the potential for significant reward if the right actions are taken.
To succeed, we must start with the customer and their experience and work backward from there. There is a growing body of research that shows that the most successful businesses across every industry are the most customer-centric. For example, 81% of companies with strong capabilities and competencies for delivering customer experience excellence outperform their competition.
This trend is not slowing down. Gartner found that 89% of companies perceive themselves to compete on the basis of customer experience alone. The same trend can be seen in the correlation of J.D. Power scores and returns on equity within the utility industry. Since 1980, ROEs for gas and electric utilities have declined from the mid 10’s to below 10% steadily. However, being above average in J.D. Powers can translate into a 0.5-1% improved ROE.
Given the general decline, increasing customer satisfaction will not save the day by itself. Only new business models and new sources of revenue will succeed. Utilities aren’t alone in having to adopt new business models in order to maintain their hold on their current market. A nice parallel can be found in the financial services industry – another well-regulated market that has been hit hard with new technology, significant changes in customer expectations and behaviors, and disruptive new competitors. To strengthen their hold on their market, financial service companies are revamping their customer experience and bundling their services in new ways to meet changing customer needs.
Across industries, the consumer experience has become the differentiator – that’s where the premium can be found. Take for example Uber, the fastest growing transportation company… that doesn’t own any vehicles. Or Facebook, the biggest media company… which doesn’t create any content itself. Or Airbnb, the largest travel accommodation provider… that doesn’t own any real estate. All of these high growth companies are competing on the basis of the customer experience alone. They have created platforms that support the entire customer journey from start to finish. In fact, Airbnb wants to take it further and own the entire travel experience by incorporating sightseeing into their customer experience.
One of my favorite examples of this is Travelocity. Like utilities, airlines were traditionally asset-based – they have planes that take customers from Point A to Point B very reliably (although perhaps this sounds debatable if you are reading this at the airport burning time because your flight was delayed!). Everyone knows flying is much safer than alternatives. You get where you want to go a very large percentage of the time. Because of the high reliability and safety involved, customers generally expect a successful outcome to occur, so airlines have little room to exceed expectations – they can only detract from customer satisfaction by providing poor service or delays. Sound familiar, utilities? Until 1978, airline fares were also regulated in similar ways as utilities. To be successful, airlines took what actions they could to maximize profits within their existing business model. This model worked… for a while.
Then here comes Travelocity (a subsidiary of Sabre Holdings which was owned by American Airlines), who recognized that the airplane was just part of a broader travel experience for customers. This experience started with travel planning and usually involved other tasks such as reserving hotel and transportation, benchmarking prices, researching local providers and entertainment, managing calendars and travel details, and keeping others informed. They created an all-in-one self-service platform that greatly simplified travel planning and management, thereby disrupting not only the travel agent industry but airlines as well.
How did the airlines respond? Well, five of the major brands (eventually joined by American Airlines) got together and formed Orbitz. Together, these two new companies upended the travel industry in a way that created massive new value to customers.
Utilities can, and must, do the same. To provide value beyond the meter, utilities must start with a deep understanding of today’s energy consumer. What do they expect from their energy experience?
Well, we know they now expect more than just reliable energy. Accenture found that 58% expect advice on how to reduce costs, 31% expect automated home energy products, and 27% expect to have increased mobile functionality such as the ability to view their usage in real-time.
Customers welcome the convenience of receiving multiple services from a single provider. They want a platform that supports their entire consumer experience. In fact, 70% of consumers would prefer a bundled solution that includes energy management and automation services. This is no doubt why 66% of utilities are exploring energy management and efficiency services as additional revenue streams.
It’s not completely clear yet what the future energy consumer experience will look like. Often, customers know what they value in terms of their experience and what job they need to do, but they don’t know exactly what products they need to achieve that. That’s our job. We must try to view the customer through the lens of how they run their lives day-to-day and create an energy platform that significantly impacts their life in a positive manner.
Henry Ford once wisely said, “If I’d asked customers what they wanted, they would have said a faster horse.”
It’s up to the utility (and their strategic partners) to deeply understand their consumers and provide an experience that provides unique value. This is why Powerley partners with our utility customers to conduct consumer research during and throughout implementation. Even with a turnkey energy management solution like ours, there is no substitution for a deep understanding of the local consumer experience.
Utilities Can Win
The good news is that utilities have been preparing for this. Most have existing innovation centers and growing customer organizations. They have been experimenting on a small scale in this space for decades. There is already customer-centric momentum within organizations due to J.D. Power initiatives.
However, in order to accelerate the pace of change to keep up with the changing landscape, the entire business has to shift to focus on the customer – to have faith that when the customer experience drives business decision-making then (and only then) will there be a resilient, successful business. Clearly, regulators must enable this shift as well or progress will halt. Penalizing utilities for doing things that are good for the customer may limit a utility’s ability to compete with new alternatives for their fair share of the consumer’s wallet. If that happens, ultimately the customer will lose, too.
The challenge in front of us is to shift our perspective from the peddling of electrons to providing a consumer energy platform that is part of a customer-centric business model. Compared to new market entrants and competing alternatives, utilities are uniquely positioned to meet the new energy consumers’ needs and capitalize on these market opportunities. They already own the energy consumer relationship and the meter data. The next step is to focus on the consumer experience and the value proposition that experience creates.