Utility Deregulation: Margin of Error is Small, Margin of Profit is Thin
by Kenneth M. Culpepper
Direct Marketing Magazine, May 1998, pp.60-61
Marketing and advertising tactics in the marketplace have taken a momentous turn.0 The mere mention of the word "unbundling" initiates a chain reaction of events. Why? Because anytime a new way of doing business is created by government, technology, society- culture, economy, law or any other non-controllable marketing component, the cobwebs of marketing myopia are exposed.
What is marketing myopia? It is when any business fails to recognize the larger scope of meeting their customers needs. Telephone companies were caught by this years ago when they realized that they were not just in the telephone business, but in the communications business. In the case of gas and electricity providers, it is stated as they are not just in the gas or electricity business, but they are in the energy business.
Utility deregulation is making its way through selected markets or states. There is an excitement and curiosity about what this means to the local distribution company (LDC) and as well as the customers in each selected market.
There is also an excitement and challenge for the marketer of these utility services. The marketer will educate, market, acquire and service these newly offered "unbundled" services to the residents, commercial and industrial customers of the soon-to-be deregulated market. But with this marketing challenge comes a new twist to old marketing questions.
A New Way of Doing Business
It's quite natural. Because of the newly added competitive component generated by deregulation, the marketing focus has to move from the transaction (sale, invoice, billing, subscription, etc.) to the customer relationship. The next logical business question in this marketing system is: What is the best way to move the focus from the transaction to the relationship?
The industrial and larger commercial customers seem to adjust more quickly than the smaller commercial and residential ones. This is usually due to the fact that they are currently being serviced by utility representatives because of their large volume usages. These are accounts that are educated immediately and updated continuously about deregulation issues. Most of these marketing efforts are understandably driven by direct selling and servicing and they are typically more energy sophisticated.
However, marketing utility deregulation to smaller commercial and residential customers is more complex than in most industries. The average margins of profit are far less than the retail, manufacturing, financial, communications and business-to-business sectors are yielding. Because average profits are lower, the margin of error for spending marketing dollars has shrunk, and the results of marketing are now magnified within the organization. Therefore, margin of error is small and margin of profit is thin.
This sets up an old marketing question for a new industry: How much should I spend on acquiring a customer? This is hard enough for industries which have a history of responses to product and service offerings from customers and are used to constant bombardment of marketing efforts from their competitors. But utility marketers are not used to this level of competition, they do not have comparable response histories to analyze, and to make matters worse, their potential customers have never had a choice for these services before now.
What To Do?
The answer is found in implementing integrated database marketing into the forefront of the marketing strategy, both short and long-term.
In this case, marketing begins with an insight into the local needs and expectations of whoever is considered a prospect for utility services. This means there must be a considerable amount of planning, research and marketing strategy before any actual marketing is initiated to potential customers.
The research and strategy areas for utility deregulation must not just develop the usual strategic packaging of creative themes and media purchase plans. However, they must create a strategic marketing business plan that has empirically determined direction to questions like:
How and when will marketing be communicated? Who will be targeted? What marketing messages of benefits will be integrated within the creative and media strategies? What are the short and long-term methods of measurement? What is the best schedule of test markets versus roll-outs of marketing efforts? How will this change the role of the LDC?
Furthermore, because margin of profit is thin, a measurement for success of each marketing effort and the return-on-investment (ROI) for the annual marketing allocation must be determined as well as a contingency plan. The plan also should provide for built-in strategy adjustments allowing monitoring of an entire integrated marketing and advertising strategy at predetermined feedback points.
Educating The Market
The marketplace rules of competition for customer acquisition by marketers are set by state regulators. Rules for customer acquisition either allow all competitors access to the same customer records or they do not allow any access.
Usually, records are withheld from everyone. This is typically an advantage to local marketers since they are more familiar with their market. However, any company seeking to acquire customers in an open market can research and build relative utility usage models of index. Thus, taking this advantage away from a local marketer that does not research and implement the same level of consumer usage and segmentation identification. Utility usage models of index create two distinct advantages for the marketer: prospect optimization and customer loyalty programs.
Prospect Optimization
The specific issue addressed with prospect optimization is how much to spend on customer acquisition in light of profit targets. Initially, in a competitive marketing environment where there are subsequent selling efforts effecting reactivation, traditional Lifetime Value (LV) models are not applicable.
However, using usage models of index, P&L's and spreadsheet software, we can determine with considerable precision the relationships between prospecting and long range profitability, while tracking the acquisition of each new customer. Based on these dynamics, we can project the optimum marketing quantities to maximize growth, maintain profit and reduce customer acquisition costs.
Customer Loyalty Programs
Since marketing to small commercial and residential customers will begin to increase as the deregulation sign-up date nears, it is crucial for any marketer to immediately initiate some type of criteria to forecast prospect response and retention. Crucial because the most expensive piece of marketing is customer acquisition, and if a marketer is successful in acquiring customers, it must learn how to maintain these customer relationships.
After usage models of index and analyses from test markets have determined the prospects who are likely profitable long-range customers, the marketer can identify a database segment of initial loyal customers.
Test markets become an important part to forecasting an initial loyal customer base because they provide the only current customer responses to applicable offers and marketing communications. In addition to the test market, exponential smoothing should not be ruled out until the marketer knows the complete marketplace scenario.
Although customers will perpetually sign-up and leave, fluctuate in profitability, and move from database segment to segment, determining a current loyal customer profile is both obtainable and efficient. In fact, because of the continuous changes in the marketplace, regulations, rates, customers, competitors and utility services, it is important to understand that the marketing database is also the first to know when the loyal customer profile changes. This signals needed changes to customer retention and acquisition strategies.
Conclusion
In any path of deregulation the focus of marketing has to be moving from the transaction to the customer relationship. It is understandable why this is crucial for all companies involved. A failure to control customer acquisition costs or build and retain customer relationships will result in both short and long-term non-profitability. The margin of error is not big enough. The margin of profit is just not high enough.
Maybe, the real business question here is why does it take something like deregulation to move the focus from the transaction to the customer relationship in any industry or marketplace? Isn't that where it belongs?
Ken Culpepper is president of Integrated Marketing Solutions, Inc., a
knowledge-base marketing firm that
integrates tactical marketing strategy with management of multiple contacts
of businesses to their customers, prospects and channel customers. IMS incorporates
marketing business planning, long-term corporate ROI strategies, and marries
knowledge-based marketing with e-commerce strategy and systems. IMS has
offices in Atlanta, GA (770) 390-9199 and Nashville, TN (615) 782-0461.
(Web: migmar.com/ims)