In 2017, deregulation of the water industry will allow business customers in England to pick and choose their provider. But deregulation in the utility sector has something of a chequered history – particularly when it comes to customer service. We look at some of the mistakes made by the energy industry, and look at what the water industry can do to avoid making the same mistakes.
At first glance the energy industry appears to be in a very healthy place, with the so-called ‘big six’ energy companies posting a record combined profit last year.
It’s a position that the water industry would no doubt love to be in.
But we all know that’s only half the story. There are plenty of underlying issues with the major energy providers, some of which may soon become reality for England’s water industry.
What’s bothering the ‘big six’ energy companies?
For starters, switching your provider has never been easier. The rise of online comparison sites and personal finance blogging has made it easier for customers to find out how to switch, and where they can find the best deal.
Secondly, a new wave of ‘challenger’ providers has entered the market. It’s still relatively early days, but some have already proved that cost isn’t the be-all and end-all, with customers willing to pay more for clear billing, greener tariffs and good service.
Thirdly, many consumers now view energy companies with a contempt that’s only usually reserved for financial institutions. This has been fuelled by unfavourable media coverage about spiralling bills, misleading pricing and dire customer service (made worse by bumper profit announcements).
All three of these factors are combining to create a more competitive market – and one that no longer favours the established players.
Where there’s a service failure, there’s a fine
In addition to the above, energy firms are now regulated by a body that’s deadly serious about service.
Ofgem has routinely issued massive fines to energy companies for ‘failing’ customers in recent years. In the past 18 months alone, the regulator has censured every one of the ‘big six’ (British Gas, Npower, E.On, SSE, EDF and Scottish Power) with fines totalling almost £60m.
But the largest of these was a £26m fine handed to Npower at the end of 2015. This was unique not only in its size, but in its reference to the importance of providing “a good customer experience” – and the likely penalties for failing to do so.
How did the energy firms get it so wrong?
Before the internet, energy companies aggressively targeted areas occupied by their rivals.
You will no-doubt remember the small armies of door-to-door salesmen patrolling your neighbourhood during the 1990s and 2000s, sent to do battle in enemy territory.
Freed from their regional shackles, their primary goal was was to take as many customers as possible from their rivals, persuading them to ditch and switch.
This strategy worked well for increasing the size of their customer base.
However, the energy companies forgot one vital element to this strategy: the ability to actually service their new-found customers and their needs.
Customers are (finally) punishing bad service
These historical bad practices, which appear to have become woven into the culture of several energy firms, have helped shape the energy market that we know today.
The introduction of the internet didn’t force energy companies to up their customer service game (or at least, not at the rate some would like). And with many older customers having been brought up in an era of regional monopolies, relatively few have chosen to switch supplier.
But the energy industry is heating up.
Last year over six million people in the UK switched energy supplier.
What’s more, there are clear signs that customers are more willing to punish providers that treat them badly. In response to its much publicised service failures, Npower lost over 300,000 customers last year, contributing to a 65% fall in profits.
The modern customer is changing the utilities market
We live in an era of the savvy online customer, always shopping around to get the best deal possible.
Meanwhile, social media is also making it easier to tell the world, let alone our friends and family about who offers a great service (and who doesn’t).
Another factor is coming to play too – the rise of the ‘millennials’. Over the coming years this younger generation, which has grown up with the internet, will become ever more influential.
And they won’t just be looking for the best deal possible. They’ll also want to be treated well, served as an individual, and feel confident that their supplier shares their ethical values.
And it’s no longer all about the big players
The latest Which? energy companies survey shows that the top spots for customer satisfaction are now dominated by relatively new market entrants. None of the ‘big six’ featured in the top ten, instead occupying six of the bottom nine positions (including the bottom two).
These smaller, better performing independents will force the larger corporations to re-evaluate their customer service strategy. It can be assumed that this new found competition will have a positive impact for all consumers, not only on price, but overall customer experience.
So what lessons can the water industry learn?
1. Customer acquisition should be conducted with care
It is likely most will have learned from the mistakes made by the energy industry during the aggressive ‘land-grab’ sales frenzies of previous decades.
Obviously door-to-door customer snatching is off the cards, but it’s clear that any acquisition strategy must offer clarity, foster trust and avoid the potential for accusations of mis-selling.
2. Customers are much more likely to switch provider now than ever before
The energy companies grew during an era where switching was difficult and required sizeable effort.
But their failure to take a proactive approach to customer service, combined with the lifting of many of the historical barriers, means they are seeking alternatives as soon as they see their annual bill.
It now only takes a few clicks online to find a supplier that offers the right mix of pricing and customer services. The key question that water companies must ask themselves is: ‘ Why would a prospective business customer pick us over a competitor?’
3. The water industry needs to focus on its customer service
As is proving to be the case with energy companies, service will prove a key differentiator in the marketplace.
When your rivals are offering similar water rates to yours, you need to show there is another string to your bow. Excellent customer service can be that string.
All things considered, it’s clear that the single most important lesson to be learned from energy market deregulation is that customers – whether they’re individuals or businesses – must be at the heart of any growth strategy.
Scotland has already opened the floodgates
Of course, deregulation is not new to the UK water industry. Scotland’s water industry has seen several improvements since 2008, including:
- Public sector savings of £20m+ in three years
- Customer satisfaction increase of 26%
- More than £35m saved in water efficiencies
The UK water industry is set for a very interesting future, one that could benefit consumers and the industry. Or it could head in the direction of the energy market. One thing is for sure: when deregulation hits and the floodgates open, the water industry will need to make sure that their customer service is airtight.