You are on page 1of 45

An Evaluation of Alternative

Pricing Models for Utilities
Convergence

Matthew Rees
Principal Consultant
Charteris 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?

These areas ♦ How are they billed?
overlap and
they all
need to be ♦ How much do they pay?
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
The Pricing ♦ Different customers have
Model is not different needs and so are
an add-on attracted to different Pricing
to the
product, it Models
is part of it
This example shows one bank’s use
of Pricing Models on current accounts
All 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
The correct by, for example, linking the
Pricing
Model aids payment frequency to
the Utility customers’ wages/salary
and the dates to improve collection
Customer
rates
♦ They can even be used to
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
Utilities can ♦ Financial products are used
learn from and understood by most
other people
sectors
such as ♦ The competitive nature of the
financial financial services market is
services
and similar to utilities
Similarly, utilities can learn from
their colleagues in other countries
Pricing
Models
have
evolved in
other
countries to
meet local
needs

Some of
these can
be
translated
to the UK,
especially
for well-
defined
customer
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 purposes
Bundling
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
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 time
Here
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 for
Customers
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;
Powergen’s “Surf & Save” is an
innovative product bundling
Customers
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
♦ 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
Open Plan
Together allowing the offset to be
has between accounts held by
multiple two different customers
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
This would paying:
allow one  a fixed amount
customer to
help  a percentage of the usage, or
another standing charge or total bill
regularly,  any amount above a
easily and predefined value
almost
invisibly  specific bills during the year,
Individual customers can combine to
increase their collective strength
Investment
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
Customers
get ♦ Products could be developed
economy of for all flats in a block or all
scale, the
utility gets houses in a street
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 products
Telephone
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
There are also several internet banks
Internet
only banks
differ from
internet
only
products
primarily
through
branding
which
implies a
different
user
experience
Electronic Bill Presentment and
Payment (EBPP) enables internet
only products
Sutton and
East Surrey
Water were
the first UK
utility to
offer e-
billing
EBPP uses internet technologies to
deliver, pay and query bills

Customer
Presentment Payment
Service

EBPP simply
uses new Bill sent Customer Customer can
technologie electronically makes payment query bill or
s to support May be full or by direct seek more
summary bill credit, card, information by
the
etc. going to the
common Customer may biller’s web-
business be notified of If paying by
direct debit site
process of a new bill by
issuing bills email or SMS then may need
to do nothing
and
collecting
payments
Utilities are interested in EBPP
because there are significant
benefits to them

Customer
Presentment Payment
Service

Reduced bill Fewer Opportunities
production payments by to market new
cost cash and services
It costs cheque Fewer service
around £20 calls to handle
per year to Enhanced
image Fewer Service calls
service a unreconciled handled faster
utility payments and more
customer accurately
and can cost
as much as
£1 to send
There are some internet utilities
amerada.co
.uk is the
most
prominent
internet-
only utility
in the UK

American
and
Scandinavia
n 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
Billing the
customer cycle is also important, e.g.
when just after pay day
he/she ♦ This could be an absolute or
wants
improves a relative date, e.g. 17th or
the chance last Wednesday
of being
paid ♦ Must be able to change
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
Recognising ♦ Annual billing with monthly
that the
billing and payments is common
payment ♦ However, a fixed monthly
cycles are
different payment may be a poor
enables compromise
both to be
designed ♦ In an extreme example,
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 telephony
Unmetered
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
The “who because, unlike telephony,
owns the there is the
meter”
debate generation/production cost to
could be pay
ended by ♦ On the other hand, some
getting rid
of the customers will pay more
meter! through fixed price than
through metered usage
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
By meters
matching ♦ Useful where there is an
annual
cycles of obvious pattern of usage,
usage e.g. holiday homes
and/or
income, ♦ Also useful where there is an
annual annual cycle of income, e.g.
consumptio builders who work more in
n patterns
can help the summer
both the ♦ Annual consumption patterns
utility and
Profit is enhanced by getting
customers to pay for something that
they do not use
The 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
Matching customers to use energy off-
estimated
usage more profile, e.g. to use off-peak
closely to power when the assumption
actual is that they will be using
usage
benefits peak power
both ♦ For example, many
utilities and
their professionals go to work too
customers early and get home too late
Late payers can be charged
substantial fees and/or interest
Finance can ♦ Late payments fees are
be a key complimentary to discounts
component
of the for early payment, the
product 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
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
What other ♦ In Denmark, consumers get a
value add
will utility discount if they own a share
customers of a windmill
pay for? No
nuclear?
Many UK companies give discounts
to shareholders
adcall lists
lots of
companies
that give
discounts to
shareholder
s, but none
of them are
utilities
Affinity products are common in the
financial sector
This is just
some of the
affinity
cards
issued by
the Halifax
Some utilities offer near equivalents
to affinity products
Powergen
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
Eastern Energy customers can earn
Tesco Clubcard points
This 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
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
adapt
Special
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
It’s a ♦ The aim is to arrive at terms
matter of and conditions that both
hitting the parties are happy with
nail on the
head! ♦ But be cautious, people may
take advantage of your
generosity; remember