A competitive and innovative energy market depends on engaged customers who are ready to switch for better value, better service or better ideas.
That need has been underlined by the Competition and Markets Authority (CMA) in its recommendations on improving the energy market. Its aim – and the stated aim of pretty much every other organisation in the industry - is to give customers the tools and incentives that will make them more active and more demanding of their supplier.
That raises a question. What is the definition of an engaged customer? The answer is not clear.
Laurence Slade, chief executive of EnergyUK, said, “If I pick up the phone and ask my supplier to put me on their best tariff, as far as I am concerned that makes me engaged even if I haven’t switched.“ He said you might call a customer engaged if they send their meter readings to their utility each month.
Neither is the kind of switching behaviour the regulator or the CMA would like to see. So how do those bodies define an engaged customer?
In its 2011 Retail Market Review Ofgem split customers into five groups: proactive (switched supplier or tariff within the last year); reactive (switched when prompted, eg by a sales call); passive (switched more than a year ago and may not switch again); disengaged (never switched but don’t rule it out); and permanently disengaged (never switched and not likely to). In the same document, Ofgem said, “we are concerned that the proportion of passive customers is growing”.
Although it does not make this its definition, that suggests its ideal is customers that switch suppliers every year or so.
What about the CMA? Asked how it defined an engaged customer, a spokesman said, “There isn’t a specific definition or threshold or similar.”
It added, “Obviously the database plan implies that a proxy for disengaged could be those who’ve been on a standard variable tariff (SVT) for more than three years.” That’s the group that CMA wants to open up to marketing from other suppliers, in the hopes they will start to switch more often.
There’s no question that switching is important to improve both the industry as a whole and the lot of individual consumers. But is it the only definition of an engaged customer?
The CMA also said, “there’s likely to be a subset of the ‘willingly disengaged’ amongst these but we believe – given what we’ve found – that there’s not going to be too many customers who are too satisfied to move”.
That assumption seems fairly safe now – but in future it may be less reliable, because other changes in our evolving energy market mean that customers’ choices will be wider.
For some the choice they will make, for good reasons, will be to stay put long-term. Those customer groups may appear to be “inactive” in the market but are far from being disengaged, for example:
- Customers of local energy companies – perhaps local authority-based – who see it as a long-term investment in their communities..
- Direct investors in local and community energy projects being supplied on a private wire network.
- Customers with domestic generation, perhaps with storage, who seldom have to interact with the network.
Meanwhile, some customer groups who are apparently active and switching may not be engaging in the energy market. That may include customers who buy several services – energy, communications, data etc – from one supplier. If they switch for a better entertainment package, how does that drive improvements in the energy industry?
We need engaged customers driving innovation and playing their part in th edeveloping energy market. But two fundamental questions remain.
What exactly is an engaged customer? It would be helpful to have a common definition.
What proportion of engaged customers (and if that is your proxy, how much switching) is enough to say that the market as a whole is competitive? What is the target?
And one final question: how do we ensure the market remains competitive, if and when the most engaged customers have switched out of it long-term?