Sales Channels in UK Energy Retail

Table of Contents

• CHAPTER 1 EXECUTIVE SUMMARY
  • The evaluation section is an evaluation of the efficiency, account mix and cost of sales channels used in subsequent modelling of sales campaigns
  • The campaign manager model simulates the sales activity of the six major residential suppliers to obtain the gross and net customer acquisitions of 2005
  • The case studies investigate three different sales strategies, finding that regardless of how much money they spend and how large their annual net gains are, all suffer a deleterious loss of Tier 1 accounts
  • The case studies provide an analysis of the difficult balance of sales activity and the acquisition of Tier 1 and Tier 2 accounts
  • Case study: The damage limiter maintains net zero growth, but because its sales are mainly dual fuel it ends up with more Tier 2 and fewer Tier 1 accounts
  • Case study: The gas incumbent loses Tier 1 gas accounts heavily but has an impressive replacement rate, however it is suffering a bad year and ends up with a large net loss
  • Case study: the aggressive acquisitor needs to expand its customer base but does so mainly with Tier 2 accounts, failing to replace most of its lost Tier 1 accounts in kind
  • An explanation of game theory indicates that sales intensity is significantly devaluing the market
• CHAPTER 2 INTRODUCTION
  • This document explains the utilisation of sales channels in the UK residential retail market through providing case studies that reflect historic market share movements
    • Purpose of the report
    • Three main sections
    • The core sections
    • Representiveness of metrics and case studies
• CHAPTER 3 EVALUATION OF THE EFFICIENCY, ACCOUNT MIX AND COST OF SALES CHANNELS
  • This section is an evaluation of the efficiency, account mix and cost of sales channels used in subsequent modelling of sales campaigns
  • In-bound cross-selling is an opportunistic sales channel; it is cheap and primarily provides Tier2 accounts
  • In-area field sales is a winback channel: gas and electricity incumbents compete to sell dual fuel
  • Out-of-area field sales yields low margin customers, but suppliers need to use it to gain share
  • In-area telesales is a high cost, low volume sales channel, typically used to win back lost customers with a dual-fuel deal
  • Out-of-area telesales is a low volume but expensive channel, and its target audience is shrinking
  • House builders provide a stream of new accounts that have higher average lifetime values, but at a higher cost
  • White labelling is often shunned by suppliers, which use it to widely varying degrees, making it difficult to model
  • Websites typically provide most customers to the lowest priced supplier, but margins are very low
• CHAPTER 4 THE CAMPAIGN MANAGER MODEL
  • The campaign manager model simulates the sales activity of the six major residential suppliers to obtain the gross and net customer acquisitions of 2005
  • The campaign model manager is based on a set of generic metrics for each of eight sales channels
  • The model relies on knowing the maximum number of accounts that can be acquired through each channel
  • The theoretical maximum potential customers is then matched to actual market share data to give actual customers per channel
  • Once actual accounts per channel are obtained, the model can build up a sales campaign for each supplier
  • The model works with an in-area bias, resorting to out-of-area channels to meet sales targets
• CHAPTER 5 CAMPAIGN MANAGER CASE STUDIES
  • The case studies investigate three different sales strategies, finding that regardless of how much money they spend and how large their annual net gains are, all suffer a deleterious loss of Tier 1 accounts
  • The case studies provide an analysis of the difficult balance of sales activity and the acquisition of Tier 1 and Tier 2 accounts
  • The year in question is atypical because of the unusual balance between acquisitions through the in-area and out-of-area field sales channels
  • Maintaining customer numbers requires relatively light use of out-of-area channels, unlike aggressive expansion
  • The Gas Incumbent is in a uniquely fortunate position because each dual fuel account it sells comprises a Tier 1 account
  • Acquiring out-of-area is much more expensive, but the gas incumbent squanders this advantage through huge gross losses
  • Case study: The damage limiter maintains net zero growth, but because its sales are mainly dual fuel it ends up with more Tier 2 and fewer Tier 1 accounts
  • The damage limiter needs to replace 1m accounts per year, which requires the use of the out-of-area channel
  • Because many of the sales are dual-fuel, the damage limiter gains as many gas accounts as electricity
  • The damage limiter may end up with a net zero position, but only by swapping Tier 1 accounts for less valuable Tier 2 accounts
  • For the damage limiter achieving a net zero position costs £30m, but swaps high value Tier 1 accounts for Tier 2 accounts
  • Case study: The gas incumbent loses Tier 1 gas accounts heavily but has an impressive replacement rate, however it is suffering a bad year and ends up with a large net loss
  • The gas incumbent needs to replace 2.5m accounts per year but only replaces two-thirds of them
  • The gas incumbent can only sell in-area, resulting in it gaining far more electricity accounts than gas
  • Unlike the others, the gas incumbent can replace Tier 1 accounts, however in this case study it loses large numbers of Tier 1 accounts and maintains its Tier 2 account numbers
  • The gas incumbent pays less per account than its rivals yet loses accounts rapidly
  • Case study: the aggressive acquisitor needs to expand its customer base but does so mainly with Tier 2 accounts, failing to replace most of its lost Tier 1 accounts in kind
  • The aggressive acquisitor overcomes the loss of 1.2m accounts to achieve a net gain of 685,000 accounts through heavy use of out-of-area field sales
  • The aggressive acquisitor gains 1.9m accounts per year gross, a little over half of them electricity because of the use of out-of-area channels
  • Although the aggressive acquisitor gains accounts, only 40% of lost Tier 1 accounts are replaced with more Tier 1 accounts
  • The aggressive acquisitior spends more than its two rivals but does not manage to replace lost Tier 1 accounts
• CHAPTER 6 WHEN TO EXPECT RETALIATION
  • An explanation of gaming theory indicates that sales intensity is significantly devaluing the market.
  • Suppliers aim to reach their optimum size, hence smaller suppliers (the aggressive acquisitor) spend more to gain share
  • Suppliers can enter into value destroying sales wars, (the damage limiter), where achieving a net zero position requires a significant level of sales spend
  • The market can be thought of as five duopolies, so there should be an opportunity to reduce sales intensity, yet the losses incurred by the gas incumbent indicates this may not be possible
• CHAPTER 7 APPENDIX
  • Definitions
  • Research methodology
  • Report writing team
  • How to contact experts in your industry
  • List of Figures
    • Figure 1: Inbound cross-sales metrics
    • Figure 2: In-area field sales metrics
    • Figure 3: Out-of-area field sales metrics
    • Figure 4: In-area telesales metrics
    • Figure 5: Out-of-area telesales metrics
    • Figure 6: House builders metrics
    • Figure 7: White label metrics
    • Figure 8: Websites metrics
    • Figure 9: The complete campaign manager
    • Figure 10: Calculating the maximum number of accounts that can be targeted through the telesales and field sales channels
    • Figure 11: Net gains and losses in residential accounts, 31 Oct 2004 to 31 Oct 2005
    • Figure 12: Snapshot of the model's output of the first three channels used by an unnamed supplier
    • Figure 13: Suppliers start with the cheapest channels and then move to more expensive channels if they need more accounts
    • Figure 14: Gross accounts acquired through the field sales channel in the UK
    • Figure 15: Actual gross account gains through out-of-area field sales versus potential maximum
    • Figure 16: Gross accounts lost and acquired: Tier 1 and Tier 2 split
    • Figure 17: Total campaign cost and cost per gross account for each supplier
    • Figure 18: Cumulative net gas and electricity accounts acquired through all channels by the damage limiter
    • Figure 19: Gross electricity and gas gains by channel
    • Figure 20: Gross gains: in-area and out-of-area split; Tier 1 and Tier 2 split
    • Figure 21: Cumulative gross and net positions, total cost and cumulative average cost per account
    • Figure 22: Cumulative net gas and electricity accounts acquired through all channels by the gas incumbent
    • Figure 23: Gross electricity and gas gains by channel
    • Figure 24: Gross gains: in-area and out-of-area split; Tier 1 and Tier 2 split
    • Figure 25: Cumulative gross and net positions, total cost and cumulative average cost per account
    • Figure 26: Cumulative net gas and electricity accounts acquired through all channels by the aggressive acquisitor
    • Figure 27: Gross electricity and gas gains by channel
    • Figure 28: Gross gains: in-area and out-of-area split; Tier 1 and Tier 2 split
    • Figure 29: Cumulative gross and net positions, total cost and cumulative average cost per account
    • Figure 30: Growing for economies of scale
    • Figure 31: Utilities can choose the strategy that destroys the most value for both rivals, even when a different strategy would clearly be better for both
    • Figure 32: In order to avoid the value destruction of sales competition, suppliers may threaten rivals with retaliation