Corporate Agenda: The Role of Price in Managing Demand

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
• ANALYSIS
  • Though at a market level energy demand is relatively price inelastic, in competitive markets the pricing function is revolutionised
    • Total demand in energy markets is largely price insensitive
    • Historically, with a captive customer base, utilities set prices to cover costs
    • In competitive markets, individual utilities' pricing decisions are fundamental to the overall success of the business
    • The pricing challenge for utilities is in keeping margin high while maintaining a customer base
    • Despite the presence of competition, outside influences can still impact upon retail price formation
  • Wholesale price is the largest and most volatile component of end user price and heavily influences retail strategies
    • Wholesale costs are the largest and most volatile component of retail prices
    • The wholesale division must manage the balancing challenge, buying according to their customers demand
    • Trends in the wholesale market can deeply affect the retail landscape
  • Price is a strong lever for managing the Industrial and Commercial portfolio
    • Price is the most important aspect of service to I&C energy buyers
    • The I&C market features a range of product options reflecting usage profile and risk appetite
    • Competitive tendering removes hidden margin and introduces a role for intermediaries in demand management
    • Pricing strategies for smaller businesses consider willingness to switch and cost of acquisition when offering renewals
    • Upon market liberalisation customers are divided along arbitrary lines
    • Specialisations develop as markets mature and new entrants target specific buyer segments
  • In competitive markets B2C customers are less sensitive to price than B2B customers, and utilities strategies reflect this fact, but it is still the most important factor
    • In B2C retail, products tend to be more standardized and offer less scope for influencing consumer behaviour via price differentials
    • Customer inertia remains dominant and therefore legacy customer power is a key opportunity
    • Cross selling may be a way of retaining customers on high margin products
• APPENDIX
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
  • List of Figures
    • Figure 1: US electricity demand and price index 1994-2005
    • Figure 2: Price setting in a captive market
    • Figure 3: The evolution of absolute margin under competition
    • Figure 4: UK wholesale power and gas prices
    • Figure 5: Potential exposure to the balancing market
    • Figure 6: Margins and costs under a theoretical falling wholesale market scenario
    • Figure 7: Industrial buyer research, importance of various influencing factors upon choice of supplier
    • Figure 8: I&C contract types
    • Figure 9: The influence of TPIs under competition
    • Figure 10: Pricing matrix applied to Small Business customers
    • Figure 11: Market shares within buyer segments with regional segmentation
    • Figure 12: Market shares within buyer segments after supplier specialisation
    • Figure 13: B2C Market Churn rate UK 2002-2006
    • Figure 14: Indicative annual dual fuel bill (excluding DUoS), 2004 to date
    • Figure 15: Customer wins and losses and price relative to market
    • Figure 16: Margin tactics when cross selling dual fuel