Value from segmentation a review of practice and potential across four geographies

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
• ANALYSIS
  • Although Italy, Spain, Ontario and the UK all have liberalized energy markets, there are significant variations between them
    • Domestic competition in energy retail is now a ' legislative' reality
    • Switching experiences differ across geographies, driven by market history and regulatory structure
    • Channel usage is dominated by the use of door-to-door and telephone
    • Telephony is a mix of three sub-channels: direct response TV and radio, inbound and outbound telesales
    • There is a void waiting to be filled in terms of the internet comparison sites market outside the UK
    • Regulatory structure provides only a partial explanation of switch rates
    • Italy has a price-controlled energy market that is dominated by Enel and comune-based organizations
    • Standard price competition is not feasible in Italian urban markets, as cost-based discounts are only €5 to €10 per annum per household
    • With strong local branding and limited scope for price competition, the locally based distributors are an attractive means of accessing the market
    • Outside of Italy' s urban areas, Enel is the dominant force and is the main threat to the comune-based organizations within urban areas
    • There are signs that the structure of the Italian energy market is changing
  • The Spanish energy market is characterized by the fact that it has both regulated tariffs and non-regulated tariffs
    • The Spanish gas market is dominated by Gas Natural
    • Most of the ' switching' that occurs in Spain is accounted for by customers moving from the regulated tariff to a new tariff (fixed or green) with the same supplier
    • As in Italy, the price-controlled tariff for electricity in Spain offers no room for price competition
    • Competitive gas pricing has allowed Gas Natural and Endesa to make some headway in the electricity market through customer acquisition
  • The Ontario energy market is semi-regulated, with competition at just the wholesale level
    • The Ontario market is a semi-regulated market that has enjoyed very high switch rates even though it has low regulated prices
    • With a mechanism akin to Italy and Spain' s for determining a low regulated tariff, why has switching been so prevalent?
    • Smart metering offers scope for distribution cost control, but may be frustrated by market structure
  • The energy market in the UK is characterized by the fact that it is highly competitive with no state control over pricing
    • The UK exhibits the highest switch rate due to the existence of high price competition potential and the emergence of a number of national brands
    • Market segmentation as a driver of sales, and marketing policy and practice are the most evolved in the UK
    • Further potential exists through focusing acquisition and retention activity on low cost payment methods and behaviors
  • The review of these four energy markets provides a number of pointers for creating additional value through market segmentation
    • The ability to segment acquisition and retention activity by size of household will be a significant value generator
    • Geography: should the UK adopt the practices of the other markets?
    • Consumer life-stage is, as yet, an untapped source of value, but smart metering will be needed to unlock its potential
    • Segmenting by breadth of product service offering may provide value in particular country environments
    • It is expected that when environmental tipping points have been reached, ' green attitude' segmentation will come into its own
    • Exploiting perceptions of future price rises
    • Playing the payment behavior/method cards
    • The propensity to switch is a double-edged sword
    • Studying the segmentation issues across geographies indicates that there is value to be extracted on six dimensions:
• APPENDIX
  • Methodology
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
  • List of Tables
    • Table 1: Of the four markets reviewed, the UK was the first to open its energy market
    • Table 2: Switching has been most prevalent in the UK since market opening
    • Table 3: Door-to-door is the most popular sales channel in all of the markets reviewed
    • Table 4: Company customer bases, June 2006 (millions)
    • Table 5: Company customers bases, June 2006 (millions)
  • List of Figures
    • Figure 1: The majority of Spanish customers that have switched have opted for a fixed or green tariff
    • Figure 2: The margins for prompt payment customers are nearly always higher than for standard payment customers
    • Figure 3: The margins for large households are twice those of small households