Don't switch off - switch over!

Have you recently received a renewal reminder to extend the contract with your electricity or gas supplier, possibly even for car breakdown cover, home insurance and more besides? And has your assumed loyalty been rewarded by an eye-watering increase in fees for next year? Well, you're not alone!

As consumers, our natural tendency is to remain loyal to a particular supplier. We then usually enjoy the nice warm glow that goes with believing we're being looked after by a caring and responsive organisation (usually courtesy an off-shore call centre). And then there's the convenience of renewing your contract with an email (unless the mail server isn't working due to essential maintenance) or a simple phone call (after negotiating a remote answering system with a long-winded message on a premium-rate line).

So I guess we can be forgiven for being bewildered by what appears to be our supplier's clumsy attempt to say 'thank you' in this rather strange manner at renewal time. But should we really be surprised?

Do customers really matter?

Companies have a responsibility to their customers, surely? Yes, inasmuch as they will have sold you a product a service for a period of time, and whilst still under contract they have a responsibility to continue providing that service - unless the terms and conditions of the contract state something different.

However, once the contract has expired, any obligation to the consumer will normally disappear with it. But what will remain in place is a longer term objective, and that is of the supplier's responsibility to its shareholders. And if in any doubt, here is a 'headline' from Scottish and Southern Electricity's website (Aug 2011)...

GROWING DIVIDENDS
Delivering sustained real growth in the dividend we aim to deliver above-inflation increases in the dividend every year through efficient operation of, and investment in, energy businesses.

And of course, a helping factor in the ability to deliver dividend growth is obviously profiting from customer revenues. OK, so we understand the need to make a profit, but even so you would have thought the supplier would still have wanted to retain their customers - in other words recognise loyalty? Maybe so, but have we've failed to fully understand the marketing model?

Profiting through customer laziness

Many service industries appear to be operating a business model that appears similar to this:

1 Offer incentives to attract and convert new customers

2 The following year - issue renewal to customers at inflated prices or inferior terms

3 Hope the customer doesn't notice or is too lazy to do anything

4 Accept churn (losing the customer) as a consequence, but assume this is an isolated case

Providing the number of people who in the category described in 'point 3', exceed those in 'point 4', the supplier (and their shareholders) are in clover. In other words, any company using this model needs to rely on a large proportion of its customer base being unwilling or unable to change for whatever reason. However, you just know they're probably on fairly safe ground.

The figures...

Now let's look at an example of how the figures could work out, based on say 80% of existing customers failing to take action...

• Year 1 = 100 new customers (total = 100 on the books)
• Year 2 = 100 more new customers, whilst retaining 80 and losing 20 who see the light (total now = 184)
• Year 3 = 100 more new customers, whilst retaining 148, and losing 36 say (total now = 248)

As you can see, as long as a supplier provides an incentive to new customers to sign up for the service, this conservative business model allows for a small amount of churn, whilst enabling growth to be maintained. And of course, some of the inflated monies paid by those who failed to take action, will go to offset any loss of margin incurred by offering incentives or discounts to new entrants.

But will this information encourage you to take action?

Why switching is smart?

According to the excellent report produced by Consumer Focus, called 'Missing The Mark', it states that 'Regular switching is confined to a small group of very active consumers', adding that '8 in 10 consumers (83%) had not switched in the last 12 months'.

That's why we want to encourage more of you to start switching. And if we can get enough energy consumers to start switching, we may just start to see a change in the suppliers' business models. Especially when the smarter amongst you realise that customer loyalty - not the same as inaction - is likely to return better profits in the long term!

In fact your actions could even change the way the switching system works - or in time, even eradicate it.

So don't switch off - switch over!

This article was published by the Energy Saving Centre in July 2011