The UK utilities industry is in for a hard time. Customers won't stay long enough to even start generating profits. What can be done?
Fewer switchers by 2005? That has to be good news. Well, not if it means that they've turned into churners. What's the difference between a switcher and a churner? If you work within the mobile telecoms industry you will no doubt know, and if you work in the utilities industry in the UK, you will very soon know. A switcher is a consumer who changes suppliers once; a churner is one who does it more than once.
70% will churn
And according to the latest research from Datamonitor, by 2005, in the UK utilities industry, churners will account for 70% of the residential customers who change suppliers. Of course, this means that first time switchers will fall to 30% as new customers energised to switch under predicted market conditions will inevitably drop.
Datamonitor's new report, The Future of Switching and Churn in the UK Residential Supply Market, analyses the impact of different factors behind a consumer's decision to switch supplier, and includes a number of scenarios that predict the level of switching and churn to 2005.
Because it is so difficult, if not impossible, to make profit from a newly acquired customer, this change in pattern will undermine suppliers' ability to generate revenue. Customers simply won't stay long enough to become profitable.
What can be done about it?
Until recently, those who have spent most on promoting price savings (the main driver behind switching) have attracted customers, but now churn is undermining this expense.
Mergers and acquisitions?
Mergers and acquisitions are an effective way of increasing market share and cutting churn. The customers acquired in this way are less likely to switch than those acquired organically. But it can be expensive. After acquiring Yorkshire Electricity, npower went on to acquire the residential customer base of Northern Electric. According to the report, it cost npower some 275 per Northern Electric customer and 295 per Yorkshire Electricity customer. Clearly, they will not switch as easily and will be easier to retain, but the estimated cost of acquiring a customer by door-to-door sales is only some 40 - an enormous difference.
Two key strategies
Datamonitor recommends that, with some 16 million customers churning in 2005, suppliers' strategies should both identify ways of making serial switchers stay, while at the same time find ways of generating extra profit from their loyal customers.
According to Datamonitor Utilities Analyst, Martin Yuill, "The growing rate of churn ensures that suppliers are likely to lose as many customers as they acquire with a resultant drain on finances. Future supplier prosperity rests on generating increased revenues from existing customers who, through being supplied with a bundle of services may be less likely to switch, in addition to reducing the desire to switch in newly acquired customers.
Developing bundled service offerings is an important way of not only generating increased revenue by cross selling products to existing customers but also by reducing the desire to switch as customers become tied in to a number of different services".
The Future of switching and Churn in the UK Residential Supply Market is available from Datamonitor priced at US$2,995.