December 1998

Ref : 1998-330-0018

....................................................................................................................

Customer loyalty, a literature review

& analysis
....................................................................................................................

Marketing Strategies & Consumer Policy

Working Group
....................................................................................................................
As of 1st January 1998, UNIPEDE and EURELECTRIC have formed a Joint Secretariat situated in
Brussels.

UNIPEDE and EURELECTRIC are organisations with a separate identity, co-operating closely to
provide effective and coherent assistance to their Members, in order to ensure and develop the
Industry's competitiveness and in order to offer and develop competitive and environmentally sound
products, in the interest of its customers. In doing so, UNIPEDE and EURELECTRIC will pay due
respect to the specific missions and responsibilities of other international organisations of the
European Electricity Supply Industry.
UNIPEDE is the association of the European Electricity Supply Industry and of world wide affiliates
and associates that operates as a centre of strategic expertise and that acts as a liaison with other
international associations and organisations with the aim to identify and respect the common
interests of its Members and to assist the Members in deciding on the solutions to be implemented
and in co-ordinating and carrying out the necessary action.
EURELECTRIC is the association of the European Union Electricity Supply Industry representing it in
public affairs, in particular in relation to the EU institutions, in order to promote its interests at the
political level.

The reports published by UNIPEDE are the result of the work of its structure of expertise: they
represent one of the most direct methods of circulating knowledge and information throughout the
sector, on subjects of common interest.
They are intended for wide circulation both within the electricity supply industry and outside it.

Ä Please do not hesitate to ask for the latest available printed UNIPEDE/EURELECTRIC
publications catalogue (with currently about 200 summaries of UNIPEDE reports) from:

UNIPEDE/EURELECTRIC Documentation
66 Boulevard de l'Impératrice
BE-1000 Brussels
BELGIUM
Tel: +32 2 515 10 00
Fax: +32 2 515 10 10

Ä You can also use the UNIPEDE/EURELECTRIC Internet Web site, which provides the
following information:
- UNIPEDE/EURELECTRIC general information
- Publications Catalogue
- Events & Conferences
- UNIPEDE/EURELECTRIC Statements
- Statistics

http://www.unipede.org
Ä You can also contact the UNIPEDE/EURELECTRIC Documentation Service at its Internet E-
mail address for individual requests (information on UNIPEDE/EURELECTRIC reports,
transmission of your order forms etc.):

documentation@unipede.org
Customer loyalty, a literature review & analysis

............................................................................................

Working Group
Marketing Strategies & Consumer Policy
............................................................................................

Paper prepared by:

Jacques Rossat (CH), Jan Larsen (NO), Drahomir Ruta (CZ),

Manfred Wawrzynosek (PL)

Copyright © UNIPEDE, 1999

All rights reserved
Printed at UNIPEDE, Brussels (Belgium)
EXECUTIVE SUMMARY

This report on Customer Loyalty comprises of a first part devoted to a theoretical

approach of customer loyalty and a second part focusing on the electricity sector.

“Customer satisfaction is not customer loyalty” warns this report so as to highlight the
rather complex, -not to say elusive-, nature of customer loyalty. If a loyal customer is no
doubt a satisfied customer, this does not entail that a satisfied customer is loyal. In fact, a
satisfied customer remains very likely to switch to other competitor’s products.

One of the main insights provided by this report is to point out that the loyalty question
does not just consist in looking at the customer in relation to products / services on offer,
but implies a whole virtuous management of the company, the employees and the
investors.

Though underlining the difficulty to define loyalty, the report analyses in practice how
profitable loyal customers are, and how important it is to retain them, namely through
zero defection schemes or by carrying out studies on defections and complaints.
In other words, customer loyalty creates value and anything that might undermine it
should be identified and eliminated.

With regard to the electricity sector, the authors of the report endeavour to establish what
are the needs and wants of the electricity customers. In doing so, they also emphasise that
electricity companies need to improve their understanding of their customers. In a
liberalised electricity market, a database storing customers’ names, addresses and
electricity demand is no longer sufficient. Special attention should be paid to the
subjective component of the customer, his emotional reactions and feelings.

It emerges from market research studies that price is the main driven criteria of
customer’s needs and wants but it would be hasardous to only take into account this
aspect. It clearly arises from a number of studies that customers are very sensible to the
quality of services (reliability, simplicity, guarantees, etc). Therefore, it is worthwhile for
marketers to explore the range of services that can be developed in view to meet
customer’s needs.

The report also examines the propensity to switch in fully liberalised electricity markets,
in particular in the UK and in Norway. The propensity may appear rather low in the first
years following the opening as a result of “a wait and see” syndrome. It might also be
limited due to the hassle caused by switching. In the UK, it seems that the percentage of
customers that are switching is now fixed at a steady 25-30 % rate.

Finally, the report addresses the incentive issue that can be successfully used to attract
customers, such as cash back incentives, price reductions, tariff options, payment options
and dual or combined packages of fuel and electricity services.
 Part I: Brief Survey of Current Trends and Theories

Customer Loyalty, a literature review and analysis

Working Group Marketing Strategies & Consumer Policy

CONTENTS

Part 1: Brief Survey of Current Trends and Theories

1. Introduction ____________________________________________________ 2
2. Definitions _____________________________________________________ 2
2.1. Loyalty ________________________________ ________________________________ ___ 2
2.2. Customer loyalty ________________________________ ___________________________ 2
2.3. Customer satisfaction ________________________________ _______________________ 3
2.4. Satisfaction-Loyalty link ________________________________ ____________________ 4
3. Loyalty model __________________________________________________ 4
4. Consequences of customers loyalty________________________________ 6
5. Toward "zero defections" ________________________________________ 7
5.1. Target the "right" customers ________________________________ ________________ 8
5.2. Analysis of defections and complains ________________________________ __________ 9
5.3. Defection costs ________________________________ ____________________________ 10
6. Measure of loyalty______________________________________________ 10
7. Conclusion ___________________________________________________ 11
STATISTICS____________________________________________________________ 13
BIBLIOGRAPHY _________________________________________________________ 14

Part II: Customer Loyalty in the Electricity Supply Industry

1. Introduction ___________________________________________________ 15
2. Needs and wants ______________________________________________ 15
3. Propensity to switch____________________________________________ 17
4. Reasons for switching __________________________________________ 20
5. Barriers / Incentives ____________________________________________ 21
5.1. Barriers ________________________________ ________________________________ _ 21
5.2. Incentives ________________________________ ________________________________ 22
6. Conclusion ___________________________________________________ 24
BIBLIOGRAPHY _________________________________________________________ 26

1998-330-0018 1 December 1998

 Part I: Brief Survey of Current Trends and Theories

Part 1: Brief Survey of Current Trends and Theories

1. Introduction

Loyalty is dead, the experts proclaim, and the statistics seem to bear them out. On average,
the U.S. corporations now lose half their customers in five years, half their employees in four,
and half their investors in less than one (Reichheld, 1996). No, loyalty is not dead; it remains
a dominant key of success. In fact, the corporate leaders in loyalty – that apply a strategic
loyalty-based management – have enduring records of productivity, solid profits and steady
expansion.
More than a limited customer approach, the loyalty effect should be viewed as a wide context
in which all the key players of a firm are far more powerful, further reaching, and more
interdependent than we have ever imagined. There would be no customer loyalty without
loyal employees as there would be no loyal employees without long term investors. We will
later focus on the customer side, but the employees and the investors problematic should be
kept in mind during the entire process. We will also, now and then, show the implications of
such a three dimensional environment in which creating value for customers has become a
strategic issue. The advantages of loyalty are numerous, but the implementation of such a
culture does not go without posing problems. What should be done, who should be
responsible for these changes, who should be targeted, and how should these changes be
conducted are some of the questions we will try to answer in this compilation of some
classical theories of the day (1998).

2. Definitions

2.1. Loyalty

Reichheld opposes loyalty to the actual profit-theory. This theory gathers the firm's resources
toward one unique goal: creation of profit. Reichheld views loyalty as a value-creation theory.
The fundamental mission of a business is oriented toward the creation of value for the
customer and profit becomes a consequence of value creation. It turns out to be a mean rather
than an end. This theory will be developed in the loyalty model described in chapter 3.

2.2. Customer loyalty

Customer loyalty is not always easy to construe and many definitions have been proposed.
Let's first settle what customer loyalty is not (Prus & Randall, 1995):

Customer loyalty is not customer satisfaction. Satisfaction is a necessary but not sufficient
criterion. We know that "very satisfied" to "satisfied" customers sometimes switch to
competitors.

1998-330-0018 2 12/98 – MS&CP WG

 Part I: Brief Survey of Current Trends and Theories

Customer loyalty is not a response to trial offers or incentives. Customers who react to
incentives are often highly disloyal and they often leave as fast as they came. They are very
much inclined to respond to a competitor's incentive.
Customer loyalty is not a strong market share. High level of market share can also be
influenced by other factors such as poor performance by competitors or price issues.
Customer loyalty is not repeat buying or habitual buying. Some of your consumers choose
your products because of convenience or habits and they can be tempted to defect for any
reason.

Prus & Randall then describe customer loyalty as follows: "Customer loyalty is a composite
of a number of qualities. It is driven by customer satisfaction, yet it also involves a
commitment on the part of the customer to make a sustained investment in an ongoing
relationship with a brand or company. Finally, customer loyalty is reflected by a combination
of attitudes (intention to buy again and/or buy additional products or services from the same
company, willingness to recommend the company to others, commitment to the company
demonstrated by a resistance to switching to a competitor) and behaviors (repeat purchasing,
purchasing more and different products or services from the same company, recommending
the company to others)".

2.3. Customer satisfaction

Satisfaction is often confused with loyalty. Satisfaction is an emotional or feeling reaction

(Westbrook, Newman, Taylor, 1978). It is the result of a complex process that requires
understanding the psychology of customers. The range of emotion is wide with, for example,
contentment, surprise, pleasure, or relief. Satisfaction is influenced, in the end, by
expectations and the gap between perceived quality and expected quality, called "expectancy
disconfirmation". The figure below shows the predominant linkage of this process.

"Objective"
Expectations Quality

Perceived
Quality

Disconfirmation

Future
Expectations Satisfaction

Source: Rust, Zahorik, Keiningham, 1996

1998-330-0018 3 12/98 – MS&CP WG

 Part I: Brief Survey of Current Trends and Theories

2.4. Satisfaction-Loyalty link

High-quality products and associated services designed to meet customer needs will create
customer satisfaction. This high level of satisfaction will produce increased customer loyalty.
According to conventional wisdom, we would be tempted to believe that the link between
satisfaction and loyalty is a simple, linear relation. But reality proves us wrong: it is neither
linear nor simple (see figure "The effect of satisfaction" below). The relation reacts
differently according to time and circumstances. Unless they are totally satisfied, there is
always a chance you will see your customers be lured away (Jones & Sasser Jr., 1995).

Impact

Dissatisfie Delighted
d
Satisfaction
scale

Source: Rust, Zahorik, Keiningham, 1996

3. Loyalty model

Most present-day strategic plans focus on a profit target and work backward to arrive at
required revenue growth and cost reduction. Time spent on studying loyalty leaders has
convinced Reichheld to develop a totally different model (see loyalty model below). The
decisive key in this model is not profit but, instead, the creation of value for the customers.
The three forces - customers, employees, and investors - that play an important role in the
enterprise form the forces of loyalty. Since a linkage between loyalty, value, and profits exists,
these forces can be measured in terms of cash flow. "Loyalty is inextricably linked to the
creation of value both as a cause and an effect." (Reichhled, 1996)
As an effect, loyalty measures permanently whether or not the company has delivered
superior value. Defects can doubtlessly be explained by a lack of value for the customer. As a
cause, loyalty creates a chain reaction. Reichheld describes it as follow:

ü Revenues and market share grow as the best customers are swept into the company's
business, building repeat sales and referrals. Because the firm's value proposition is
strong, it can afford to be more selective in new customer acquisition and to concentrate

1998-330-0018 4 12/98 – MS&CP WG

 Part I: Brief Survey of Current Trends and Theories

its investment on the most profitable and potentially loyal prospects, further simulating
sustainable growth.
ü Sustainable growth enables the firm to attract and retain the best employees. Consistent
delivery of superior value to customers increases employee's loyalty by giving them pride
and satisfaction in their work. Furthermore, as long-term employees get to know their
long-term customers, they learn how to deliver still more value, which further reinforces
both customer and employee loyalty.
ü Long-term employees learn on the job how to reduce costs and improve quality, which
further enriches the customer value proposition and generates superior productivity. The
company can then use this productivity surplus to fund superior compensation and better
tools and training, which further reinforce employee productivity, compensation growth,
and loyalty.
ü Spiraling productivity coupled with the increased efficiency of dealing with loyal
customers generates the kind of cost advantage that is very difficult for competitors to
match. Sustainable cost advantage coupled with steady growth in the number of loyal
customers generates the kind of profits that are very appealing to investors, which makes
it easier for the firm to attract and retain the right investors.
ü Loyal investors behave like partners. They stabilize the system, lower the cost of capital,
and ensure that appropriate cash is put back into the business to fund investments that will
increase the company's value-creation potential.

The Right
Customers

Surplus Cash
Reinvested
Customer Loyalty

Superior Growth
Customer
Value
Investor Loyalty
The Right New
Employees

Compensation
The Right Advantage
New Investors

Employee Loyalty
Profits

Cost Superior
Advantage Productivity

Source: Reichheld, 1996

1998-330-0018 5 12/98 – MS&CP WG

 Part I: Brief Survey of Current Trends and Theories

To sum up, this model demonstrates that a company willing to follow a loyalty-based
management should concentrate its resources in order to offer a superior value.

4. Consequences of customers loyalty

Businesses with high customers' loyalty rates have proven to reach great financial results.
Buchanan & Gillies identified six reasons explaining why long-term customers are more
profitable than others are:

ü Regular customers place frequent, consistent orders and, therefore, usually cost less to
serve.
ü Long-established customers tend to buy more.
ü Satisfied customers may sometimes pay premium prices
ü Retaining customers makes it difficult for the competitors to enter a market or increase
their share.
ü Satisfied customers often refer new customers to the supplier at virtually no cost.
ü The cost of acquiring and serving new customers can be substantial. A higher retention
rate implies that fewer new customers need be acquired, and that they can be acquired
more cheaply. In fact, the acquisition cost of a new customer is three to five times more
expensive than retention cost.

We could also add that a loyal customer is more willing to give feedback on his
dissatisfaction and becomes this way a sort of quality controller. Finally, loyalty is an
excellent weapon, since it is almost impossible to measure a competitor's retention rate.

All these explanations become evident on the figure below. The same ascertaining can be
demonstrated for the employee or investor's point of view.

60

50

An 40
nu
al
Cu
st 30 Price premium
o Referrals
m
er Cost savings
Pr Revenue growth
20
ofi Base profit
t Acquistion cost

10

-10
0 1 2 3 4 5 6 7
Year

Source: Reichheld, 1996

1998-330-0018 6 12/98 – MS&CP WG

 Part I: Brief Survey of Current Trends and Theories

5. Toward "zero defections"

Any way, loyalty has to become a strategy and should be applied to customers, employees,
and investors. Because of the interconnection of these key players, it is not possible to operate
on only one. For example it would be a non-sense to concentrate on customer loyalty if
employees were not formed to do so, or if the investors reacted only to short term profits. It
has to be considered as an indivisible system.
We have now seen the numerous advantages of having loyal customers. In fact, the process of
acquiring new customers and retaining the old one can be illustrated by the image of a bucket
of water (see the figure below).

Customers that
leave the market

Customers that
New to market switched to us
customers form competitors

Market share

Customers that switch

to the competition

Source: Rust, Zahorik, Keiningham, 1996

This scheme is quite easy to understand. A hole in the bucket causes a loss of water. The same
happens with customers. In order to keep at least the same level of activity, we now have to
compensate by attracting new customers, or customers who are currently linked to a
competitor. There are two ways of reacting if you ascertain a leak. The first one would be to
find more customers coming in than those going out. The second tactic consists in plugging
the leakage. It's exactly what a zero-defection program aims. But zero-defection does not
mean there will be no further loss of customers. The objective is to target the good customers
and retain them.

1998-330-0018 7 12/98 – MS&CP WG

 Part I: Brief Survey of Current Trends and Theories

5.1. Target the "right" customers

Before retaining all the customers at any price, it is very important to identify your core
customers. There are three easy questions you can ask yourself (Reichhheld, 1996). First, who
are your more profitable and loyal customers? You will look for those who spend more, pay
promptly, require less service, and prefer stable, long-term relationship. Second, which
customers place the greatest value on what you offer? Those for whom the product fits best to
their needs. Third, which of your customers are worth more to you than your competitors?
The more customers fitting one, two, or three of these groups you attract, and the more you
increase the chances to have loyal customers. All customers are not good to keep. That's why
it is critical to know the characteristics of the customers you target. Jones and Sasser have
identified four different ways consumers behave. A resume is proposed in the frame below.

The Loyalist and Apostle. In most cases, the loyalist is a happy customer who has had good
experiences with the company and who is ready to return on a regular basis. This customer
has a need and the company provides exactly the product or service that fits him. It explains
why this customer is so easy to serve. Even more enthusiastic than loyalists, the apostle is so
overwhelmed, his experience brings him so much more satisfaction than he expected, that he
share his strong feelings with others.
The Defector and the Terrorist. Defectors' ranks include very dissatisfied, quite dissatisfied,
neutral, or even satisfied customers. The number of merely dissatisfied customers or satisfied
customers who have encountered failures and defect can be quite impressive. It would be a
huge error to let them go since the company has the tools to turn them into highly satisfied
customers. The worst defector a company can dream of is called the terrorist. This customer
has endured a bad experience and he cannot wait to communicate his frustration and anger to
others. These people are angry because no one was there to respond, listen or correct the
failure they encountered.
The Mercenary. This is a kind of customers having no rule and reacting in unpredictable
ways. Even if they are highly satisfied, they will show almost no loyalty. "These customers
are often very expensive to acquire and quick to depart. They chase low prices, buy on
impulse, pursue fashion trends, or seek change for the sake of a change" (Jones & Sasser,
1995).
The Hostage. These customers have endured the worst the company has to offer and still
have to accept it. These individuals are stuck in a monopolistic environment.
From there, Jones & Sasser enact what should be every company's ultimate objective:
"Turning as many customers as possible into the most valuable type of loyalist, the apostle,
and eliminating the most dangerous type of defector or hostage, the terrorist".
Individual Customer Satisfaction, Loyalty, and Behavior
Satisfaction Loyalt Behavior
y
Loyalist/Apostl high high staying and
Defector/Terroris
e low to low to supportive
leaving or having left and
t
Mercenar high
medium low to
medium coming
unhappyand going; low
y
Hostage low to medium
high commitment
unable to switch;
medium trapped
Source: Jones & Sasser, 1995

1998-330-0018 8 12/98 – MS&CP WG

 Part I: Brief Survey of Current Trends and Theories

5.2. Analysis of defections and complains

"Any defection is the result of a lack of value". (Reichheld, 1996)

The defection analysis has a double purpose. First and before anything, it is a very convenient
and reliable indicator of customer loyalty. Customer loyalty is often calculated in terms of
satisfaction, repurchase, but none of these rates give the results retention rate has. Second, by
creating a data base on the reasons expressed by your customers for leaving, you give your
company the means to correct the mistakes done while processing with customers. The
reasons a customer invokes could lead other customers to defect too. View it a warning signal
and take advantage of it. One way to collect this information is to listen to the customer and
analyze his complains. Most of the time, listening, showing you care, and find a way to repair
the damages can transform a rather unsatisfied customer into a loyal one. But paying attention
to complain is not enough. You should now that "only 4 % of customers complain. This
means that a company will probably never hear about 96 % of her clients, and from the 91 %
of them who will defect because they think it would be of no use to complain". (Gerson,
1995) This gives us a good justification to conduct interviews with defectors.

You are maybe one of many skeptical who thinks most of the defections are natural and
cannot be controlled by a company. You will be surprised to see what has been found by
Gerson.
Your customers stop buying your products because:
1 % die
3 % move
5 % look for replacement solutions or develop other relationships
9 % go directly to your competitors
14 % are not satisfied with the product or the service
68 % are displeased with the way they have been treated.
If you look closely at these numbers, you will find out that you can indeed overcome 96 %
of the reasons why a customer stop buying your products or services.

De Souza, on her side, has identified 6 types of defectors:

Price defectors. They switch to a lower price.
Product defectors. They switch to superior product.
Service defectors. They switch because of poor service.
Market defectors. These customers are lost but not to a competitor since they leave the
market.
Technological defectors. They switch to convert to a product offered by companies outside
the industry.
Organizational defectors. These customers are lost because of internal or external political
considerations.

1998-330-0018 9 12/98 – MS&CP WG

 Part I: Brief Survey of Current Trends and Theories

5.3. Defection costs

No existing accountable system can measure the costs of a customer defection. Of course, a
loss has to be compensated by the acquisition of a new customer. We know these costs can be
very expensive (advertising, promotion, recruitment, establishment of a personal file, etc.).
But companies often forget to consider the potential profit a loyal customer represents. When
he leaves, he takes everything with him. During the time a relation lasts, the customer spends
more each year and the costs of processing diminish in regards of experience and volume.
Nevertheless, the company will not benefit of the free advertising and recommendation a
loyal customer can make. The figure below illustrates the case of a credit card company that
has a return rate of 2 or 3 % for direct marketing. This company sends 30 to 50 thousands
letters in order to record 1000 adhesions. This figure also shows that the company will not
make any profit if it does not keep its customers for at least two years

87
79
72
66

40

0 1 2 3 4 5

-80

Age of account (years)

Source: Reichheld, 1996

6. Measure of loyalty

"Measurement turns vision into strategy and strategy into facts" (Reichheld, 1996). Measure
is a necessity in every system, it allows the company to identify its weaknesses and control it
has reached its objectives. Measure also establishes the feedback loops, which are essential
for any organizational learning.
This task is not easy. How can we measure what drives customer value? First it is important
to understand the cause-and-effect relationships between loyalty and value creation (see
model at page 4). The mission that consists in delivering superior value can be measured by
customer loyalty, best expressed by retention rate, share of purchases, or both. Indirect effect
can also be stated with indicators such as revenue growth (increases as a result of repeated
purchases and referrals), costs (declines as a lower acquisition expenses and from efficiencies

1998-330-0018 10 12/98 – MS&CP WG

 Part I: Brief Survey of Current Trends and Theories

of serving experienced customers), employee retention (increases because job pride and
satisfaction increase, creating a loop that reinforces customer loyalty and reduces costs of
hiring and training and productivity rises). We could also be tempted to measure a third order
effect, that is profit (increases as costs go down and revenues augment).
Reichheld suggests building a reporting system that will focus on a couple of factors and
would send a warning signal when the indicator leaves a certain range. It would be composed
of two basic reports for each of the three sectors (customers, employees, and investors),
analogous to balance sheet and income statement in financial accounting, but more centered
on human capital. In this system, all the data converge toward one main focus, Net Present
Value (NPV). This system offers the advantage to measure all three factors: customer
duration, lifecycle cash flow, and new-customer gain rate (see figure above).

Level 1 Customer-base
Net Profit Value

Customer Lifecycle New-customer

Level 2
duration profits Gain rate

Level 3 Volume Price

Cost
Investment Referral

New customer
Level 4 Quality
Value drivers (yield rate)

Source: Reichheld, 1996

7. Conclusion

As a conclusion, we could imagine a wise Chinese man discharging some of his favorite
proverbs on customer loyalty. His sentences would be close to these: a business should serve
its customers. People are your most important asset. Choose your associates carefully and be
sure you share the same important values. Learn the lesson of each and every one of your
mistakes. You can manage only what you measure. Treat the others as you would like to be
treated. Profit is not everything. Even if these clichés are known by all, it is worth repeating
them one more time. They seem obvious but surprisingly, they seem to be forgotten with
increasing frequency as companies look for short-term profits (Reichheld, 1996). Loyalty
leaders have found the way to put it in practice and with their zero-defection program they
now climb the hill for consistent superiority. Loyalty is not a strategy decided by the
marketing department, loyalty is a commitment, a culture made by the entire company,

1998-330-0018 11 12/98 – MS&CP WG

 Part I: Brief Survey of Current Trends and Theories

focusing on the creation of superior value. By developing a loyalty-based management, these

leaders have entered in the ascending spiral of profit, growth, and lasting value.

1998-330-0018 12 12/98 – MS&CP WG

 Part I: Brief Survey of Current Trends and Theories

STATISTICS

For each complains your company receives, there are 26 other customers with unknown
complains or non-solved problems – and 6 of them have serious problems. They are
people you will probably never hear about. But they are also people who can tell you how
to improve your business. (Gerson, 1995)

Most of the customers who complain (54 to 70 %) will do business with you again if you
solve their problem. If they feel you react quickly and to their satisfaction, 95 % of
them will do business with you and there is a great deal of chances they will talk about
you in a positive way around them. (Gerson, 1995)

One unsatisfied customer will communicate his feelings to approximately 10 persons

around him. These 10 persons will then talk to another 5 people. (Gerson, 1995)

Happy customers, for whom you have found a solution to their complains, will talk to 3
to 5 people about their positive experience. (Gerson, 1995)

You will need 5 to 6 times more time to acquire a new customer than to retain old ones.
Customer loyalty and his long life value can be 10 times greater than the price paid for a
single purchase. (Gerson, 1995)

In most business, 60-80 % of customer defectors said they were 'satisfied' or 'very
satisfied' on the last satisfaction survey prior to their defection! In the interim,
anything can happen, and often does. (Reichheld, 1993)

It has been found that a decrease of 5 % in defection rates can increase profits by 25
to 100 %. (Reichheld, 1993)

Disloyalty at current rates stunts corporate performance by 25 to 50 %, sometimes

more. (Reichheld, 1996)

Success is Getting the Right Customers… and keeping them (Cawley Charlie, founder of
MBNA1)

Unless you have 100 % customers satisfaction – and I don't mean that they are just
satisfied, I mean that they are excited about what your are doing – you have to
improve. And if you have 100 % customer satisfaction, you have to make sure that you
listen just in case they change… so you can change with them. (Jones & Sasser Jr., 1995)

1
Maryland National Bank

1998-330-0018 13 12/98 – MS&CP WG

 Part I: Brief Survey of Current Trends and Theories

BIBLIOGRAPHY

BARSKY JONATHAN, "Guarantee; Warranty; Loyalty", Marketing Tools Magazine,

September 1995
CSR, "Loyal customers- Fact or fiction?", Customer Service Review, 1996
FORNELL CLAES, JOHNSON MICHAEL D., ANDERSON EUGENE W., CHA
JAESUNG, & EVERITT BRYANT BARBARA, "The American customer satisfaction
index: nature, purpose, and findings", Journal of Marketing, Vol. 60 (October 1996),
pp. 7-18
GERSON RICHARD, "Fidélisez à vie vos clients", Les Presses du Management, Paris, 1995
HARVARD L'EPANSION, "Fidéliser le client", Groupe Expansion Magazines, Paris, 1991
HENNARD DANIELLE, " Comment fidéliser vos clients", Bilan, 2/98, pp. 70-74
JONES THOMAS O. AND SASSER EARL W. JR., "Why satisfied customers defect",
Harvard Business Review, November-December 1995, pp. 88-99
KEAVENEY SUSAN M., "Customer switching behavior in service industries: An
exploratory study", Journal of Marketing, Vol. 59 (April 1995), pp. 71-82
LOWENSTEIN MICHAEL W., "Keep them coming back", Marketing Tools Magazine, May
1996
NAUMANN EARL, "Creating customer value", Thomson Executive Press, Cincinnati, 1995
O'BRIEN LOUISE AND JONE CHARLES, "Do rewards really create loyalty?", Harvard
Business Review, May-June 1995, pp. 75-82
PAYNE ADRIAN, CHRISTOPHER MARTIN, CLARK MOIRA, PECK HELEN,
"Relationship marketing for competitive advantage. Winning and keeping customers",
Butterworth Heinemann, Oxford, 1998
PINE II JOSEPH B., DON PEPPERS, AND ROGERS MARTHA, "Do you want to keep
your customers forever?", Harvard Business Review, March-April 1995, pp. 103-114
PRUDEN DOUGLAS, VAVRA TERRY G., SANKAR RAVI, "Customer loyalty: the
competitive edge beyond satisfaction", Quirks Marketing Research, April 1996
PRUS AMANDA AND BRANDT RANDALL D., "Understanding your customers",
Marketing Tools Magazine, July-August 1995
REESE SHELLY, "Happiness isn't everything", Marketing Tools Magazine, May 1996
REICHHELD FREDERICK F., "Learning from customer defection", Harvard Business
Review, March-April 1996, pp. 56-69
REICHHELD FREDERICK F., "The loyalty effect. The hidden force behind growth, profits,
and lasting value.", Harvard Business School Press, Boston 1996
REICHHELD FREDERICK F., "Loyalty-based management", Harvard Business Review,
March-April 1993, pp. 64-73
ROMAN ERNAN, "Customer for life", Marketing Tools Magazine, July-August 1996
RUST ROLAND T., ZAHORIK ANTHONY J., KEININGHAM THIMOTHY L., "Return on
quality", IRWIN Professional Publishing, Chicago, 1994
WESTBROOK ROBERT A., NEWMAN JOSEPH W., TAYLOR JAMES R.,
"Satisfaction/Dissatisfaction in the purchase decision process", Journal of Marketing 42
(October), pp. 54-60

1998-330-0018 14 12/98 – MS&CP WG

 Part II: Customer Loyalty in the Electricity Supply Industry

Part II: Customer Loyalty in the Electricity Supply Industry

1. Introduction

The aim of this paper is to review and to extract the teachings of open electricity and gas
markets experiences in the field of customer loyalty. At this writing (autumn 1998), a few
countries such as England and Norway have passed through all the different stages and
changes that will become unavoidable for most other developed countries in a very near
future. As we assumed, customer loyalty is very often in the middle of the preoccupations of
the industry since competition gives numerous opportunities to newly freed customers. It is
thus particularly interesting to compare the similarities and differences that may exist between
theoretical knowledge and reality.

In the UK, the first customers to access the opening electricity market in 1990 were the
largest industrial users who had installed power of 1 MW and over. This first step concerned
about 5000 sites. Later in 1994, customers with a demand of 100 kW and over (about 52'000
sites) were also offered the chance to choose their electricity provider. The final phase of
liberalization took place in 1998, giving supplier's choice to 1.5 million businesses and 24
million households.

In Norway, "deregulation" gave household customers complete access to the market in 1995.
All the remaining obstacles such as supplier switching fee were finally removed in the
beginning of 1998.

Please note that the observations being exposed in this document have to be taken with a lot
of circumspection and are by no mean a prediction of what will happen in other countries. The
very competitive nature of first hand information about customer loyalty makes access to this
information difficult to those outside of the circle of the studies' owners. Therefore, even if it
gives a valuable background, this small number of information available does not allow any
broad-based generalization.

This report focusses on customer loyalty of household customers. Obviously, customer

loyalty of small, medium and large size customers has to be analysed differently, as also the
needs of these customers are different from those of domestic ones.

In contrast to almost all other industries, the technical quality of the product "electricity" does
not have an influence on domestic customer choice. This choice is therefore based on other
factors that will be outlined below.

2. Needs and wants

The first topic that should be explored in a customer loyalty's perspective is customers' needs
and wants. This may seem evident but which company in the industry can truly state it
possesses this information? Knowing what customers' expectations are and who these
customers really are is the basis of the choice of any strategic option. Even if electrical
companies have the advantage to know every single customer by her/his name, it looks like
they often don't know anything more. The databases used by most of electricity companies

1998-330-0018 15 12/98 – MS&CP WG

 Part II: Customer Loyalty in the Electricity Supply Industry

still in monopolistic environment can be summarized to name, address, electricity demand,

the kind and age of the meter, the date of the contracts, the tariff, the amount of the last bill,
the bank details, etc. Yet often nothing about real needs and wants of the players who will
dictate the market. This is perhaps due to the fact that building such a base requires time,
sophisticated IT equipment and experience. However, this lack of customers' knowledge
seems to be also found in some companies operating on an open market. How can therefore a
company create value for its customers? Offering a product without taking into accounts what
customers want is a bet nobody can take anymore.

The "electrically correct" common wisdom on the "real" needs of consumers in an open
market is that these consumers want a good price first, then a good price and, finally, a
good price. This saying carries a lot of truth. Two hours spent with the salesman of a
Norwegian utility, working his phone with potential customers is the best confirmation
of this wisdom. Is this corroborated by available researches and studies?

On the UK gas market, a research (Lias, 1997) concluded that customers needed familiarity,
security, value for money, good customer service but more precisely a range of services, new
products, and attractive brands.

Another research2 illustrates the fact that large customers are more sensible to reliability than
to price, as presented in the graph below. The problem faced by the supplier is the difficulty
to communicate this reliability and turn it into a decisive strategic advantage. All competitors
will claim they are reliable but it is extremely hard for customers to compare unless some
kind of guarantee is proposed. Offering a guarantee is an approach commonly used with
products but it also applicable to services. In fact, it can be a strong competitive advantage.
The implications are numerous. It builds trust and loyalty, reassure skeptical customers, gives
a warning signal in case of problem within the organization, shows you care about your
clients, forces your company to give a perfect service and help to identify weaknesses. We
could add to the list, but the result would be to emphasize on value creation for the customers.
This value is worth paying attention to a few simple rules that assure the success of this
strategy.
Subjects like responsive emergency repair, uninterruptible power or protection against spikes,
ranked as important by customers would suit perfectly to a guarantee clause.
The next ascertaining we can bring to light at the reading of the figures below concerns the
advantage established suppliers have on new comers. It shows the importance accorded to the
track record and industry experience. Of course, the impact can be negative for suppliers who
neglected their customers before the opening.

Yvan Laroche, in his report3 at the recent UNIPEDE Lisbon convention identifies the basic
demands. First, comes price (more or less important depending on the segment) and then
follow: quality, simplicity, flexibility, choice, and quite often ecological preoccupations.

But in our opinion, none of these results is fully satisfactory. The data collected do not go
deep enough in the reasoning process of customers. In addition, most of the time, customers'
characteristics and segmentation are not taken into accounts. This lack of data is responsible

2
DIAMOND M.S. (BOOZ·ALLEN & HAMILTON), "Large customers. A misunderstood market opportunity",
Lisbon: Conference on Customers & Markets, session 2, 1998
3
LAROCHE YVAN, "Nouvelles opportunités de développement à 5-10 ans", Lisbon:
Conference on Customers & Markets, session 4, 1998

1998-330-0018 16 12/98 – MS&CP WG

 Part II: Customer Loyalty in the Electricity Supply Industry

for making difficult the building of marketing strategies. A great deal of efforts should be
directed toward creating databases that could be used to add value for customers.

7
6.27 6.13 6.06 5.97
6
5.26 5.17
4.99 4.88
5
4.42 4.41
4.12 4.12
3.86 3.76 3.73 3.73
4 3.54

0 Re Un Pr El El Cu Lo Fix Re Be Ri On On On E On
Bill
sp int ot ect ect sto we ed gul nc sk e e e DT e
co
on err ect ric ric mi st pri ar h m re su su for na
ns
siv up ion su su ze po ce sal m an gio ppl ppl pa tio
oli
e tibl ag ppl ppl d ssi co es ar ag nal ier ier yin nal
da
e e ain ier ier co ble ntr re k e su for for g su
tio
m po st wit wit ntr pri act pai inf m ppl en ga bill ppl
n
er we spi h h act ce s r or en ier er se s s ier
ge r ke a ind s / co m t gy rvi an
nc s tra ust k ntr ati to co ce d
y ck ry W act ms ele
re re ex h m ctri
pai co pe odi cit
rd rie tie y
nc s
e an
d

Source: Survey (Diamond, 1998)

3. Propensity to switch

We know the opening of electricity market creates a leakage in companies' reservoir of

customers. We will now examine how big this hole is, how many customers are tempted to
leave, how many actually put their threats into acts, and what is the rhythm of this defection.
Defection is often compensated by acquiring new customers, but at what cost!

In Norway, the 2 million household customers have the right to choose their supplier since
1995. Numbers for 1997 show that this trend is now slowly taking off; the figures for 1998
confirm an acceleration of the process. It corresponds to the time needed for those who
adopted a wait and see method to gently consider switching. The second factor of influence is
undoubtedly the recent free of charge switching policy. In April 1997, 4200 changes were
recorded; this figure was of 7100 in July. The total number of customers with a different
electricity supplier than the dominant provider reached 13'900 in July, of which 81 % had
changed in the last two quarters. In January 1998, around 89'000 customers switched.
Reported in percentage of the total of households, these numbers still look rather meagre since
they represent 1,75 % of the total population of household customers. However, the
acceleration pace is impressive. Companies offer simplified switching formulas on which the

1998-330-0018 17 12/98 – MS&CP WG

 Part II: Customer Loyalty in the Electricity Supply Industry

customer only has to write down the date, the numbers indicated on his meter, choose a new
contract and sign. The company will then take care of the rest.
The Norwegian market is quite complex as it is divided into approximately 200 sub-markets.
The figures show that 20 % of customers live in areas where the market share for the
dominant electricity supplier is below 99 % and 10 % live in an area in which no one has
changed supplier. These figures prove that the traditional supplier still holds a dominant
position and that customers' switching has not really started yet.

In the UK, figures (Electricity Association) for industrial market (100kW) show that over a
third of customers has changed supplier since April 1994. Answering the survey, 7 % of
households have said they were "very likely" to "likely" to switch supplier and 31 % remained
undecided. This would give us a maximum of 40 % potential switchers. However, the
experience lived in the gas industry seem to suggest a far lower potential, probably around
25 %.

Another research conducted in 1998 on "Customer attitudes in the UK domestic electricity

market" (MarketLine International, 1998) gives us more details. These figures are expressed
in the table below. We see that 16.6 % of household customers declare they will switch
before the end of the first year of liberalization. 24.3 % are not sure or did not know this
opportunity was offered. Finally, 59 % claim they will not switch. Again, the overall
maximum switching prognoses is estimated around 25-30 %. But these numbers are not
static; the market, or more precisely the difference between the expectations of the market and
reality will influence switching rates. For example, important disparity in prices could
encourage people who said they wouldn't switch to change their mind, just as a small gap
could dissuade others. Going deeper in the analysis, we verify that little variance has been
observed on the basis of sex segmentation. A slight difference of 3 % (higher will to switch
for male) seems to predict there will be no major behavior contrast for these segments. Age
has a greater impact: Customers in the 25-34 age group are more inclined to switch. They are
typically considered to be early adopters and embrace new ideas and technological changes
first. The older the customer is and the more reticent to switching he is. The 65 and more age
group is very reluctant to switch with a rate of 74.4 % saying they will not exchange their
actual provider. A significant difference has been reported according to the region. Working
status also plays its role. Part time and full time workers are more receptive to switching then
any other group (retired or others) and make us believe they will behave in very similar
manners. Other groups such as retired are far less enthusiastic.

MarketLine International has tempted to draw a profile of the most likely and the least likely
to switch:

ü The most likely person to switch is…

A male, 25-34 years old, living in Wales or The Midlands, belonging to a well-to-do
social class, and working part time.
ü The least likely to switch is…
A female, 45-54 years old, living in Scotland or the North, belonging to less favored
social class, and being neither employed part nor full time.

1998-330-0018 18 12/98 – MS&CP WG

 Part II: Customer Loyalty in the Electricity Supply Industry

65

59

55

45

35

25
20.9

15
11.1

5 3.2 3.5
0.9 1.5

No Yes, already Yes, immediately Yes, after a few Yes, after year Unaware I would be Don't know / Not
-5 switched month able to switch stated

Source: MarketLine International

In the US, 33.2 % of residential customers declared in a recent survey 4, they would consider
switching with no price difference, and 24.2 % additional would definitely switch with
"significant" cost savings.

In Germany, people were asked the question: "if you could freely choose, would you choose
your existing electricity supplier again?" 5. "Convinced" customers said "definitely" at 35.5 %
and "probably" at 18.9 %. "Satisfied" customers answered "definitely" at 24 % and "probably"
at 18.1 %. Finally, "disappointed" customers responded "definitely" at 11.9 % and probably at
6.4 %. This confirms that a complex link exists between satisfaction rate and loyalty, but it is
worth repeating it cannot be the only explanation.

This is even better demonstrated in a survey (British Gas, 1997) realized on the UK gas
market: The relation between customer satisfaction and likelihood of switching supplier and
the relation between value for money and likelihood of switching were opposed. It showed
value is undoubtedly a more reliable indicator of switching propensity.

4
McINTOSH H.E. (ANDERSEN CONSULTING), "Customer service. Satifying and
saving", Lisbon: Conference on Customers & Markets, session 1, 1998
5
Source: Das Deutsche Kundenbarometer – Qualität und Zufriedenheit, Jahrbuch der
Kundenzufriedenheit in Deutschland, 1995

1998-330-0018 19 12/98 – MS&CP WG

 Part II: Customer Loyalty in the Electricity Supply Industry

4. Reasons for switching

Studying the reasons that push customers to switch from one supplier to another gives your
company the tools to comprehend and measure its performance. As Reichheld claims in his
book6, "any defection is the result of a lack of value". Knowing what is going wrong also
enables the company to take corrective actions. It can also be a good indicator of the
company's global performance or its performance in a special domain in comparison with
competitors.

On UK's gas market, the identified reasons for switching were listed as follow (Lias, 1997):

- Price only 15 %
- Dissatisfaction with British Gas 5%
- Innovators 1%
- Early adopters 9%

On the electricity market (MarketLine International, 1998), price was the dominant answer
with 61.7 %. Still, over one third of respondents did not mention price as a dominant factor.
Once more, the other options were far behind. The second most popular choice, customer
service, gathered only 23 %. Clear information allowing comparison of suppliers ranked third
with 10.6 %. All the others, such as combined gas and electricity, combined utilities,
switching bonus, other discounts, were under 10 %. Let's note the high degree of uncertainty,
probably coming from those who did not know at the time if they would switch or not.
Broken down by sex, this survey indicates that female respondents were far more sensible to
price and service (around 6 % higher than male). The younger age groups show a high degree
of uncertainty that can be explained by the fact they are not often decision-makers and thus do
not feel too concerned. The importance of service declines with the age. Disparities between
working status are greater than in any other segmentation. Price is particularly decisive for
part time group (82,9 %, 20 % more than full time workers). This information enables us to
make a new customer profiling for each of the reasons that can lead to switch:

6
REICHHELD FREDERICK F., "The loyalty effect. The hidden force behind growth,
profits, and lasting value", Harvard Business School Press, Boston 1996

1998-330-0018 20 12/98 – MS&CP WG

 Part II: Customer Loyalty in the Electricity Supply Industry

Sex Age Working status

Price F 35-44 Part Time
Service F 25-34 Part Time
Information M 55-64 Retired
Combined gas and electricity M 25-34 Retired
Combined utilities F 45-54 Part Time
Switching bonus F 15-17 Retired
Recommended offer through a non-utility M 35-44 Full Time
Discounts on other products and services F 18-24 Part Time

Source: MarketLine International

After having considered these results, it is tempting to raise the problem of over-
simplification often observed in such studies. It seems to us it is quite dangerous to say that
price and only price is the determinant factor that explains most of switching behaviors. Price
is a more complex notion than what we usually imagine. Price is an interaction of many
different elements and is the result of a long personal process. It involves psychology as much
as economy. Prices influence products as products influence prices. So we should not forget
to consider all the elements when we "simply" speak of price. This concern is also relevant in
the case of service because it is not necessarily clear what service means in customer's mind.

5. Barriers / Incentives

5.1. Barriers

The main purpose of deregulation and opening of electricity market is to introduce

competition in a domain that was until now in a monopolistic situation. But we now know
some dysfunction may occur in a liberalized market and may be the sign competition does not
work exactly as it should. Some of these barriers can also be due to other factors inherent to
customers rather than to the market. Let's look at these barriers through practical examples.

On the UK gas market, four barriers have been identified (Lias, 1997). These barriers force
the suppliers to go out and win customers via direct channels. Barriers create inertia, mostly
due to the risk perceived and to the low involvement of customers who have adopted a wait
and see attitude.

ü The first obstacle that slows customers down is ease. Customers ask themselves questions
like "do I have to sign a contract", "are there a lot of documents and paper work", "do I
have to pay an exit or entry tax"?
ü The second difficulty is the level of simplicity. Is the contract clear and do I really see a
difference with my old supplier? Am I going to save a significant amount of money? Will
I see an improvement in the relations and a better understanding?

1998-330-0018 21 12/98 – MS&CP WG

 Part II: Customer Loyalty in the Electricity Supply Industry

ü Third, brand will be a handicap for newcomers and companies working outside of their
usual perimeter. New entrants will lack, in customers eyes, the background and the
experience other companies have built over the years in a rather complicated and technical
domain. Customers will more easily trust brand they know.
ü Finally, the reputation, created by the numerous errors some of the new entrants made,
could cause prejudice to others.

Still in UK, but this time on the electricity market, another research (MarketLine
International, 1998) also approached the subject of barriers. People were asked to give the
main reason responsible for not willing to switch electricity supplier. The answer is quite
surprising. The reason 76.9 % of non-switchers invoked is just that they are happy with their
current supplier. The second most popular answer, but far behind happiness, is the hassle
caused by switching. 14.9 % of non-switchers do not want to be bothered by what they feel is
a long and complex process. In fact, hassle should not be an obstacle since it is easily
remedied as door-to-door or telephone sales people make most of the efforts on behalf of the
customers; the problem is having the latter know of this service!
The difference between male and female behavior is rather small. Male customers seem to be
more preoccupied by the hassle caused (17.3 % vs. 12.7 %) while female seem a little happier
(78.5 % vs. 74.7 %). Again, we observe small distinctions by age, the 65+ age group being
the most satisfied and the 35-44 group most concerned about hassle (probably a time issue
since it is at this age that family and work ask for a lot of time and energy). People working
full time showed more concern about hassle (20.2 %), about twice as much as part time or
retired. They are also less happy by 10 %. These people feel they don't have that much time
available and don't want to waste time on choosing a new supplier.

5.2. Incentives

Customers are waiting for the companies to give them good reasons to switch. These
incentives can vary from one company to another, but in order to attract new customers or just
retain the existing ones, they must be decisive in customers' mind.

On the UK gas and electricity market, some suppliers propose to join a loyalty club that
gives points and can later be used to reduce shopping bills. Energy providers have concluded
alliances with all kinds of non-utility companies. This solution seems to be liked by
customers because of its convenience. It looks like it is a win-win strategy since both side are
taking some advantage out of this offer. Suppliers touch a larger population and at a much
better price than what they could do on their own. In addition, they create a better retention
rate and have found an ideal ally. Supermarkets are great candidates for alliances for a
number of reasons. First they have stores nationwide and are visited by most of the population
on a regular basis. The loyalty schemes provide a database and a mean for joining marketing
initiatives. Finally, energy suppliers benefit from the stores "one-stop" principle. In the UK, it
seems that energy companies try almost frantically to make alliances with non-utilities. These
alliances concern airline companies (miles), credit card and financial service companies,
media industry, building societies, and so on.
We believe the arrival on the electricity market of new entrants such as non-utility companies
will have an indirect impact on customer loyalty. The resulting side effect could lead
customers to be more receptive to switching opportunities. These newcomers could carry a
more "neutral" image and reputation in buyers' eyes and therefore speed up the switching
process.

1998-330-0018 22 12/98 – MS&CP WG

 Part II: Customer Loyalty in the Electricity Supply Industry

Others have given welcome cash back incentives. This tactic may be quite dangerous since
nothing guarantees that the new customer will stay loyal long enough to pay off the
investment. This solution is risky in a world in which people are used to take advantage of
this kind of deals and run away at the first occasion. They will also respond to your
competitors' incentives!

A research led by MarketLine International in UK focused on the additional components a

company can offer as an incentive. Beside the traditional supply package containing price,
tariff structure, service undertakings and dual or combined fuel discounts, suppliers can offer
incentives linked to non-utility companies. Three main methods have been used:

ü Offering a preferential price or tariff to an affinity group. This method is most

suitable for financial services, banks, insurance, charities, unions, and media.
ü Continuous reward schemes and sign-up cash bonus. These methods are most suitable
for supermarkets and high street stores with reward schemes.
ü Sign-up vouchers. Suits to any company, but especially charities, unions, high street
stores, energy goods, retailers, and building societies. Usually used when transactions are
less frequent.

The main package has been thought over again too. Suppliers offer price reductions and
time-of-day tariff options since most of the competition is based on this matter. The margins
being already so tight, no real significant drop is expected (some say it will be below 10 %
and probably even below 5 % for domestic electricity). This explains why companies try to
offer lower bill by playing with tariff options. Reduction is expected through the offering of
a tariff closely related to consumption pattern. In this system, prices vary according to the
load profile of customer. The problem is that the more complicated the tariff and the more
complex and expensive is the meter. Other tariff options such as tariffs on payment method
(see below) and on overall consumption will also aim to reduce customer electricity bill.
Product based tariffs will focus more on people having strong believes about environment
(green tariff) or wanting to save the British coal industry (Eastern's Lionheart) for example.
Payment options are also being considered as a key for customer acquisition and retention.
Both sides particularly appreciate direct debit. Suppliers incur a far lower credit risk and
billing costs are lower. Customers see their transaction simplified and do not have to bother
about their monthly bill any more. Since the costs are lower, direct debit users are often
offered a lower price. But what are the figures for direct debit? 26.8 % already use this
method and 32.7 % stated they would be happy to switch to direct debit to save money while
26.2 % stated they would not switch. The main reason for this refusal is the fear that
electricity companies have access to their bank account.

Another trend has emerged some time ago with the offer of dual or combined fuel packages.
Many companies have chosen the option to offer gas and electricity. Some have even linked
gas and electricity so tight that they offer a price reduction only if customers take both
products. The range of offers is very wide, but in any case, the goal the suppliers are aiming at
is to acquire and keep customers by offering them an easier solution to their energy problem.
They bet on time saving, ease, effort reduction, and unique interlocutor in order to do most of
the job for the customer. But in a rather short-term perspective this advantage could be
substantially annihilated since most of competitors are on their way to offer dual-fuel.

1998-330-0018 23 12/98 – MS&CP WG

 Part II: Customer Loyalty in the Electricity Supply Industry

We until now have listed what kinds of incentives were available on the market. Let's look at
the customer point of view. What incentives will he/she react to? The figure below confirms
what we had already guessed.
Cash back is the preferred customer solution but it does not mean a company should do it at
any cost. As discussed earlier, both sides should be winning on the long term when such a
deal is concluded.

6. Conclusion

The reading of those researches made on liberalized utility markets leads us to make a series
of final comments.

First, and as a residue of the monopolistic situation that characterized the electricity industry
for years, we discover we know very little about our customers. We miss the essential. Not
only what his needs are, how he reasons when he has to make a complex decision, but even
who he is. It is therefore urgent to build databases gathering the most relevant information on
customers. These information can then be treated and used to refine our positioning and really
work toward the creation of value for our customers, and consequently for ourselves.

Measures have to be taken as soon as possible since the years preceding the opening are
essential to consolidate the position and the image of the company. Once the market is
liberalized, everything goes very fast. It is true a wait and see attitude can be observed in the
first months, but as the trend takes off, it becomes harder to inverse the tendency. With the
fall of the psychological as much as the real barriers starts a real struggle for survival.

The reasons invoked for switching were first price (two third) and then service (one third).
These results are confirmed in a number of studies but are not satisfactory enough. They
suffer from a simplification effect and too often forget to correlate these factors with other
elements. A service can be cheap or expensive, but always in comparison with what is
offered, with what guarantees you get. So let's not resume everything to price just because it is
convenient to do so.

Barriers exist. The more persistent are in customers' mind. Customers have a lot of
presumption (that are sometimes not only presumptions!) due to the fact electricity has a long
history. But what is important is that companies have the tools to guide, help, and do most of
the work in order to facilitate customer's life.
And if suppressing the barriers is not enough, companies can always fight customers' inertia
by sending incentives. The options are numerous and they range from cash back incentives,
tariff offers, combined fuel packages, to alliance to non-utility companies. But let's forget that
these actions should always result in long-term benefits, for customers as much as for
electrical companies; and this is not an easy task when margins on electricity sales shrink as
they do in fully open markets.

1998-330-0018 24 12/98 – MS&CP WG

 Part II: Customer Loyalty in the Electricity Supply Industry

30 29.3
27.2

25

20

% 15

10

5.9 5.7
5 4.2
2.4 2.4 1.8 1.4 1.1 0.5
0 Ca Du Sh Ba Su Hi No Do Ch Fi In
sh al- op nk pe gh ne na ari na su
ba fu vo su rm str loy of tio ta ncisu ra
ck el uc pp ar ee alt th n bl al pp nc
on dis he ly ke t y es to e se ly e
sw co rs t st e sc do rvi co
itc un loy or ho na ce m
hi t alt ols tio s pa
ng

Source: MarketLine International

1998-330-0018 25 12/98 – MS&CP WG

 Part II: Customer Loyalty in the Electricity Supply Industry

BIBLIOGRAPHY

BRITISH GAS, "Residential gas. Relation between customer satisfaction and likelihood of
switching gas supplier", December 1997
ELECTRICITY ASSOCIATION, "European & overseas relations. Switching supplier and
customer loyalty in the UK electricity market"
KOBER MAGNUS & HJELLE ANN-KRISTIN, "Electricity market survey 1997", NVE,
August 1997
KOBER MAGNUS & HJELLE ANN-KRISTIN, "Supplier change January 1998", NVE,
January 1998
LIAS ALAN (Managing director Beacon Gas Limited, Presentation by), "What has made
domestic customers switch? Analyzing the critical success factors for profitably attracting
new customers", European Utilities Conference, November 1997
MARKETLINE INTERNATIONAL, "Domestic electricity competition. Customer attitudes
in the UK domestic electricity market", 1998
MOORE KATHERINE, "Split affinities", Utility Week, 16/page 20-21, January 1998
MOORE KATHERINE, "Talking tactics", Utility Week, 20/page 14-16, March 1998
OFFER, "Competition in supply", OFFER Annual Report, 1996
REICHHELD FREDERICK F., "The loyalty effect. The hidden force behind growth, profits,
and lasting value", Harvard Business School Press, Boston 1996
UK GAS REPORT, "Marketing: Tesco teams up with ENERGI to offer gas customer loyalty
points", 102/page 12-13, February 1998
UNIPEDE, "Conference on Customers & Markets", Speeches & Slides, Lisbon 1998

1998-330-0018 26 12/98 – MS&CP WG

 Publications Order Form

Name: .....................................................................................................................................................

Position: .................................................................................................................................................

Undertaking:...........................................................................................................................................

Address: .................................................................................................................................................

Town: .........................................................Country:.............................................................................
(with postal code)

Telephone:.........................................................Fax: .............................................................................
(with regional code)

UNIPEDE/EURELECTRIC member: p Yes p No (Tick the appropriate box)

Reference No. Title1 Quantity

To be returned to:

Concetta PALERMO – UNIPEDE/EURELECTRIC Documentation

66, Boulevard de l’Impératrice – BE-1000 Brussels

Tel.: + 32 2 515 10 00 E:mail: cpalermo@unipede.org

Fax: + 32 2 515 10 10 Web: http://www.unipede.org

Some documents are available in two or three languages: DE – German, EN – English, FR – French.
Please indicate the language of your choice, when possible.