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

Different energy market structures, dynamics and player strategies across geographies leads to widely differing approaches to customer segmentation and value extraction. This brief provides an analysis of segmentation practice across four key liberalised markets and provides insight into best practice for exploiting customer value elsewhere.
Report Highlights

There is a void waiting to be filled in terms of the domestic energy internet comparison site market outside the UK. In all of the countries studied, with the exception of Canada (Ontario); being able to identify a customer's propensity to purchase multiple products from a retailer was seen as a significant source of value as it offers a higher margin per customer with little difference in acquisition cost or cost-to-serve Only the UK hides the costs of distributing products from its consumers (although this practice was originally put in place for regulatory rather than market driven reasons). The ability to segment acquisition and retention activity by size of household will be a significant value generator.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
Although Italy, Spain, Ontario and the UK all have liberalized energy markets, there are significant variations between them 2
Domestic competition in energy retail is now a 'legislative' reality 2
Switching experiences differ across geographies, driven by market history and regulatory structure 2
Channel usage is dominated by the use of door-to-door and telephone 3
Telephony is a mix of three sub-channels: direct response TV and radio, inbound and outbound telesales 3
There is a void waiting to be filled in terms of the internet comparison sites market outside the UK 3
Regulatory structure provides only a partial explanation of switch rates 4
Italy has a price-controlled energy market that is dominated by Enel and comune-based organizations 5
Standard price competition is not feasible in Italian urban markets, as cost-based discounts are only €5 to €10 per annum per household 5
With strong local branding and limited scope for price competition, the locally based distributors are an attractive means of accessing the market 5
Outside of Italy's urban areas, Enel is the dominant force and is the main threat to the comune-based organizations within urban areas 6
There are signs that the structure of the Italian energy market is changing 6
The Spanish energy market is characterized by the fact that it has both regulated tariffs and non-regulated tariffs 7
The Spanish gas market is dominated by Gas Natural 7
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 8
As in Italy, the price-controlled tariff for electricity in Spain offers no room for price competition 9
Competitive gas pricing has allowed Gas Natural and Endesa to make some headway in the electricity market through customer acquisition 9
The Ontario energy market is semi-regulated, with competition at just the wholesale level 10
The Ontario market is a semi-regulated market that has enjoyed very high switch rates even though it has low regulated prices 10
With a mechanism akin to Italy and Spain's for determining a low regulated tariff, why has switching been so prevalent? 10
Smart metering offers scope for distribution cost control, but may be frustrated by market structure 11
The energy market in the UK is characterized by the fact that it is highly competitive with no state control over pricing 12
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 12
Market segmentation as a driver of sales, and marketing policy and practice are the most evolved in the UK 12
Further potential exists through focusing acquisition and retention activity on low cost payment methods and behaviors 13
The review of these four energy markets provides a number of pointers for creating additional value through market segmentation 14
The ability to segment acquisition and retention activity by size of household will be a significant value generator 14
Geography: should the UK adopt the practices of the other markets? 15
Consumer life-stage is, as yet, an untapped source of value, but smart metering will be needed to unlock its potential 15
Segmenting by breadth of product service offering may provide value in particular country environments 15
It is expected that when environmental tipping points have been reached, 'green attitude' segmentation will come into its own 16
Exploiting perceptions of future price rises 16
Playing the payment behavior/method cards 16
The propensity to switch is a double-edged sword 17
Studying the segmentation issues across geographies indicates that there is value to be extracted on six dimensions: 17
APPENDIX 19
Methodology 19
Ask the analyst 19
• The Energy & Utilities analyst team can be contacted at asken@datamonitor.com 19
Datamonitor consulting 19
Disclaimer 19
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Table 1: Of the four markets reviewed, the UK was the first to open its energy market 2
Table 2: Switching has been most prevalent in the UK since market opening 2
Table 3: Door-to-door is the most popular sales channel in all of the markets reviewed 3
Table 4: Company customer bases, June 2006 (millions) 7
Table 5: Company customers bases, June 2006 (millions) 8


Figure 1: The majority of Spanish customers that have switched have opted for a fixed or green tariff 8
Figure 2: The margins for prompt payment customers are nearly always higher than for standard payment customers 13
Figure 3: The margins for large households are twice those of small households 14
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