Utilities 2015: A policy positioning paper

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This article originally appeared in UtilityWeek.

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Getting the right measure of customer satisfaction is critical in all markets, but in utilities, the wrong measure is currently the focus of attention. Regulators use customer switching as their default measure for determining how well the competitive market is working, and they equate results with happy or unhappy customers—one logical jump too far.

Utilities are seeking clarity and support from regulators and government agencies, regarding measures to make the competitive utility markets more effective. In the electricity and gas sector, the Competition and Markets Authority (CMA) focuses heavily on customer engagement (or the lack thereof) and regards customer switching as the key measure of how well the industry is working. Regulators also monitor switching in Scotland’s deregulated water market, and they will closely watch as the non-household water market opens in England and Wales.

Customer switching is an attractive metric, because it is easy to observe and it leaves no room for misinterpretation. But in terms of encouraging positive change, it is the wrong tool. Switching measures dissatisfaction and sheds very little light on customers’ reasons for leaving their utilities.

A better metric would be Bain & Company’s Net Promoter ScoreSM, which measures customer advocacy and engagement, and can help utilities (or any business) understand why customers are happy or unhappy, so companies can improve their services. Customers are asked a simple but powerful question: On a scale of zero to 10 how likely are you to recommend your supplier to a friend or a colleague?

Customers who answer 9 or 10 are considered true promoters: happy with their service (including price), likely to remain with the company and eager to see their friends benefit as well. Those who give scores of 6 or less are considered detractors, who are more likely to switch suppliers. Bain’s research shows that utility customers with high Net Promoter Scores are less likely to churn, are willing to buy more services from the same suppliers and have fewer issues, so they are less expensive to serve – a benefit that can be passed on to customers.

When utilities follow up on this initial question with a simple “why?” they capture customer feedback, both positive and negative. This allows them to build on their successes and address their shortcomings, to improve their services; it’s a powerful learning and behavioural change mechanism.

Competition in any sector is good, because the threat of losing customers encourages participants to raise their game. Measuring customer switching, however, does little to achieve the desired outcome of better service and happier customers. Adding the Net Promoter Score to the measures used by companies, regulators and governments would give them a better picture of the health of competition –which is particularly important as regulators consider intervening further in utility markets.

Olga Muscat is a partner at Bain & Company.

Click here to read the Utility Week paper that summarises the output of several high-level policy workshops that Bain facilitated to set the industry’s position on key issues.