Behavioural Aspects of Marketing: Electricity Market in UK - Term Paper Example

1. Background 1.1 Electricity market in UK The electricity market consists of the sale of electricity to industrial, commercial, household and other end-users, including agricultural and transport users. Consumption is the highest in the household sector which was 53.2% in 2005 while the industrial and commercial sectors consumed 27 and 18 percent respectively, the balance 1.8% being consumed by other areas. The chart below represents the segmentation of the electricity market in the UK (Table 1). There are several players in the UK electricity market but the major ones are Centrica, E. On UK, EDF Energy, SSE apart from several small players. The market share of the major players has been shown in Table 2. The electricity market reached a value of $32.8 billion in 2005 in the UK and is expected to have a value of $44.3 billion by 2010. The market volume has shrunk to reach a volume of 340.9 billion kwh in 2005 but it is expected to go up to 351.7 billion kwh by 2010 which represents an increase of about 3.2% since 2005. The increase in the turnover over the years is not due to increase in volume but due to increase in tariff. All of the major players in the UK market are engaged in electricity and gas supply to consumers. All of them are headquartered in the UK and only Centrica offers additional services like plumbing and central heating. It also operates in North America and the rest of Europe while others concentrate in the UK alone. There has been a negligible growth in population in UK while the inflation has increased between 2001 and 2005. 1.2 EDF Energy – competitive position EDF Energy is a major generator of electricity and has a customer base of 5 million. The company runs power station and wind farms, and buys and sells power. It generates about 5GW of energy. Despite the electricity market being highly volatile, the company experienced robust financial growth and created value for the shareholders. Their customer base has been steadily increasing despite the hike in tariff. The Chairman of the company has expressed a vision for the company to be recognised as the passionate, committed, caring, innovative and successful energy company, enabling its people to make a difference. This implies that EDF has to work towards enhancing its brand image as product or service brand holds great importance for the customer. It thus becomes essential to understand and chart out how the consumer base can be increased, while retaining the existing customers. In nutshell customer satisfaction strategies have to be devised. 1.3 Rationale for the study Since the privatization of the utility sector in UK, competition has been fierce which has actually driven down the combined household utility bills for the consumers until 2004 when the prices have risen dramatically (Graham, 2006). Competition was encouraged since liberalization and the new entrants were provided with incentives to develop new market. Even though the rates offered by the new entrant were low, consumers were reluctant to switch providers (Watson, Viney & Schomaker, 2002). This makes it imperative for EDF Energy to understand consumer behavior and determine the right strategy to enhance the brand value and augment the customer experience. 2. Marketing approach 2.1 Segmentation Success in marketing can be achieved by matching the organizational capabilities with the requirements of the marketplace. Market segmentation has been defined as the process of dividing the total market into a number of smaller, more homogeneous submarkets, termed market segments (Danneels, 1996). The concept of segmentation comes naturally to human beings and this categorization reduces uncertainty and simplifies procedures (Bond & Morris, 2003). Segmentation helps to focus on the specific market and its needs. The goal of segmentation is not to have just any customer but to select a homogeneous group of customers and focus on servicing their needs. The market for electricity has already been segmented and since the household segment is the highest group of consumers, EDF should concentrate on servicing this segment. EDF needs to understand the requirements of the consumers in this segment and target their needs accordingly. 2.2 Consumer psychology Consumer psychology determines how consumers process information and form judgments and how memory and judgment affect consumers' decision making (Tybot & Artz, 1994). Tim Kasser, a professor of psychology, says “to be happy people need to feel safe and secure. They need to feel competent and able to do the things they need to do; they need to feel they are connected to people, loved; and they need to feel free, autonomous" (McCarthy, 2004). Enhancing motivation is a technique that involves the creation of an attractive and interesting message that will create positive effect (Hallahan, 2000). Electricity being a utility product differs from conventional products and hence the marketing approach too would differ. Electricity can be categorized as convenience goods as it is a daily necessity by the consumers. Electricity is intangible in nature although its benefits are not, contend Watson, Viney and Schomaker (2002). The supply is continuous and there is no substitute for electricity. The service providers have to ensure continuous, reliable, and steady supply with sustained frequency and voltage. Apart from maintaining these, the service providers can do little in product differentiation. The consumers cannot decide not to have electricity supply but they can decide who to take the supply from. Against conventional products like good available in stores, in the field of electricity supply, the only area where electricity suppliers can compete is price and service. 2.3 The decision-making process The buying process begins with the need recognition. Once the need has been recognized, the consumers start looking for stores or service providers. They search for the maximum information that they can extract from different sources and then evaluate the alternatives. After the purchase the decision is assessed. To what extent the consumers would go through each of these stages in the buying decision process would vary with the nature of purchase and the risks perceived. 2.3.1 Need recognition The need for a product or service may be functional or psychological and the need for electricity is functional in nature. Electricity is taken for granted and consumers expect that when the switch is turned on the lights would come up or the refrigerator would never stop functioning. Once the electricity connection has been set, normally the consumers would not seek out another supplier unless of course they have to shift residence. At this point, the service providers can stimulate need recognition urging the consumers to shift suppliers. This is not simple but consumers are known for being conservative and are reluctant to change. They also exhibit inertia and it is this inertia that EDF should capitalize on. EDF should provide such facilities like an annual payment which offers interest to the consumers at the prevailing market rates. The consumers do not lose out on the regular interest and besides, this direct debit facility saves them the regular anxiety to ensure that the bills are paid on time. This ensures customer loyalty as far as EDF is concerned. 2.3.2 Search for information The consumers search for information from varied sources – from friends, advertisements, articles, previous experience or they use their memory to remember whose service they had used. Consumers are attracted through advertising and promotions. The first impression that a consumer attains through advertising influences his purchasing decisions. To create a positive impression, companies try to create a distinctive brand image for their products. As far as electricity is concerned, the advertisements so far were used as a means to attract consumers. Electricity being a routine and one-time decision, the information search is likely to be limited. The decision to change suppliers would require an extensive search pattern. Without a strong motivation they are not likely to search for new suppliers. The tendency, as discussed above, is to exhibit inertia. They remain loyal to the existing supplier and as long as they are satisfied with the existing supplier they will not desire to search for information on other providers. Even if they are supplied with information, they may be reluctant to evaluate all of the information that comes their way. To motivate or stimulate the consumers to search for information or evaluate the information, EDF could bring price differentiation in their service. Merely offering a lower price may not be a sufficient cause for consumers to change suppliers. For small gains they may be reluctant to change suppliers and unless the incentive is substantial, it would be difficult to stimulate responses. 2.3.3 Evaluation Electricity being such a utility, consumers most often is not aware of the charges being levied and hence even if small price benefits are offered, they would not normally go deep into it. In fact any price message may even confuse the consumer. Thus they may be reluctant to evaluate any information as they prefer the convenience of remaining with the existing supplier. Trust has already been established with the existing supplier and a change again requires them to rebuild trust. This also acts as a deterrent for changing suppliers as far as electricity is concerned. 2.3.4 Decision The consumer may undergo all the stages of need recognition, search for information, evaluation but not take a decision immediately. Since he already has a regular supply and is not in any immediate need to change, he can always defer the decision for tomorrow. Once the suppliers have made information available, they must also ensure that consumers react to it promptly because delay means a lost consumer. Electricity being such a utility, here aggressive marketing techniques cannot be applied. It may turn out to be counter-effective. Those moving homes or new consumers, newly married couples setting up home for the first time, try to evaluate the information collected and often times are confused on which is the best service provider. When people look for some security, persuasion from a trustworthy source plays an important role. a trustworthy source would be someone of worth in the society. An expert celebrity tends to be persuasive and generates a higher willingness to buy that brand, service or product. A brand is not merely a name, logo or a slogan. It is the customers’ perception of the stimulus when the brand is presented (Berry & Lampo, 2004). A trustworthy source can generate the strongest opinion change by consumers (Mehulkumar, 2005). EDF can think of something different way of using celebrity endorsements for creating a distinctive brand image. Celebrity advertising can have both informational and emotional impacts on its viewers, says Gu (2005). The emotional impact creates the awareness of the product and the emotional impact creates a strong linkage between the viewer and the endorsed product and there by enhances the willingness to buy the product. People claim to be obsessed with the talent or the beauty of the celebrity and this leads them in their purchasing decisions. When confused consumers would see that their role model or a known celebrity is endorsing the use of EDF energy, they could be tempted into opting for this service. This implies that consumer psychology has a role to play in the decision-making process. 2.3.5 Post-purchase evaluation The only way that consumers can evaluate the electricity supply is that they receive a steady supply with substantial price differentiation or savings in some form. It has also been found that a consumer is more likely to switch provider if previous experience from switching resulted in gains in terms of energy efficiency or price benefit. 2.4 Impact of price change Payment for electricity has always been consumption based. The tariff for domestic consumers has been simple which incorporates a standing charge and a charge per therm of electricity used. Some efforts had been made to encourage consumers to use electricity outside of peak hours but these have been limited (Graham, 2006). Demand for electricity is income elastic and generally takes up a very small portion of the total household budget. The cost to domestic consumers relates to the energy efficiency of their living accommodation. Some houses are more difficult to heat than others and therefore the cost to such consumers is higher than normal. It has also been found the consumers are unresponsive to price changes in electricity (Kiesling, 2004). Firstly, EDF should be simple and transparent in the transmission of information to the consumers. To induce the customers to respond, EDF can capitalize on two issues. EDF should bring about price differentiation by way of offering incentives to those consumers who would consume electricity outside of peak hours. The offer should be generally made available to all without discrimination and tariff for such period should be less than tariff for peak hours. The second segment that should be aggressively targeted is those consumers whose houses are more difficult to heat than others. This segment should be offered incentives for using outside of peak hours. In addition, as their consumption would be higher than average household, EDF should offer discounts over a certain amount of usage. This practice would have to be implemented after confirming through concerned authorities that such households fall under the category which takes longer to heat. This would help avoid others trying to misuse the facility or offer. This is based on the principle that electricity can be sold as a differentiated product according to time (Kiesling, 2004). Thus pricing should be based on demand response and customer choice can in the long run reduce the utility bills. 2.5 Customer loyalty Retaining existing customers in today’s volatile markets is a challenge. Service both poor and outstanding has a strong emotional impact upon customers creating intense feelings about the organization, its staff and services (Wirtz & Johnston, 2003). It influences customer loyalty. Acquiring new customers is difficult as customers are not very keen to switch service providers unless there is a genuine problem with the existing supplier. Hence, EDF needs to concentrate on providing not just satisfaction to the existing customer but aim to attain ‘customer delight’. Towards providing pleasurable customer experience, a feedback mechanism should be started EDF to collect the experiences of the existing consumers. This has become extremely important to protect an existing customer base. A feedback form can be collected every month to check of disturbances in supplies, in their experience in contacting the service providers, payments, billing, service disruption, concerns over integrity of supply or any other suggestions they may have. 3.0 Customer expectations The customers have a wide choice of providers but to capture the market the suppliers must study the need of the consumers instead of just supplying electricity. Consumers look for a price-effective product but without any compromise on the service quality. They search for a reputed reliable supplier with energy efficiency and undisrupted supply. If an incentive is offered for change they may consider. This incentive could be in the form of reduced rates for the first month or perhaps EDF cur offer one fortnight free usage after observing the general consumption trend. Alternatively a gift could be considered like an electric appliance. 4.0 Conclusion EDF should take into account that consumers are not very keen to switch providers and hence pay more attention to the existing customer base. Offers should be altered from time to time to keep the existing customers happy and alert. Since customers search for information through different channels, awareness should be generated. Using a celebrity as endorsement of its services is likely to renew the interest among the existing customers. At the same time, possibilities exist that it could attract potential consumers as well. The decision making process move through need recognition, search for information, evaluation and the final decision. The consumers display inertia in switching providers and even if they are loaded with information they would be reluctant to evaluate for insignificant difference in price. Hence it is essential to offer something distinctive. Electricity is something that is taken for granted and forms a very small part of the monthly household budget. Since it is a convenience product, facilities should be offered that would further ease the problems of the consumers. This could be by way of annual payments facilities offering discounts, reduced rate outside of peak hours and for the segment whose house requires excess heating. Since the household segment comprises of the biggest segment of consumers of electricity, EDF should focus on enhancing the customer loyalty of this segment and perhaps attracting new consumers. References: Berry, L. L., & Lampo, S. S. (2004). Branding Labor-intensive services, Business Strtaegy Review, Vol. 15 Issue 1 Bond, J & Morris, L (2003), A class of its own: latent class segmentation and its implications for qualitative segmentation research, Qualititative Market Research, Vol. 6 NO. 2 2003, pp. 87-94 Danneels, E (1996), Market segmentation: normative model versus business reality, European Journal of Marketing, Vol. 30 No. 6, 1996, pp. 36-51 Graham, C., (2006), The politics of necessity: electricity and water in Great Britain, J Consum Policy (2006) 29:435–448 Gu, Z. (2005). Celebrity Endorsement Advertising and Product Adoption through Social Networks, http://www.econ.au.dk/afn/workshops/departmental/Jane%20Gu.pdf Hallahan, K. (2000). Enhancing Motivation, Ability, and Opportunity to Process Public Relations Messages. Public Relations Review 26.4 (Winter 2000): 463. British Council Journals Database. Kiesling, L., (2004), Electricity Consumers Prove Their Smarts, 23 February 2008 McCarthy, M. (2004). Shopping 'til we drop: can psychology save us from our lust for possessions?. The Lancet 363.9405 (Jan 24, 2004): 296. British Council Journals Database. Mehulkumar, P. (2005). An Examination of Universal Personality Endorser and the Interaction Between Perceived Celebrity Image (PCI) and Perceived Brand Image (PBI) Across National Boundaries. http://lubswww.leeds.ac.uk/researchProgs/fileadmin/user_upload/documents/Pajuani.pdf Tybot, A. M. & Artz, N. (1994). Consumer psychology. Annual Review of Psychology 45 (Annual 1994): 131(39). British Council Journals Database Watson, A., Viney, H., & Schomaker, P., (2002), Consumer attitudes to utility products: a consumer behaviour perspective, Marketing Intelligence & Planning; 2002; 20, 7; ABI/INFORM Global p 394 Wirtz, J., & Johnston, R., (2003), Singapore Airlines: what it takes to sustain service excellence - a senior management perspective, Managing Service Quality, Vol. 13 No. 1 2003 pp. 10-19 Table 1: Market segmentation: electricity consumption in UK (2005) Source: Datamonitor Table 2: United Kingdom Electricity Market Share: % share, by volume, as of 2005 Read More