Managing Customers for Value

Customer relationships are the most important asset of an energy retailer and
represent the value of an energy retail business. Yet how many retailers out
there can truly say they understand the total value
of their customer base, let alone the customer lifetime value (CLV) of every

In many ways, CLV is a holy grail for energy retailers striving
to manage their portfolio of customer relationships. Martin Yuill, utilities
analyst at Datamonitor, emphasizes: “Understanding customer lifetime
value and its associated profitability and loyalty dynamics is an important
trend amongst leading energy retail organizations. Those retailers who are
able to develop a competitive edge through leveraging detailed customer profitability
and loyalty information for strategic advantage will find themselves a step
ahead of their competitors.”

As Yuill highlights, CLV intrinsically links customer profitability and customer
loyalty. Customer profitability evaluates revenue, margin, and cost-to-serve
at the individual level to determine each customer’s profit contribution.
Customer loyalty evaluates the expected length
of each customer relationship and the underlying dynamics. CLV incorporates
both individual customer profit contribution and the expected length of the
customer relationship (loyalty) to determine
the value of each customer relationship in today’s dollars. Once a retailer
understands the value of each customer relationship and the drivers behind
it, enormous opportunities are created for managing and increasing that value.

What is important to understand is that CLV is forward looking.
It is not an evaluation of past profitability or performance of a customer
relationship. It does not matter if a customer was acquired six months ago,
is still in the red due to their acquisition cost, and has added little value
during that period. Nor does it matter if a customer has been with the retailer
for 10 years and has added enormous value to the bottom line during that time.
The respective past values have already been attributed, received, and consigned
to the past. CLV references historical profitability and loyalty as indicators
to future performance, and evaluates that future performance from a zero-value

The platform for CLV analysis is the customer information system (CIS), a primary
operational system in an energy retailer’s IT application portfolio.
An advanced CIS is a rich mine of up-to-the-minute transaction and customer
interaction data. When combined with analytical models for customer profitability,
loyalty, and lifetime value, the CIS has the potential to transform operational
data into strategic knowledge far beyond an energy retailer’s traditional

An advanced CIS captures detailed customer loyalty and customer profitability
information that enables energy retailers to determine who is a profitable
customer and who is a loyal customer today, and what characteristics individual
customers are expected to show going forward. The retailer can then work with
its salespeople and customer service teams to develop strategies to retain
its most profitable customers and seek to change the behavior of the unprofitable
less loyal customers.

Profitability and Loyalty

Recent Peace research has sought to ascertain whether customer profitability
measures leveraged in other industries apply consistently to the energy retail
sector. One such measure is the whale curve of profitability that is typically
found in other business sectors such as printing and haulage. The whale curve
depicts the profit contribution profile of a customer base and highlights that
typically 20 percent of customers can actually contribute up to
300 percent of overall customer base profitability, and that another 20 percent
of customers can erode 200 percent of the bottom
line (see Figure 1). Peace’s analysis of utility cost-to-serve factors
including calls to call centers, billing frequency, and collection activity,
as well as revenue drivers such as energy usage and pricing is yielding energy
retail results consistent with the whale curve used in other industries.

The ultimate business value, however, is not simply to recognize
that there are profitable, break-even, and loss-making customer relationships
within a customer base, but to identify which customers are in which profitability
segment in order to focus business resources to increase individual and overall
profitability. It is by applying customer profitability and energy-industry-specific
analytical technology to CIS data that enables energy retailers to identify
which customers are actually profitable.

Peace research is also looking more deeply into understanding energy customer
loyalty drivers. Figure 2 displays a selection of customer traits that contribute
to the evaluation of individual customer loyalty.

If a retailer is able to accurately answer these questions and determine
what makes a customer satisfied or dissatisfied and attribute ratings to each,
will be able to apply an analytical customer loyalty model to build a picture
of individual customer loyalty and provide comparisons across the entire customer
base. It can help identify which customers and groups of customers a retailer
be focusing retention initiatives on in order to build loyalty.

Customer Value Quadrants

Figure 3 shows how customer profit contribution and loyalty combine
to determine CLV.

  • Golden customers: These are a retailer’s best
    customers. They have significant potential to enhance value going forward.
    require retention strategies that will reinforce the retailer’s
    positive image and keep the customer loyal for the length of time they
    to be profitable.
    This might include online payment options for those who work in an office
    or add-on services (such as energy audits, various types of warranties,
    and lighting) that foster an image of the company as an essential energy
    solutions provider.
  • Mercurial customers: These include a retailer’s “butterfly” customers
    who flit from retailer to retailer. They are highly profitable, but might easily
    switch supplier given the right opportunity. In this case, a retailer armed
    with CLV information might strive to enhance loyalty with targeted retention
    programs addressing specific factors influencing the customer’s
    propensity to switch. This might include a committed contract term
    at an attractive
    price, the introduction of convenient electronic bank transactions,
    and online bill
    payments that enhance customer stickiness and affinity programs such
    as frequent flier miles or charitable donations. The goal is to move
    customers in
    the direction of, if not into, the golden quadrant over time.
  • Marginal customers: These are customers on the borderline
    of profitability or unprofitable and are not expected to be with the retailer
    very long. Nevertheless, one would expect at least some of these customers
    to have
    the potential to move toward
    the golden quadrant. A retailer should not view all customers in this
    segment through a negative lens. A retailer might examine segments within
    quadrant for potential to build both loyalty and profitability.
  • Faithful customers: These customers are what some in the industry have
    labeled the “barnacles”: loyal customers who have always been
    with the retailer and have no intention of switching. An example
    of such a customer
    might be one who uses little power on their single product offering,
    and the
    overhead of the billing, payment, and customer care transactions
    is, and will always be, more
    than the margin on revenue. Facing a small or negative CLV, a retailer
    can decide whether it can influence the profit contribution upward
    through a
    lower-cost relationship or by up-selling additional products to
    increase revenue and margin.

Every Customer Is Different

As the customer value quadrants highlight,
CLV and its associated loyalty and profit dynamics raise some interesting
questions. A retailer might ask: “Do we have a strategy for new customer
acquisition and retention that provides optimal
profit and value for the company? When a customer shouts, should
we always jump, and how high?” Sometimes it makes sense to temper the knee-jerk
reaction by considering just how valuable that customer will be over the
lifetime of their relationship.

A retailer treating all customers the same
risks suffering a double blow. First, resources can get squandered
on unprofitable customers and, second, profitable ones can get short
and become
less satisfied. With accurate per-customer cost and revenue information,
and a
deeper understanding of a customer’s loyalty drivers, energy retailers
will be able to target investments at loyalty and profitability improvement
that focus on the appropriate customers, products, and channels.

The Future for CIS

Understanding the dynamics of individual
customer loyalty, profitability, and value has
however proved difficult for many retailers in
the past. Many previous CLV strategies have floundered, overcome
by too much data, too
much complexity, too many intangibles, and the
lack of systems equipped to support a CLV focus. Today, CLV has become
feasible with advanced
CIS systems that drill down into deeper customer insights, and shed
light on the lifetime value of each customer.

CLV analysis need not incur the time and cost of collating and incorporating
every last piece of data at the outset. Early results can be attained
from informed selections of data that can highlight major value drivers
in specific
business and customer segments that can then be fed back
into the system to enhance value going forward. The customer is the
most valuable
asset, and understanding and managing this
value is entirely feasible with the right technology and the right