Once viewed as secondary to an organisation’s main activities, ancillaries have taken center stage in many sectors in recent years. Following in the footsteps of the travel and financial industries, it’s time for Utilities to think outside the box when it comes to revenue streams in an increasingly deregulated and competitive environment.
Why think beyond the meter?
Ancillary products and services were once an afterthought in the Utility sector. After all, they were in the business of providing an essential commodity be it power, gas or water. Their core product was their raison d’être and there was no incentive to change in a heavily regulated environment.
Opening the floodgates
But things have evolved dramatically. Deregulation has taken down the walls that used to shelter utility providers from the vagaries of the market opening the door to new entrants who have disrupted business as usual. New technologies and the changing needs of consumers have also reshuffled the cards.
Customers “are defecting Utilities and new entrants are rushing into the market to fulfill customer needs,” says Accenture’s Utilities at a crossroads report. They’re “offering better service, more transparency in rates, energy efficiency recommendations and a wider array of products at costs 10-30 percent lower.” As a result, demand is stagnant or declining and Utilities profits are dwindling.
In this context, ancillaries give Utilities a chance to:
- Expand outside the commodity space
- Increase their relevance in customers’ minds
- Develop alternative sources of revenue with higher profit margins to reinvest in new more customised solutions customers want, from smart meters to managing their account on-line
Who does it best?
In their quest to develop new and more profitable revenue streams, Utilities have some very successful models to learn from, starting with the travel industry. Ten years ago, airlines were still reeling from the 2008 downturn and facing an influx of new budget competitors.
According to the Thinking like a retailer report, despite an increase in the number of travelers, airlines were struggling to make a profit. “With high fuel and labor costs as well as intense competition and diminishing yields, industry profit margins” were very low at 1 to 2%.
They responded by monetizing a wide range of services from seat and meal selection to extra baggage. They took advantage of the fact that “79% of travellers prefer to buy services from the airline directly rather than a third-party,” according to the report.
They multiplied added value services such “in-flight entertainment, food and drink, customized services” all the way to “products at the destination, including hotel packages, sports and concert tickets, restaurant and theater reservations,” explains Joe Sharkey from The New York Times.
In other words, airlines were able to leverage a high level of trust into products that made their customers’ lives easier. For that, they’ve been handsomely rewarded. In 2018, the global airline industry is getting very close to the $100 billion mark in ancillary revenue. On average, that represents 17% of total revenues and as high as 47% for American budget airline Spirit.
Whilst other sectors, like the financial industry, have faced similar challenges and embraced ancillaries to inject their activities with fresh revenue streams, the airline industry has probably been the most successful.
Reaping the rewards: Do’s and Don’ts
The travel industry has proven that ancillaries can be very profitable. What do Utilities have in common with the airline sector and how can they benefit from their experience?
Here are three things Utilities should keep in mind when extending their core offerings:
- Do build on your customers’ existing trust
Just like traditional banks and airlines, Utilities have built trust and credibility with their customers over the years. This is one of their greatest assets. It allows them to capture market shares in areas that are not part of their core activity.
According to Escalent’s Utility Trusted Brand & Customer Engagement study, “Utilities with strong Brand Trust have more influence on customer purchase decisions and are, therefore, more likely to be considered as a provider for new offerings.”
When brands enjoy a high level of trust, they can also more easily convert their customers’ interest into using competitive offerings, found the study.
This is confirmed by HomeServe’s Engagement Opportunity for Utilities survey, which found that 64% of Utility customers believe their Utility would be a suitable provider of home emergency and repair services; a perfect example of ancillary product.
- Do create a utility marketplace
The quality of customer experience proposed by Utility providers often pales in comparison to what nimbler new tech entrants can offer. For that reason, experts believe Utilities must pay more attention to their online presence and offer a portal, via an app and/or website, that gives customers 24/7 access to their account and usage data.
Utilities should also create a utility marketplace, through which they can:
- personalise the customer experience,
- integrate a wide range of their own and third-party ancillary offerings, and
- facilitate the exchange of energy surpluses as the use of alternative sources is increasing.
“Successful marketplaces make it easy for customers to select products and services that fit their needs and budget,” explains Escalent’s K.C. Boyce. In “one transaction they can purchase a smart thermostat, enrol in a demand response program, and redeem an energy efficiency rebate via an instant discount.”
The Utility Trusted Brand & Customer Engagement study found those who use marketplaces “score 13% higher on average” on customer engagement. Considering only 5% of customers currently use a utility branded marketplace in the US while 80% say they’d like to use one, the potential is enormous.
- Do consider partnerships
Entering into partnerships with innovators developing smart technologies and service providers is a painless way to add a roster of ancillary products and services. It’s can also be very profitable and have a positive impact on satisfaction.
Through partnerships, Utilities can bank on their brand and established relationship with customers, while at the same time introducing quality smart technologies and services that will multiply connections.
HomeServe partners with many Utilities and insurance companies around the world offering home assistance coverage. These ‘beyond the meter’ services not only create incremental revenue but cal also help forge stronger customer relationships. HomeServe USA found many advantages for Utilities offering home services programmes through partnership. Enrolled gas customers were 77% more satisfied whilst 45% were more likely to rate their Utility favourably and to feel it is looking for their well-being. HomeServe has recently established a partnership with US TV show host Mike Rowe, best known for the iconic series Dirty Jobs, to demonstrate the value and peace of mind home services bring to homeowners.
When done right, ancillaries can boost profits because even though they may represent only a fraction of a Utility’s overall revenue, they can generate a disproportionate amount of profit. To benefit from ancillaries, there are a few things to avoid.
Here are three pitfalls Utilities should avoid when extending their core offerings:
- Make sure they’re relevant to your core and brand
Would you buy meat from a clothing shop on the high-street? Probably not. Consumers trust their energy suppliers the most when it comes to the installation of smart products in their home because it makes sense. Relevance enables a utility provider to bank on their brand and reputation even when the offering is not a core activity.
So, when introducing ancillaries, Utilities should ensure they’re relevant to their core offering and brand. Smart products like lightbulbs, meters and leak detectors for example, as well as home emergency and maintenance services, are relevant to a Utility’s core activity.
- Make sure they’re introduced at the right time
Introducing ancillary products and services at the right moment is also key to their success. In the airline industry many of their services are presented during flights so at a moment in the customer journey when it’s needed.
Asking travelers whether they want to pay extra for entertainment and Wi-Fi access before a flight won’t have the same impact as presenting it to them when they’re contemplating a 7-hour flight with a toddler. It’s all about the right product at the right time.
In the utility sector, there are key moments that lend themselves naturally to ancillary offers. For example, when customers sign up for new or upgraded services, they may be more receptive to the installation of smart devices.
During peak consumption season, potential breaks can be more disrupting. As a consequence, customers may be more interested in purchasing Home Assistance cover before it starts.
- Make sure they offer added value to your customers
Consumers are becoming more sensitive to the possibilities of making their home more efficient and environmentally-friendly but that doesn’t mean they know how to make it so. It’s not surprising then that 60% are interested in technology that could completely automate the management of their electricity.
Utilities are well placed for educating their customers about possible solutions and offer them products that not only help them reduce their carbon footprint but that also give them peace of mind. To be successful, ancillaries must offer added value to a customer’s life.
Utilities are in a great position to be consumers’ preferred provider of commodity-related products and services. They can bank on the trust and the credibility they built over the years to become a marketplace of new solutions in this increasingly competitive and evolving environment.
Whether they do this on their own or through partnerships, Utilities can open up new revenue sources that present a high potential for profit and makes them more relevant in their customers lives.
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