Energy switching and the role providers can play

It’s widely known across the industry that around half of the UK’s population switch energy suppliers regularly as they look for the best deal and better service.

This “engaged” 50% have often painstakingly researched their next move, compared prices online, or taken advice from friends and family. But what about the other 50% who don’t switch? Are they worried or intimidated about switching?  Do they assume it’s going to be very difficult, or even worse, don’t know how to or don’t have the support network to do so?

Here in our latest blog, I cover the part energy suppliers and support agencies can play in educating the other half of the country about switching and the things they can do to make the process simpler for the consumer – especially vulnerable customers who crave support.

Price and profit

First and foremost, it’s important to highlight that profit margins within energy firms are extremely tight if non existent, meaning a dip in revenue or increased costs would have to be recovered somehow.

It’s also a fact that roughly half of the population who haven’t switched energy providers tend to be on standard variable tariffs which are higher than fixed deals – with recent OFGEM figures showing an average annual price difference of around £170, based on a fixed deal of £968 per year.

That’s not a saving to be sniffed at. However, energy companies simply couldn’t supply everyone at the £968 ‘Fixed Deal’ price as their revenue would dip and quite simply there’s no real differentiation in service for a higher or lower price. It must be true, therefore, that if every household switched to the fixed tariff of £968 and we didn’t want energy companies to go out of business then this ‘fixed deal’ price would rise. Add to that the cost of switching and then not only has revenue dropped, but costs will have an upward trajectory.

This suggests that if more people switch the lowest tariffs could rise by an average of £185. To help explain, here is a working example based on a fictional energy firm: 

Example – New Energy Co Ltd

Let’s say that New Energy Co Ltd has 1,000 customers – 500 on a standard variable tariff who are paying £1,138 per year, and a further 500 customers on a fixed deal where they are paying £968 per year. This would generate a sales revenue of £1,053,000 per year.

If the 500 customers on variable tariffs (£1,138pa) switched away but they gained 500 new customers on a ‘Fixed Deal’ price of £968 per year then overall revenue will drop.

That’s great news for everyone if they can still make a profit at this reduced revenue but it’s unlikely and worse case is that this drives up the price of fixed deals on offer.  If the same revenue was to be maintained lowest price could go up by £85 to £1,053. 1,000 x £1,053 = £1,053,000

Switching costs money for suppliers to administer and that has to be recovered through the charges to customers. An estimate for the costs for the energy firm to administer and conclude each switch could be up to £200 when you factor in bad debt together with acquisition costs, administration and customer service costs. 

Over a two-year fixed deal a further £100 per year has been added which could see the £968 deal disappear altogether and be replaced by the cheapest tariff of £1,153 – that’s more than the standard variable tariff customers were already unhappy with.

Again, this is just a brief working example but does give food for thought on the profit and bottom-line pressures for energy firms when it comes to switching.

Switching channels and doing things differently.

Looking more widely, and with a continued stream of people wanting to switch energy firms, there are a large pool of options and channels energy providers can utilise to attract new customers. These include price comparison websites, automatic switching websites, the more traditional telesales approach, and refer a friend schemes.

There are also examples, however, of energy firms doing things differently to attract people to switch. Some have started old school door to door sales again. Utilita has a small but growing number of high street stores, whilst Utility Warehouse have a successful partnering scheme where selling to friends, family and their wider network drives a sales domino effect.

But what other channels could be made available to try and support the groups of people considered above, those that would likely benefit more from lower prices? If someone isn’t internet savvy, wouldn’t take a telephone call, answer the door to a stranger or didn’t know where to start on comparing prices, where do they go?

There are many support agencies out there that help energy customers day in and day out and whilst some will do tariff checks, and Citizens Advice Bureau actually has its own Price Comparison tool, it remains down to the individual to navigate their way through the switching process and ensure they get the best deal. 

Is there anything to explore here, expansion of local face to face locations that do a comparison assuming it all could be done cost effectively?

More than anything, it’s clear that energy firms must continue to do more than ever to win customers, keep them, impress them and give them the best possible service each and every time.

It would be great to hear views from people as to what other channels either are or could be available and let’s see if we can help you make them a reality.