In an August 2005 report issued by Standard & Poor’s (S&P), it states there is a “fairly strong correlation” between customer satisfaction and a supportive utility regulatory environment – and possibly better credit quality. Titled “Customer Satisfaction Levels Can Affect U.S. Utility Credit Quality,” S&P’s internal study compared its opinion of a company’s regulatory environment and the J.D. Power and Associates Customer Satisfaction Index (CSI). Simply stated, satisfied customers are an asset in achieving favorable regulatory outcomes, higher company valuations and, ultimately, higher stock prices.
Just as the tangible assets of plants, pipes and wires have value, a utility’s customers possess a less tangible, but even more important, value. Handled with care, they don’t depreciate. In fact, customers possess intrinsic financial value that utilities can leverage to achieve their goals in the marketplace. Tom Peters, famed author of In Search of Excellence, stated it this way: “It boils down to this. When you build a plant, it starts depreciating the day it opens. The well-served customer, on the other hand, is an appreciating asset.”
The electric utility landscape is experiencing a sea of change – just where the waves will
ultimately carry the industry is still an unknown. Regardless, most utilities realize that 21st century customers are a force to be reckoned with and an asset to be leveraged. These empowered,
enlightened consumers demand more from their utility every year. The key is delivering service aligned with expectations in a cost-effective manner. But how much is it worth to the utility to give a customer the best possible service and maximize the value of the relationship?
Customer Lifetime Value – A Fundamental Concept
Faced with this dilemma, utilities are discovering what many other industries have understood for years – the concept of customer lifetime value (CLV). According to E Source, a division of Platt’s, an energy information and services provider, “Growing recognition of the lifetime value of a customer relationship is raising the profile of customer care in the utility industry from an operations backwater to a key strategic asset.”
While there are many variations on the definition, marketers tend to think of CLV as a metric that projects the total value of a customer over the entire history of that customer's relationship with a company. According to COLLOQUY, the loyalty-marketing publication, CLV is, at its root, a
measure of the retention effect of a company's marketing efforts. In other words, if a company has a good understanding of a customer's current or potential value, and they exercise a marketing stimulus that keeps that customer from attriting, then the retention effect compounds over time-- the company not only retains the customer's spend during this period, but all future periods over the history of that customer's relationship. This compounding effect allows companies to understand the Net Present Value (NPV) of their marketing efforts. Inputs that typically allow them to calculate CLV are acquisition costs, churn rates, discount rates and retention costs. For yearly sales cycles, CLV scores are typically calculated three to seven years in the future; calculations any farther into the future are usually too speculative to be useful.
Beyond the Numbers: CLV as a Way of Doing Business However, CLV is more than a numbers game. It requires a new perspective on the way business is conducted.
UtiliPoint® International, Inc., a leading utility industry analyst firm, in a white paper titled “The Changing Nature of Customer Service”, stated, “Utilities must match their service level to the needs, preferences, priorities – and lifetime value – of the customer they are serving.” Further, according to UtiliPoint, “Effective customer service not only involves strengthening existing bonds, but it also means increasing business opportunities. The key to improving customer service is optimizing the customer experience to build loyal relationships. Customer loyalty is essential to profitability, growth, and competitive differentiation.” For some utilities, this approach will require a major shift in perception, culture and approach. No longer are customers merely ratepayers or accounts – they are individuals who can increase the value of the utility merely by their positive opinion and
perception of the company.
As noted by Standard & Poor’s report, J.D. Power examines five factors to measure customer satisfaction:
• Power quality and reliability
• Company image
• Price and value
• Billing and payment
• Customer service.
Taken together, these factors, if positively perceived by the customer, add value to the utility. As S&P states, “Although the trend toward competitive markets has stalled, of course, and even backtracked in some states, customer satisfaction still influences credit quality. Standard & Poor’s believes happy customers may translate into a happier regulatory environment, and regulation is a highly important factor in ratings decisions.”
We Are Not Alone: What Other Industries Already Know
Utility colleagues in the wireless telecom industry are keenly aware of the critical value of customer retention and loyalty. A report from Peppers & Rogers Group, entitled “What Every Exec Should Know About Customer Retention,” states that this is an industry in which “it can easily cost more than $300 to acquire a new retail customer, and perhaps $60,000 or more to secure a new enterprise customer.” While customer acquisition and retention are just two variables in determining customer value, they are particularly essential in the mobile telecom world. Peppers & Rogers cite a marketing campaign by the wireless division of Sprint that increased its wireless customer base by 22 percent and a single-quarter operating income improvement of 64 percent. However, Sprint’s campaign also created more shareholder value as a result of a significant decline in its customer churn rate, hence, greater lifetime customer value. These acquisitions and retentions each created about the same amount of increased lifetime values.
This outcome is supported by research
reported in “Valuing Customers,” published by the Marketing Science Institute, which stated, “…Retention has a very large impact on customer value. Specifically, a 10 percent improvement in retention increases the value of a firm’s customer base by about 30 percent.”
Who’s Minding the Shareholders?
In a Sarbanes-Oxley, post-Enron world, the feet of corporate executives are routinely held to the fire when it comes to explaining the financial profile of an organization. Investors expect specific customer data, such as how much you are investing in each customer, earnings realized per customer, customer satisfaction levels, and how the organization is maximizing opportunities to increase customer value. While many utilities still have a captive audience, how management spends money to service customers – and the value delivered for that money – factor into market valuation and perception. Investing in the lifetime value of customers can demonstrate that the utility is prudent, customer-centric, regulator-sensitive and accountable to its shareholders. Claes Fornell is a pioneer of the American Customer Satisfaction Index and expert on customer asset management. His advice: “Unless an action is likely to increase both capital efficiency and the value of customer assets, don’t do it.”
Customer Satisfaction and Customer Lifetime Value: The Convergence
Faced with the impetus to incorporate customer lifetime value into decision-making, how does a utility translate that concept to the daily delivery of customer service and achieving customer satisfaction?
The process could start by gaining a greater understanding of the customer base, segmenting customers by available demographics, credit and payment history, usage patterns and potential for increased sales via upselling and cross-selling. Management can then make assessments of how best to serve the customers – while still adhering to regulatory guidelines – that create the most value. For example, the most valuable customers could receive premium service when they call. Customers with poor credit histories may not receive the fastest service. The utility could survey the high-value customers or those likely to increase value to obtain feedback on service delivery and how the utility might serve them better. In competitive markets, acquiring and retaining the right customers and building their lifetime value is key to survival.
The utility should also have in place a mature emergency and disaster response plan. Nothing dooms customer satisfaction faster than the perception that the utility is either unprepared or unresponsive during an emergency. A good faith effort will earn customer satisfaction, even if service cannot be restored as quickly as customers wish.
Utilities who demonstrate their ability to manage responsibly and without waste may be able to count on less customer resistance and a more positive regulatory environment.
In addition, they will be more appealing to capital markets and, as S&P notes, earn better credit quality as a result of higher customer satisfaction. The ability to demonstrate increased valuation and higher credit quality is critical in obtaining favorable financing and decreasing indebtedness. Equally important, shareholders – and stakeholders in municipal environments – will see their investment appreciate as a result of customers who believe the utility sincerely cares about identifying and meeting their needs.
_____________
About the Author
Kay Fuhrman is Vice President of Business Development for Alliance Data's Utility Services division, supporting sales and business development activities for the company. Kay brings nearly
20 years of utility and energy experience that includes leading large-scale sales negotiations with tier-one utility clients. She can be reached by phone at 972-348-4396 or via email at
kfuhrman@alldata.net.
References
Todd A. Shipman, CFA, Primary Credit Analyst, “Customer Satisfaction Levels Can Affect U.S. Utility Credit Quality,” Reprinted from Ratings Direct, Standard & Poor’s, a Division of The McGraw-Hill Companies, Inc., August 4, 2005, available at
http://www.esource.com/public/products/Customer%20Satisfaction-S&P-JDPA.pdf.
Shipman, ibid.
Tom Peters, “The Customer as Appreciating Asset,” TPG Communications, Mar. 27, 1987, available at http://tompeters.com/col_entries.php?note=005084&year=1987
The E Source Utility Customer Care Service, Platt’s, A Division of The McGraw-Hill Companies, 2006, available at http://www.esource.com/public/products/frs_ucc.asp.
J. Christopher Perdue, “White Paper: The Changing Nature of Customer Service,” UtiliPoint International, Inc. October 2004, available at http://www.energycentral.com/download/products/Utilipoint1.pdf.
Perdue, ibid.
“JD Power Associates Reports: Electric Utilities Improve Customer Satisfaction,” Press Release, July 21, 2005, available at http://www.jdpower.com/news/releases/pressrelease.asp?ID=2005094.
Shipman, ibid.
Don Peppers & Martha Rogers, PhD., “What Every Exec Should Know About Customer Retention,” Peppers & Rogers Group, reprinted from sas.com Magazine, available at http://www.bettermanagement.com/library/library.aspx?LibraryID=13327
Peppers & Rogers, ibid.
Sunil Gupta, Donald R. Lehmann, And Jennifer James Stuart, “Valuing Customers,” Working Paper Series, Marketing Science Institute, Report 01-119, 2001, 25, therein further defined as “…improving customer retention by 10 percent improves customer value by 28-32 percent.” Summary available at http://www.msi.org/msi/publication_summary.cfm?publication=47
Claes Fornell, “Customer Satisfaction, Capital Efficiency, and Shareholder Value,” Conference Summary, prepared by Simon Walls and Debra L. Zahay, Report No. 00-107, Working Paper Series, Marketing Science Institute, 9. Summary available at http://www.msi.org/msi/publication_summary.cfm?publication=9.
Just as the tangible assets of plants, pipes and wires have value, a utility’s customers possess a less tangible, but even more important, value. Handled with care, they don’t depreciate. In fact, customers possess intrinsic financial value that utilities can leverage to achieve their goals in the marketplace. Tom Peters, famed author of In Search of Excellence, stated it this way: “It boils down to this. When you build a plant, it starts depreciating the day it opens. The well-served customer, on the other hand, is an appreciating asset.”
The electric utility landscape is experiencing a sea of change – just where the waves will
ultimately carry the industry is still an unknown. Regardless, most utilities realize that 21st century customers are a force to be reckoned with and an asset to be leveraged. These empowered,
enlightened consumers demand more from their utility every year. The key is delivering service aligned with expectations in a cost-effective manner. But how much is it worth to the utility to give a customer the best possible service and maximize the value of the relationship?
Customer Lifetime Value – A Fundamental Concept
Faced with this dilemma, utilities are discovering what many other industries have understood for years – the concept of customer lifetime value (CLV). According to E Source, a division of Platt’s, an energy information and services provider, “Growing recognition of the lifetime value of a customer relationship is raising the profile of customer care in the utility industry from an operations backwater to a key strategic asset.”
While there are many variations on the definition, marketers tend to think of CLV as a metric that projects the total value of a customer over the entire history of that customer's relationship with a company. According to COLLOQUY, the loyalty-marketing publication, CLV is, at its root, a
measure of the retention effect of a company's marketing efforts. In other words, if a company has a good understanding of a customer's current or potential value, and they exercise a marketing stimulus that keeps that customer from attriting, then the retention effect compounds over time-- the company not only retains the customer's spend during this period, but all future periods over the history of that customer's relationship. This compounding effect allows companies to understand the Net Present Value (NPV) of their marketing efforts. Inputs that typically allow them to calculate CLV are acquisition costs, churn rates, discount rates and retention costs. For yearly sales cycles, CLV scores are typically calculated three to seven years in the future; calculations any farther into the future are usually too speculative to be useful.
Beyond the Numbers: CLV as a Way of Doing Business However, CLV is more than a numbers game. It requires a new perspective on the way business is conducted.
UtiliPoint® International, Inc., a leading utility industry analyst firm, in a white paper titled “The Changing Nature of Customer Service”, stated, “Utilities must match their service level to the needs, preferences, priorities – and lifetime value – of the customer they are serving.” Further, according to UtiliPoint, “Effective customer service not only involves strengthening existing bonds, but it also means increasing business opportunities. The key to improving customer service is optimizing the customer experience to build loyal relationships. Customer loyalty is essential to profitability, growth, and competitive differentiation.” For some utilities, this approach will require a major shift in perception, culture and approach. No longer are customers merely ratepayers or accounts – they are individuals who can increase the value of the utility merely by their positive opinion and
perception of the company.
As noted by Standard & Poor’s report, J.D. Power examines five factors to measure customer satisfaction:
• Power quality and reliability
• Company image
• Price and value
• Billing and payment
• Customer service.
Taken together, these factors, if positively perceived by the customer, add value to the utility. As S&P states, “Although the trend toward competitive markets has stalled, of course, and even backtracked in some states, customer satisfaction still influences credit quality. Standard & Poor’s believes happy customers may translate into a happier regulatory environment, and regulation is a highly important factor in ratings decisions.”
We Are Not Alone: What Other Industries Already Know
Utility colleagues in the wireless telecom industry are keenly aware of the critical value of customer retention and loyalty. A report from Peppers & Rogers Group, entitled “What Every Exec Should Know About Customer Retention,” states that this is an industry in which “it can easily cost more than $300 to acquire a new retail customer, and perhaps $60,000 or more to secure a new enterprise customer.” While customer acquisition and retention are just two variables in determining customer value, they are particularly essential in the mobile telecom world. Peppers & Rogers cite a marketing campaign by the wireless division of Sprint that increased its wireless customer base by 22 percent and a single-quarter operating income improvement of 64 percent. However, Sprint’s campaign also created more shareholder value as a result of a significant decline in its customer churn rate, hence, greater lifetime customer value. These acquisitions and retentions each created about the same amount of increased lifetime values.
This outcome is supported by research
reported in “Valuing Customers,” published by the Marketing Science Institute, which stated, “…Retention has a very large impact on customer value. Specifically, a 10 percent improvement in retention increases the value of a firm’s customer base by about 30 percent.”
Who’s Minding the Shareholders?
In a Sarbanes-Oxley, post-Enron world, the feet of corporate executives are routinely held to the fire when it comes to explaining the financial profile of an organization. Investors expect specific customer data, such as how much you are investing in each customer, earnings realized per customer, customer satisfaction levels, and how the organization is maximizing opportunities to increase customer value. While many utilities still have a captive audience, how management spends money to service customers – and the value delivered for that money – factor into market valuation and perception. Investing in the lifetime value of customers can demonstrate that the utility is prudent, customer-centric, regulator-sensitive and accountable to its shareholders. Claes Fornell is a pioneer of the American Customer Satisfaction Index and expert on customer asset management. His advice: “Unless an action is likely to increase both capital efficiency and the value of customer assets, don’t do it.”
Customer Satisfaction and Customer Lifetime Value: The Convergence
Faced with the impetus to incorporate customer lifetime value into decision-making, how does a utility translate that concept to the daily delivery of customer service and achieving customer satisfaction?
The process could start by gaining a greater understanding of the customer base, segmenting customers by available demographics, credit and payment history, usage patterns and potential for increased sales via upselling and cross-selling. Management can then make assessments of how best to serve the customers – while still adhering to regulatory guidelines – that create the most value. For example, the most valuable customers could receive premium service when they call. Customers with poor credit histories may not receive the fastest service. The utility could survey the high-value customers or those likely to increase value to obtain feedback on service delivery and how the utility might serve them better. In competitive markets, acquiring and retaining the right customers and building their lifetime value is key to survival.
The utility should also have in place a mature emergency and disaster response plan. Nothing dooms customer satisfaction faster than the perception that the utility is either unprepared or unresponsive during an emergency. A good faith effort will earn customer satisfaction, even if service cannot be restored as quickly as customers wish.
Utilities who demonstrate their ability to manage responsibly and without waste may be able to count on less customer resistance and a more positive regulatory environment.
In addition, they will be more appealing to capital markets and, as S&P notes, earn better credit quality as a result of higher customer satisfaction. The ability to demonstrate increased valuation and higher credit quality is critical in obtaining favorable financing and decreasing indebtedness. Equally important, shareholders – and stakeholders in municipal environments – will see their investment appreciate as a result of customers who believe the utility sincerely cares about identifying and meeting their needs.
_____________
About the Author
Kay Fuhrman is Vice President of Business Development for Alliance Data's Utility Services division, supporting sales and business development activities for the company. Kay brings nearly
20 years of utility and energy experience that includes leading large-scale sales negotiations with tier-one utility clients. She can be reached by phone at 972-348-4396 or via email at
kfuhrman@alldata.net.
References
Todd A. Shipman, CFA, Primary Credit Analyst, “Customer Satisfaction Levels Can Affect U.S. Utility Credit Quality,” Reprinted from Ratings Direct, Standard & Poor’s, a Division of The McGraw-Hill Companies, Inc., August 4, 2005, available at
http://www.esource.com/public/products/Customer%20Satisfaction-S&P-JDPA.pdf.
Shipman, ibid.
Tom Peters, “The Customer as Appreciating Asset,” TPG Communications, Mar. 27, 1987, available at http://tompeters.com/col_entries.php?note=005084&year=1987
The E Source Utility Customer Care Service, Platt’s, A Division of The McGraw-Hill Companies, 2006, available at http://www.esource.com/public/products/frs_ucc.asp.
J. Christopher Perdue, “White Paper: The Changing Nature of Customer Service,” UtiliPoint International, Inc. October 2004, available at http://www.energycentral.com/download/products/Utilipoint1.pdf.
Perdue, ibid.
“JD Power Associates Reports: Electric Utilities Improve Customer Satisfaction,” Press Release, July 21, 2005, available at http://www.jdpower.com/news/releases/pressrelease.asp?ID=2005094.
Shipman, ibid.
Don Peppers & Martha Rogers, PhD., “What Every Exec Should Know About Customer Retention,” Peppers & Rogers Group, reprinted from sas.com Magazine, available at http://www.bettermanagement.com/library/library.aspx?LibraryID=13327
Peppers & Rogers, ibid.
Sunil Gupta, Donald R. Lehmann, And Jennifer James Stuart, “Valuing Customers,” Working Paper Series, Marketing Science Institute, Report 01-119, 2001, 25, therein further defined as “…improving customer retention by 10 percent improves customer value by 28-32 percent.” Summary available at http://www.msi.org/msi/publication_summary.cfm?publication=47
Claes Fornell, “Customer Satisfaction, Capital Efficiency, and Shareholder Value,” Conference Summary, prepared by Simon Walls and Debra L. Zahay, Report No. 00-107, Working Paper Series, Marketing Science Institute, 9. Summary available at http://www.msi.org/msi/publication_summary.cfm?publication=9.
