Editor’s note: R. Eric Reidenbach and Gordon McClung are principals of ValTec Group, Inc., a Morgantown, W.Va., consulting firm and authors of the book The Wizardry of Customer Value: An Action Guide to Measuring and Managing Loyalty.

Albert Einstein once cautioned, "You can’t solve current problems with current thinking. Current problems are the result of current thinking." And, while we are reasonably sure that the "current problems" or "current thinking" Einstein was mentioning had nothing to do with electricity, we do believe that his advice is extremely relevant for the utility industry.

As the industry moves from a regulated environment to one directed by market forces, a new type of thinking must emerge. It is a type of thinking that is directed by and responsive to market dynamics. The critical dynamic that will direct behaviors is value-customer value.

If the industry follows patterns of the financial services, health care, telecommunications, retail and other industries, we will see an increased emphasis on price. Some will believe that price is the only way to compete. But if we have learned anything from those who have unshackled themselves from the "current thinking," it is simply this: "There need be no such thing as a commodity!" Successful competitors in these deregulated industries have learned that the key to the kind of performance that identifies them as industry leaders is based on the creation and delivery of outstanding customer value. Non-current thinking is the kind of thinking that divorces itself from simplistic notions of customer satisfaction and customer service. Non-current thinking drives critical questions concerning value, loyalty, retention, and how these factors lead to operational and strategic excellence.

Understanding the concept of value

The concept of value is not new. However, what is new is the ability to measure customer value. And with that measurement capability comes a better understanding of how to manage customer value. Value is a powerful buying dynamic influencing all types of customers and all types of buying situations. Value is the interaction between the benefits that a customer wants in a transaction or relationship and the price that the customer is willing to pay to obtain those benefits. In its functional form it is represented as:

Value = Benefits sought :: Price to acquire the benefits

There are several critically important propositions regarding value. First, value is relative. It is relative to the value offered by competition. Your value proposition has meaning only when it is compared to the value proposition of your competition. The key question from both a customer acquisition and, ultimately, a customer retention, standpoint is "Who is offering the best value?" This relativity issue is a major weakness with regard to many CSM approaches. Companies that do not get competitive readings are operating in a vacuum and are seeing only part of the picture, a dangerously one-sided picture with consequences for misleading and misdirecting initiatives.

Second, value is market segment-specific. Your commercial customers will more than likely define value differently than your residential customers do. Moreover, large commercial customers will probably define value differently than smaller commercial customers. The key to creating loyalty among the different market segments is to fine-tune implementation and customer delivery processes to market segment specific definitions of value.

Third, value, as a strategic and operational approach to the market, becomes so much more potent when it is linked to other information platforms within the organization. This is particularly true when the customer value information system (CVIS) is linked to revenue and cost information. How much is a given customer worth? What are the consequences of poor value delivery? What is the annuity associated with a loyal customer who is receiving outstanding value from you? These are critical questions, the answers to which will make managing the customer base and reducing the inevitable churn more effective.

Many organizations are currently measuring satisfaction and use this metric to shape strategic and operational decisions. Satisfaction ignores several realities of the buying decision and provides only a partial understanding of how evaluative decisions are made.

For example, most customer satisfaction systems look at each attribute or dimension individually. Included in this analysis, if measured at all, is the price attribute. Price is treated as simply another product attribute. This is too simplistic an approach. Customers evaluate attribute performance in terms of the price that they pay for those attributes.

Second, many CSM systems do not take into account competitor performance. It may be pleasing to note that 69 percent of your customers are either satisfied or extremely satisfied, but - and it is a big but - are your competitors’ customers getting greater satisfaction? Failure to monitor competitive actions can be dangerous.

Third, satisfaction begs the issue of "What is the customer satisfied with?" Is it the attributes, price, or what? Our research indicates that there is a direct link between customer value and profitability. It is shown in what we call the Value Performance Chain®.

The Value Performance Chain®

Customer Value - Customer Satisfaction - Customer Retention - Profitability

The Value Performance Chain clearly points out the connections among customer value, satisfaction, loyalty and profitability. Customers are, in the long run, satisfied not with individual attribute performance, but with the value relationship they establish with a supplier. This satisfaction with the supplier’s competitive value proposition creates a loyal customer. Moreover, we know from experience that the costs of customer acquisition can run as high as 10 times the cost of customer retention, making the linkage between loyalty and profitability extremely cogent and strong. Focusing on satisfaction is misdirected because it ignores the cause of satisfaction: value. Customer value becomes a critical driver of retention and profitability. This is the new type of thinking that will guide the successful electric supplier of the future.

Putting value to work

What are the strategic and operational implications of customer value in the electric utility industry? Here’s an example of how value can help you both from a customer acquisition standpoint and a customer retention perspective.

The first step is to develop a valid model of value for each segment. This involves identifying the key value drivers. For example, a model of value developed for commercial customers revealed that there were four non-price value drivers. These value drivers vary from segment to segment and are comprised of individual attributes concerning such factors as service delivery, customer relations, billing, repair, ability to solve customer problems, the providing of useful information, etc.

In addition, there is a price driver that measures customer perceptions of fairness, competitiveness, etc. These are then used to model value. Each driver varies in its relative importance in explaining how customers within a segment define value. For example, in the model shown in the graphic at right, which shows the value drivers for customers of High Volt Power Company, Value Driver 1 is the most important (.362), followed by Value Driver 2 (.278), Value Driver 3 (.181), and Value Driver 4 (.174). Taken together, these drivers become the benefits that the customers in this segment consider the most important in a relationship with their electric supplier. The specific number of value drivers as well as the individual weights of the drivers will vary from segment to segment.

These individual value drivers are combined into a value driver index (VDI). This is weighted in terms of their relative importance. This VDI, in conjunction with the price driver, is used to model customer value. The model shows the relative impact of both the VDI (.442) and Price (.381) in the customer’s definition of value. In this case, the VDI (non-price drivers) are somewhat more important than price in determining value.

This hypothetical model of commercial customers indicates that non-price factors and price are not equal contributors to commercial customers’ definitions of value. The relative contribution of non-price and price drivers will vary from market segment to market segment.

Identifying your competitive value proposition

Your competitive value proposition can be examined through the use of our Competitive Value Matrix®, which uses the definition of value (VDI and price) generated from the market segment (commercial customers) to map competitors into one of four quadrants describing the kind of relationship they perceive that the utility offers existing and potential customers:

  • Outstanding value relationship. Customers locate competitors in this quadrant based on above average segment performance on both the VDI (benefits) and price satisfaction. Outstanding value relationships result from high benefit performance interacting with high price satisfaction. In the example shown on page 50, two competitors occupy the outstanding value relationship quadrant: End Run Power Company and Duchess Power. These companies are in the best position to leverage their differential value advantage into superior performance. This is the only true value position. All others are inferior in terms of the capacity to sustain high performance.
  • Poor value relationship. Customers placing competitors within this quadrant do so based upon below market average performance on the VDI (benefits) and price satisfaction. Poor value results from poor benefit delivery interacting with a high price (low price satisfaction). Customers placed VAT within this quadrant.
  • Discount relationship. Competitors located within this quadrant are perceived as providing poor benefit delivery (low VDI scores) but above average scores on price satisfaction. Customers are saying that while the service delivery is not good, we are not paying too high a price for it. Customers within the commercial customer segment locate High Volt Power Company here.
  • Expensive relationship. This describes the utility that is providing above average performance on benefits but at a high price. In other words, the service delivery is good but customers believe the price is too high. In the current example, no competitor is located within this quadrant.

The distance between End Run Power Company and High Volt Power Company is the differential value advantage End Run holds over High Volt. Our experience clearly supports that a differential value advantage can readily be translated into:

  • relationships that are based on less price sensitivity;
  • greater customer willingness to recommend the utility to others;
  • higher overall customer satisfaction with their electric supplier;
  • higher evaluations of service delivery;
  • greater loyalty and less willingness to switch;
  • higher market share;
  • greater profitability.

The task facing High Volt Power Company is to improve its competitive value proposition. A blueprint for this is readily available from a disaggregation of the various value drivers and using this information as input into its continuous improvement process. Customers indicate satisfaction with the pricing policy. Improvement on the key value drivers, beginning with the most important one, Value Driver 1, will allow High Volt Power to move from its current position within the discount value relationship quadrant to the outstanding value relationship quadrant.

The Customer Retention Matrix®

Using the same matrix, customers of High Volt Power can be examined based on their perceptions of the value provided by High Volt Power.

Examination of the Customer Retention Matrix reveals two key pieces of information: 1) which customers are vulnerable and 2) how many of them are susceptible to better competitive value propositions. In other words, which of your customers are at-risk to competitive acquisition efforts? For example, in the case of High Volt Power, 31 percent of its customers describe their relationship with High Volt Power as one of outstanding value. About 48 percent of its customers would describe their relationship as average value. Finally, 31 percent of High Volt Power customers would characterize their relationship as one of poor value. Customers located within the poor value quadrant are likely defectors. The probability of their defection is significantly higher than their outstanding value counterparts. In this case, about 31 percent of High Volt Power’s commercial customers are at risk.

The average value customers are the next least loyal. The 38 percent of High Volt Power’s customer base that describe their relationship as one of average value are also an at risk group.

The most loyal are the customers that are located within the outstanding value quadrant.

As evidence of the effect of value on loyalty consider the above graph. On the vertical axis is a 10-point loyalty scale ranging from low (0) to high loyalty (10). The horizontal axis shows three value groups, poor value group one, average value group four, and the outstanding value group two. These are the same High Volt Power value groups shown earlier. How price sensitive are the different customers in the three different value groups? What is the likelihood that customers will switch to an alternative supplier at the same rate, at a rate reduction of 5 percent or a rate reduction of 10 percent? Clearly, a distinct pattern emerges. Those customers in the outstanding value group enjoy significantly and substantially higher loyalty scores than do their counterparts in either the average value group or the poor value group. Customers enjoying an outstanding value relationship with their electricity supplier are more loyal and less price sensitive. How do you reduce churn and enhance loyalty? Become a deliverer of outstanding customer value!

Act now

As deregulation hits the utility industry, many organizations will try to identify a strategy that will increase the probability of their survival and growth. Becoming a value-driven organization means an increased probability of both survival and growth. It is the major weapon against reducing churn. And the time to begin the value journey is now.

During years of operating as regulated monopolies, utilities have been teaching their customers about the kind of value they will receive in a deregulated competitive environment. Many customers, like many of High Volt Power’s, have not appreciated these lessons. We have learned from recently regulated industries these are lessons that are not easily and readily un-learned. It is relatively simple to teach customers that they cannot get good value from you. It is much more difficult and resource-consuming to re-teach them. To wait until competitive pressures are swirling around you is too late. If you are not actively managing your own competitive value proposition, ask yourself who is. The answer: your competition. If you’re not willing to trust something as important as the management of your value proposition to your competitors, now is the time to take control. Now is the time to unshackle yourself from the "current thinking" that has produced "current problems."