Energy prices? Epic fail on pricing strategy!

Pic By Thomas ( photostream Flikr)

This morning it’s become clear that the government intends to push ahead with forcing the energy companies to reform their tariff structures to help people ensure they are on the cheapest possible rate.
This is a major blow for the companies, a huge embarrassment and a counter intuitive PR victory for a governing party that is otherwise wedded to free market principles. Consumers will no doubt say this is long overdue, and for many this will be a relief.
For the energy companies this represents many things. But above all else for those that provide electricity and gas to our homes this will come to be viewed as a failure of pricing strategy.
Indeed for pricing experts, and this is turning into something of an industry here and in the US, the energy debacle will become a case study of a how the approach to pricing went disastrously wrong - so wrong in fact that a national government felt it had to intervene. Ouch!
It doesn’t help that the energy companies are selling an essential commodity. It didn’t help that on the back of constant price hikes, the companies kept making decent profits (they should, shouldn’t they?). It didn’t help that they became bogeymen for the media and consumer groups. But it would be a mistake for the energy providers to sit back and complain they are victims and that this was all out of their control. They and many other companies should take a long hard look at what happened with energy pricing and ask: why did it all go wrong?
It may be that the sector is poorly structured, and that’s a fundamental that may need addressing in some way. But my guess is that it will all come down to the way energy suppliers priced their products.
What happened? In short tariffs multiplied beyond most peoples’ understanding and ability to understand why gas and electricity was being priced the way it was. Consumers, I suspect, find the structure of the sector hard to grasp and their hold on why all the prices are the way they are is even less secure. That led to a widespread perception that people did not know exactly what they were paying for and if they don’t know that they simply couldn’t grasp the “value” they were receiving in return for hard earned money.
This haziness over the value was exacerbated even more when energy companies announced that prices had to rise (mostly across the board) because of rising wholesale prices, and yet continued to make big profits. Public perception inevitably gravitated toward the idea that something was wrong.
I suspect the vast array of tariffs was a way of trying to create “value” for consumers. (though some of it may have been the hope that complexity would lead to may buyers ending up on more expensive tariffs than was necessary). The problem with that is that if you simply cannot communicate the value - if it’s not patently clear for your clients, then your strategy has already failed.
This morning representatives of the energy companies protested on TV that they had already begun to simplify their offerings and that there are far fewer on the market now. But unfortunately it was too little too late. But complaints about pricing have been underway for years. And how knew anyway. The communication has still been underwhelming.  
This year a paper appeared in the Harvard Business Review from Marco Bertini of the London Business School and John T. Gourville of Harvard Business School. In it they wrote: “Few signals are more powerful than price when it comes to motivating consumers - in ways that may be good or bad for the firm, customers or both. Whereas branding campaigns are often dismissed as clever attempts at persuasion, pricing is a call to action that puts customers in control.”
Profound words, and ones that energy execs may be wishing they’d heeded. The interesting thing here is that though there’s nothing like consumer “power,” there’s nothing quite like the power of consumers in relation to essential commodities like energy and heating. Because, in this instance, as far as pricing goes, this isn’t the failure of a single company, this is a failure of an entire sector to sort out what they were doing. Because of that dynamic consumers really didn’t have the kind of power that Bertini and Gourville refer to - their only recourse is to a higher authority. In this instance government. Coincidentally, doing something about energy gave government a PR friendly campaign at a time when it is desperately in need of improving its poll ratings.
Perhaps the energy companies thought it would never happen. Perhaps they thought it was all a storm in a gas pipe. Perhaps they just didn’t care. But they appear to have miscalculated industry dynamics they should have been all too aware of. Ironically, the scary thing is wondering if government is the right place to set prices either for the companies or consumers. There’s no guarantee that consumers will end up better off financially.
It’s a lesson for business leaders. You have to know what you customers want, you have to understand their power. And because this is a strategic issue it should be an understanding that is ingrained everywhere from marketing to sales to finance to customer service. Get it wrong and you may very well be punished, or humiliated.
Let me know what you think.


Anonymous said...
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Anonymous said...

If you think Energy company pricing is perverse take a look at the way companies are expected to buy their energy, be it gas or electricity. At least household consumers have a regulator (what a complete misnomer that is) to complain to. Corporates, in particular the SME customer, are completely at the hands of these pirates.
Where is the mechanism in the self-constructed market that insures efficiency on the part of the energy company? Keep looking because you won't find it...

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