Rewarding customer loyalty – How can reward schemes in the energy market provide real customer benefits?

Posted: 24th February 2017

In a recent parliamentary hearing, the Competition and Markets Authority (CMA) reported that 56% of UK consumers have never switched supplier or do not know if they have.

They have also asserted that two thirds of customers on standard variable tariffs (SVTs) are paying more than they need to. The intimation given these figures is that the industry could do more to engage customers in the act of switching tariffs for a better deal.

With npower and EDF recently suggesting that they are looking into ways to reward the ‘sticky’ customers who haven’t changed their tariff for a number of years, we could soon be seeing a significant move by firms towards tackling the engagement issues that have been detrimental to both energy customers and the reputation of energy suppliers.

If there is a challenge in getting some customers to switch suppliers for a better deal (an activity which almost always saves them money), can customers be incentivised for their loyalty in order to improve their outcomes and satisfaction?

The challenges involved in rewarding customer loyalty

Details around how the proposed loyalty schemes will work are not yet available, but a key question that will surely have to be answered is; ‘will the rewards for loyalty be a match for the potential gains of switching?’. If the answer is ‘no’, or even ‘it depends’, the next question will likely ask whether the introduction of loyalty schemes – and their deterrence to switching – could unfairly lock customers into deals that cause detriment and poor outcomes.

By taking these innovative and disruptive steps, firms like npower and EDF are embarking on the journey towards reconciling the desires of consumers, the CMA, the government and Ofgem. I think we have to accept that this journey is likely to be challenging for firms, as massive industry change always is; there will certainly be a period of ‘feeling out’ the outcomes that loyalty incentives deliver.

There are a number of factors to consider if your firm is thinking about offering loyalty incentives to its customers. Loyalty incentives will only have the desired effect on customer outcomes if:

• Every level of the firm is aligned with the intended purpose of the incentive – introducing incentives is not just a commercial exercise in customer retention, but a method of ensuring better product suitability for those customers who don’t engage. This means that the criteria under which they are offered must be carefully considered, understood and applied
   
• The incentives (and the procedures around applying them) take vulnerability into account – passive customers who choose not to assess the suitability of their tariffs are quite different to customers who are unable to assess suitability for reasons of vulnerability. Firms must accurately distinguish between the two populations of customers. For example, is there a risk that discounts could inadvertently be applied across populations of vulnerable customers because they show some of the same behaviours as passive or disengaged customers?
   
• Competition around incentives does not jeopardise the standard of customer outcomes – how will incentives be seen by firms from a market competition perspective? The risk is that they may try to compete on the ‘best’ loyalty schemes, which could work against the more transparent encouragement they offer customers to compare and switch. Will disengaged customers see the ‘best energy tariff’ as the one that offers the greatest reward for doing nothing? Is this the sort of customer behaviour firms wish to incentivise given the current regulatory landscape and their desire to provide consistently good outcomes? There will be a fine balance here in encouraging the right behaviours in consumers
   
• Training relating to incentives is designed and delivered effectively – does your firm currently provide its people with detailed training on regulatory requirements, or does it focus more on internal processes? Firms should seek to ensure every member of staff understands the context and technical obligations around the offering of loyalty incentives. Firms must also ensure customer communications (including financial promotions) are clear, fair and not misleading

As well as all of these considerations, firms will need to think about how customers perceive the value of non-financial benefits (for example, free boiler repair for long-standing customers) against the financial benefits of switching – this is likely to be a challenge for customers who do not have knowledge of the typical costs of the beneficial service (in this example, the call-out costs to have a boiler assessed and repaired). Without like-for-like comparison, incentives could serve to muddy the waters of choice and negate the benefit to customers altogether.

Innovating in the right way

All parties involved in supervising the energy market have, in one way or another, made it clear that homogenous products and a lack of choice have led to problems in the industry. Innovation on how to make the industry more transparent and products easier to compare and understand is a continuing success – will loyalty schemes serve to complement this work and provide better outcomes to those who do not engage?

Clear communication will play a key role in any rewards schemes your firm offers. Disengaged customers may of course remain so, but ensuring you meet your obligation to keep your customer informed is nonetheless vital.

If applied in the right way, customer loyalty schemes may now have the ability to deliver a better deal for disengaged customers, and can provide positive disruption if attempts to engage customers in thinking about product suitability fail.