Develop Marketing Information Systems to Compete Effectively

Develop Marketing Information Systems to Compete Effectively

By Wayne Beaty, Contributing Editor

In a deregulated environment, utilities must open their market to competitors, but they are also allowed to start marketing other products and services to their customers. Utilities are seeking effective tools to maintain existing customers and even to attract others. They are often competing with other industries which may be far more experienced with marketing in a consumer-driven environment. One of the most effective tools is a good marketing information system.

Utilities have always been attentive to consumer needs, but in this era of competitiveness, the customers have moved to the driver`s seat–at least the larger customers. The customer will not only determine the products and services that best meet their needs, they will ultimately decide the industry`s winners and losers. For some utilities, it provides opportunities to expand their business; for others, it may signify an end to their business.

At the 1997 DistribuTECH(TM) Conference, Janet Walrod, The Resource Planning Group, presented an excellent plan for utilities in developing competitive strategies. The following discussion is based on her paper.

Why Develop a Strategy?

The transition to a competitive industry is expected to shift marketing emphasis to those markets deemed profitable. Market success, while the goal of all competing companies, will be especially important to energy service providers supporting regulated markets or having the provider of last resort role while competing against wholly unregulated service companies. A provider of last resort is a term used to describe the role of a utility that may be required to provide energy on an emergency basis to consumers that may be purchasing the commodity from marketers.

Having a competitive strategy that highlights not only the correct marketing mix, but also the weight of each in the market investment portfolio will be necessary to meet the company`s goals.

Evaluating markets on a stand-alone basis is a prerequisite to developing a competitive strategy. With the traditional regulations of the past, most products and services came in one flavor, and as long as they could be justified, a return on the investment would be forthcoming.

That may no longer be the case. Financial analysis and strategic planning must be undertaken to successfully compete in each market, many of which do not provide the safety net of a pre-determined return. The process is described within four areas of evaluation–market segmentation, competitive advantages and barriers, risks and returns, and competitive positioning strategy–which are shown in Figure 1.

Market Segmentation

Since consumers are the ultimate decision-makers in competitive industries, any strategy development naturally begins with a thorough understanding of their decision-making process. To do this, markets need to be segmented by differentiating attributes such as regulated and non-regulated, load patterns, and possibly rate classes. Within these groups are price-sensitive customers or those preferring value-added services. There are any number of differentiating attributes that can achieve the goal of defining homogeneous groups that use energy similarly and can be expected to respond alike to market stimuli.

Once segmented, a profile of each group is generated to determine underlying consumer needs and wants, demographics, perceptions and attitudes, housing/building and business structures, and the penetration of end-use technologies.

In conjunction with these differentiating factors, a load analysis is usually conducted, providing energy usage patterns with each segment. This information is often obtained from survey respondents` billing histories. In some instances, average energy and capacity usage may become a primary segmentation factor. When the load analysis is combined with the characteristics of each group, a number of meaningful statistics can be derived. Among these are average season and annual usage, and in many segments, peak demand is also calculable. Depending upon the mix of technologies within and between segments, energy end-use estimates can also be derived. The resulting information, along with any relevant economic forecasts, are then used to project potential sales and their costs for any given segment.

Another prime objective of market segmentation is to assess the potential for new services and products among the various groups based upon their responses to the survey. A good example is the direct purchase of gas from a marketer rather than bundled services from a utility. Yet, as long as price remains within a range considered competitive, some consumer groups can be expected to place bundled services at a higher value than price. Among those responding strictly to price differences, some prefer a do-it-yourself approach, and still others will purchase the commodity but rely on the utility for balancing service.

Market segments relying on energy and production efficiency are often amenable to new products that can reduce their energy costs. Some groups want energy-efficient products and measures for environmental reasons.

Competitive Advantages and Barriers

Success in competitive markets (or even competitive end-use technologies in regulated markets) is not completely dependent upon the energy service providers` quantitative and qualitative assessments of the various segments. Equally important is a competitive evaluation. In any given market, there are advantages and barriers affecting all competitors, which should be factored into any market strategy. Existing market share, especially when it involves undaunted customer loyalty, can also prove to be a barrier to new entrants. Although, customer views can be changed, it may require a strong commitment of time and money, which has been successful for many businesses.

Risks and Returns

Revenue projections are dependent upon sales and the market prices of products and services under evaluation, and over which the energy provider may have little or no control due to the potential for exogenous impacts. In addition to the level and flow of sales, their sustainability over time should also be a major consideration before the market investment is made. Any number of risks can affect the prospective revenue and returns, which include inadequate levels of economic activity, high interest rates, lack of control over prices, substitute products and possible obsolescence. The potential for these eventualities not only underlies investment return levels, it impacts the advantages and barriers.

The next phase of developing a strategy is estimating a particular market`s value to the company based on projected returns weighted for their riskiness. All the quantitative parameters gathered to this point are aggregated and adjusted for any qualitative assessments to arrive at a bottom line–the annual return over each of the years under evaluation. These estimates can then be weighted for any uncertainties with the potential to alter the results. They might include the possibility of an unexpected rise in interest rates, the entrance of a substitute product into the marketplace or any number of occurrences that could arise over the planning horizon. As important as the weighting of these parameters is the timing of these occurrences, both of which lend themselves to sensitivity analysis.

Competitive Positioning Strategy

When a company has completed the process of researching and analyzing existing and potential markets, it should have a strong sense of the markets in which it can successfully compete and those for which its capabilities are lacking. A competitive strategy for each market can then be formulated on the basis of its strengths and weaknesses. Typically, companies would play to their strengths and shore up weaknesses where necessary, recognizing that one`s weaknesses are another competitor`s strengths and vice versa.

An extremely important byproduct of the process is the contingency plan that results from the sensitivity accounted for; the range of values contributing to, or detracting from, market threats; and profitability. The company has information on the impacts of a change in one factor and the extent to which it can be remedied by modifying in another factor. For example, a drop in sales may be turned around by a price decrease, or an increase in operating costs may be offset by lowering margin requirements rather then increasing price. Table 1 illustrates the factors that will influence an overall market strategy. Market A and Market B have the same average annual return, suggesting the company may be indifferent to either market. However, the risk factor for Market B is almost three times as great. A goal of minimizing risk points to Market A is a better choice.

Markets C and D have similar risk factors, but Market C offers a much higher return and should be preferred over Market D. If a company were focused on returns alone, Market E has the highest return of 16 percent. However, it also has the highest risk factor. If one is concerned with initial investment costs, Market D, with an average return of just over 2 percent in the first four years, or Market B, at 4 percent would be poor choices.

The range of players and issues involved in developing a marketing information system are wide and point to strategies that are customized and fine-tuned to a particular business. A cookie-cutter approach will not produce the needed results. However, if there is a constant in the prerequisite to successful competition, it is the need to thoroughly understand the consumers making up these markets and their decision-making processes.

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