Direct marketing prepares for second wave

Bob Shields

Chris Nadherny

Spencer Stuart

Direct marketing by utilities is still in its infancy, but it`s about to go through a major growth spurt. To date, most utilities recognize the importance of using direct marketing to reach retail customers, and perhaps, are testing it on a product or two.

This “first wave” of direct marketing activity has been appropriate since most utilities don`t yet have the revenue to support more comprehensive efforts or the in-house expertise to guide direct marketing at its most complex and sophisticated levels.

As competition heats up, a “second wave” is coming-one that requires more comprehensive, complex and sophisticated efforts guided by high-level executives. And as utilities recruit this talent, they enter yet another competitive arena. These professionals add significant bottom-line value, and they`re in high demand.

Direct marketing power

Direct marketing targets specific individuals with specific messages, which is important for closer and more enduring customer relationships. Information helps a company understand what individuals like and dislike, how they want to be served and communicated with, what products they might buy in the future, and more.

Because of this, direct marketing potentially has profound implications for nearly every aspect of a utility`s success in competitive markets, from product development to customer service.

So far, however, “few utilities have kicked off big direct marketing programs,” said Jeff Conklin, direct marketing specialist for energy consulting firm Metzler & Associates. “Perhaps a half-dozen nationwide have aggressive programs; of these, perhaps only two or three have been moderately successful. The smart utilities are climbing up the learning curve, figuring out what works and what doesn`t, and preparing themselves for more comprehensive efforts in the near future.”

Utilities hesitating on the sidelines may be doing so for a variety of reasons. For example, they may not have figured out their strategic market positions. Cost for direct marketing may hold them back, particularly if they don`t have revenue to support these activities. And other utilities may be counting on consumer complacency experienced in some newly deregulated markets.

Still, many more utilities are beginning to explore direct marketing`s potential. “Utilities traditionally haven`t done much marketing at all, much less direct marketing, because they haven`t had to,” said Brad Andress, vice president of marketing for Wisconsin Public Service (WPS).

Utilities close to competition in particular are stepping up their direct marketing efforts. “We`re using direct marketing to build relationships and provide customers with information on what they can expect from competition in the utility industry,” said Laura Jean Hughes, director of business marketing for ComEd, a subsidiary of Unicom. ComEd faces deregulation in six months.

“Using direct marketing to heighten customer involvement in the energy category and to deliver relevant products and services will ensure a successful transition to a competitive marketplace,” Hughes said.

Second wave leaders

Clearly, utilities are on the brink of more aggressive marketing efforts. Those efforts require a new type of leadership, which will likely come from outside the traditional, monopoly structure. Andress and Hughes were recruited specifically for their direct marketing expertise developed in other industries-Andress from consumer goods and Hughes from telecommunications.

Direct marketing leaders at utilities face a variety of new challenges, including:

– Building the marketing database

“Monopoly utility databases are primarily about rates and usage information, not customer information,” said Deb Nowak-Rapacz, senior client consultant for DraftWorldwide. “Once the utility enters open-market competition, that`s not enough. The goal is to continually develop more and more intelligence about the customer.”

– Segmenting the residential market

Most utilities know direct marketing remains an excellent way to reach residential customers. “The days of advertising to the general public are gone; it`s not efficient enough,” Andress said. “Target marketing helps you find the most desirable customers and tailor messages for them.”

But, as Conklin pointed out, figuring out how to segment the residential market is a story that`s still being written.

Some customers-both households and businesses-will be more profitable than others. Utilities are still determining how to identify these more desirable customers and align marketing efforts around them, Conklin said.

– Determining the product mix

Although some utilities plan to market suites of products, Andress said customers may not be fully prepared for that yet. “They may accept a product for saving energy, yes; telephone or other services, no,” he said. “Monopoly utility customers are accustomed to the silo approach. They haven`t been exposed to what a suite of products can do.”

– Maximizing call centers, direct mail

Utilities have enormous untapped call center and direct mail capacity. Industry-wide, about 90 percent of utility call center communications are still incoming calls, and although utilities send out $330 billion in bills each year, most remain reluctant to include direct marketing materials with bills for fear of regulatory intervention. Determining what offers are possible under regulatory guidelines also will be a challenge.

– Controlling costs

“When they first start using direct marketing, a utility may be willing to invest as needed to learn more about their customers,” Conklin said. “For example, a utility may spend several hundred dollars per customer acquisition when it first enters open-market competition. But it cannot sustain this level of spending. This utility will need to cut ongoing acquisition costs to more like $30-$40 per customer in order to be competitive going forward.”

Beyond these issues, utility direct marketing executives also face the challenges of direct marketers in any industry, including how to apply creative, innovative approaches to stand out from the “noise” of messages that bombard consumers daily; and how to integrate direct marketing intelligence into strategic business planning, new product development and customer service.

Finding talent

As detailed in Spencer Stuart`s recent study New Frontiers in Direct Marketing Leadership, the direct marketing industry is currently redefining itself, and “new frontier” direct marketing executives are rare.

Fueled by rapid technological advances, explosive growth, changing consumer lifestyles, the globalizing business market, and heightened competition, direct marketing is rapidly evolving from an ancillary marketing tactic into a central means for bringing products and services to market. It has developed into a sophisticated, data-driven business model used to identify, reach, market to and interact with customers; manage customer relationships; and maximize lifetime customer value.

Fundamental business management skills are the No. 1 prerequisite for executive leadership in direct marketing. While direct marketing executives must understand direct marketing and its metrics, they also need to operate in a broader management context.

Another key requirement is recognizing and harnessing technology`s potential. This includes tapping the direct marketing potential of the Internet, which appears enormous, and harassing database technology for managing customer relationships.

“Utilities routinely currently spend $30 million to $100 million on billing systems or enterprise resource planning systems,” said Ron Edwards, utility business development leader for database marketing expert Acxiom Corporation in Arkansas. “The smart utilities are realizing that for a fraction of that cost, they can invest in customer relationship management solutions that are critical to the future of their company.”

Understandably, the “new breed” of direct marketer is in demand across industries of all kinds. Because the competition for these highly desirable professionals is intense, utilities can take certain steps to enhance their ability to attract these candidates, such as:

– Demonstrate commitment to direct marketing as a strategic tool.

– Ensure senior-level enthusiasm for direct marketing programs.

– Be willing to commit necessary human and financial resources.

– And, at all times, be adaptable and flexible in identifying and implementing lessons learned as the programs evolve.

Spencer Stuart`s Great Leap Forward study documented the many challenges facing executives who join utilities from other industries. In fact, recent experience indicates that as many as 50 percent of these transplants left the utility industry within two years of joining.

Conclusion

As utilities become more aware of and begin to capitalize on direct marketing as a means to gain competitive advantage with existing and new customers, services and products, they will need to recruit new direct marketing-experienced talent into their organizations.

To do so effectively, utilities must be knowledgeable of the changing nature of the truly skilled direct marketing executive. This knowledge enables them to recruit and train the best talent to help ensure their success in a more competitive business environment.

When utilities do attract direct marketing executives, they must provide top-level support and the autonomy, resources and staff needed to maximize the utility`s direct marketing success.

Bob Shields is managing director of Spencer Stuart`s energy utilities practice. Christopher Nadherny is a senior director and leads the firm`s direct marketing practice for the Americas. Both authors can be reached at (312) 822-0080.

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