Power plays: Electricity sellers add a little extra
New home services and products pad profit margins and build customer loyalty
Homeowners interested in security systems, air conditioning repair and water purification don’t have to look too hard these days. Most likely, they can buy them from their retail electricity providers.
Electricity sellers have added a wide range of services with higher profit margins to sell alongside lowmargin electricity contracts, adopting the strategies pioneered by banks and gas stations to attract and hold onto customers.
Much as gasoline has become a way to get customers into affiliated — and more profitable — convenience stores, electricity increasingly is becoming a way into customers’ homes, where retail power companies can sell more profitable products and services. And, as banks have shown, once customers sign up for multiple products and services, it makes it much harder for customers to untangle their affairs and leave for competitors.
Just Energy, a Canadian company that sells electricity in Texas under the brands Just Energy, Amigo Energy and Tara Energy, recently added water purification to a list of ancillary services that include smart thermostats, shower heads and weatherstripping. In a recent presentation, CEO Pat McCullough told analysts and investors that adding these extra services have allowed Just Energy to raises its electricity prices four times over six months without losing more customers than usual and boost gross profit margins on new and renewing power contracts by 25 to 40 percent. Adding just one new product per customer, whether it’s a smart thermostat or water purification system, would boost Just Energy’s gross profit margins by $400 million, executives said. The company’s goal: Get customers to buy four products, double the current average. “It gives us pricing power,” McCullough said. “It’s moving the needle.” Retail electricity providers face a peculiar problem because they are selling the exact product as their competitors, purchased in the same wholesale markets and distributed by the same regulated utilities. For years, the main way companies differentiated themselves was by price, offering steep discounts for limited periods, and hoping that customers would stick around, either by choice or inertia, after the
prices increased.
Adding new products and services is becoming another way for the companies to separate themselves from the pack and build customer loyalty, marketing specialists said. This strategy also fits well with other changes in how retail power companies sell their brands.
Increasingly, companies are setting up kiosks at supermarkets, discount stores and big box retailers to sign up customers, an approach that is beginning to outpace door-to-door sales, telemarketing and and even Internet promotions. Sales agents armed with smart pads and calculators can also pitch extras like power surge protection and home security services to shoppers coming in to see if they can find a better electricity deal.
Direct Energy, the third biggest retail electricity seller in Texas, has recently expanded into Walmart, opening its first Houston-area storefront in Walmart’s League City supercenter earlier this year, after a trial run in Dallas with three Walmart stores. In the stores, sales agents representing Direct Energy offer shoppers a range of smart devices such as temperature controls, surveillance video cameras, and dimmable lights, along with services such as home warranties, essentially a service contract on major appliances and household systems.
The devices are tangible, something customers are able to hold, feel and touch, executives said, which creates a deeper connection between the company and its customers.
“You can’t do that with electricity,” Kosta Zujic, said U.S. energy director for Direct Energy, which is headquartered in the United Kingdom.
Sales of home devices are up 75 percent year-over-year and a significant share of customers are buying them, said Zujic, who declined to disclose more specific figures.
It’s difficult though to know how many electricity shoppers are buying extra services, since most companies, like Direct Energy, won’t disclose that data. Many customers are never approached because they buy electricity through the state-run Power to Choose website and switch providers, based on prices, when their contracts end, leaving few opportunities for providers to make pitches.
Reducing the number of frequent switchers is among the goals of selling more products and services, company officials and business analysts said. But the strategy tends to work only if those products and services are connected to the primary offering, in this case electricity, said Betsy Gelb, a marketing professor at the University of Houston.
She recalled a Houston bank that started a travel service that flopped because it had no connection to banking at all. “The more remote the add-in to the base core service, the less likely to be successful,” she said.
Reliant Energy didn’t set out to launch a home repair service to complement its electricity business eight years ago when the NRG Energy-owned company began offering customers free energy evaluations. When Reliant’s energy efficiency specialists found problems such as inadequate insulation and air conditioning units that needed repair, homeowners would ask the specialists for advice on whom to hire. From that, Reliant Home Services was born.
“We get really high ratings with customer satisfaction,” said Scott Burns, head of innovation and customer experience for Reliant. And high customer satisfaction, he said, leads to customer loyalty.
Houston electricity broker Rhino Solutions still makes more money from selling electricity than it does selling ancillary services, which includes renters insurance, cable television and security services. But selling the extras is what drives customer growth because they lead to referrals, said owner Tommy Duncan, who estimates that at least half of his customers end up buying an extra service.
As an electricity broker, Rhino sells power on behalf of several retailers. It started brokering other services by accident when apartment managers would refer new renters to Rhino to sign up for electricity. The renters also asked Rhino representatives where they could get insurance, cable television and security services, which led Duncan to expand his offerings. Duncan said he receives referral fees from the insurance companies, cable companies and security providers for which he finds customers.
But the company’ real secret for getting people to renew power contracts? Duncan and his employees call their customers — all 8,000 in Texas — every year and sing “Happy Birthday” on their big day.
“You can hear the smile on their face,” he said. “They never forget it.”
“It gives us pricing power. It’s moving the needle.” Just Energy CEO Pat McCullough