by Sam Shrank
December 10, 2012
Utility operations are being forced to evolve as customer expectations shift, technological change continues, and new players enter adjacent markets. As utilities chart their courses in areas such as energy efficiency, smart grid, and distributed generation, they find themselves in unfamiliar positions. The second in our four-part series (See Part I by my colleague, Mat McDermid, Finding the Regulated Utility Role in a Shifting Energy Landscape), we discuss how utilities can leverage behavioral science research as they expand into markets where they are not a monopoly and customers need to be convinced about the benefits of the products and services offered.
Since setting up auto-pay the day I moved into my apartment, I've given no thought to my utility bill. Given that my job is to analyze and advise utilities, I'd venture to say most people are no more engaged. However, with an evolving set of customer offerings—energy efficiency (EE), alternative fuel vehicles, demand response, and the like—many utilities are realizing that they may require better, different, or more communication. In short, they are discovering what it means to sell.
And not only are they beginning to market things customers may not feel they need, they now have competitors as well, particularly in the EE market. Various other entities are looking to advise large electricity and gas users about how to lower their bills and provide help with financing, sell devices directly to customers that increase automation, and control, or take over the utility's role as the provider of EE offerings funded through utility bill surcharges. All of these reduce both the direct benefit to utilities from performance incentives and the indirect benefits from higher customer satisfaction, improved regulatory relationships, and perceived leadership.
Mining the extensive body of knowledge on consumer behavior provides insight on how utilities can more effectively communicate the benefits of EE and raise awareness of their changing offerings, and therefore attract more customers. Understanding how consumers behave and react to different sales tactics can help utilities stay ahead of their new competitors by more clearly demonstrating the value proposition of their EE efforts.
1. Convenience over cost
We all hate transaction costs, the costs incurred in dealing with the logistics of purchasing something or reaching a deal. Sometimes they can be just as important as the price itself (why we don't all cook our own dinners, for example). The true price of a good, from a consumer's perspective, can be thought of as the sum of the money, time, and mental energy required to acquire it. There is one exception to this rule, however, that is very pertinent to EE: rebates. Though of course it would be easier just to pay less for that cell phone from the outset, the idea of getting paid money to spend money seems to have a visceral appeal. Investing in EE, whether as a consumer or a business, usually incurs significant transaction costs. Audits require time, understanding savings potential of retrofits requires mental energy, and incorporating EE into new construction requires both.
Making things simpler almost goes without saying. But when allocating resources, it is worth considering that it may be more cost-effective to reduce the number of necessary forms associated with a program than to allocate equivalent money to increasing the incentive.
2. The power of More
Recent research in the Journal of Marketing demonstrates how our minds can play tricks on us. Consumers are unable to properly compare the savings from receiving a discount and from receiving extra product for the listed price, consistently favoring receiving more product even it is not in their financial best interest. EE is inherently a discount, allowing users to get the same energy service for a lower price. Framing it as getting something for free is an uphill battle, and saying "two loads of laundry for the price of one" defeats the purpose. Finding ways to do so, however, would increase uptake. Increasing the availability of on-bill financing immediately reduces transaction costs, but it also has the potential to change the way people think about EE. Marketing a more efficient washing machine as "a free washing machine with two years of electricity payments" rather than "saving you $10 on your electric bill" would position EE as a bonus rather than a discount.
There are other ways to frame EE as an extra service. For example, loans that allow lessees to pay off their debt through energy savings, but without the on-bill aspect, or marketing emphasis on the higher quality of efficiency equipment or building design rather than the energy savings. Both of these would help change perception.
3. Benevolent deception
For all the surveys demonstrating consumers' stated interest in reducing energy consumption and spend, EE is rarely top of mind. Utilities struggle to get consumers to pay attention. If the customer won't come to them, perhaps it is time for utilities to go to their customers. By combining EE measures with offerings that have higher intrinsic appeal and shifting marketing focus from saving energy to the benefits of the other measure, utilizing a concept known as goal substitution, utilities can attract more customers. In one initiative in Britain, an attic insulation provider offered to remove and dispose unwanted clutter, solving a problem more likely to resonate with a homeowner. This also reduced consumer time and mental energy required. Uptake of the insulation incentive rose threefold.
There are many opportunities to combine residential EE interventions with complementary offerings that should be considered. Retrofits that require moving furniture could be combined with repainting, perhaps, or work that involves breaking into walls coupled with cleaning out pipes.
The field can veer into off-putting territory (for example, one branch looks at how to take advantage of the way consumers judge value to steer us towards more expensive items); regulated utilities especially would need to steer clear of tactics that could be perceived as exploitative. Given the well-accepted societal benefits of EE, however, all stakeholders should support leveraging the more innocuous insights, such as those discussed above, to increase participation and savings.
All of these interventions would require regulator input. With regulators understandably wary of utilities asking for more money to spend on what could be deemed overhead, demonstrating the benefit of investing resources in areas other than beefed up incentives is an almost necessary prerequisite. Using the rich literature on consumer behavior and biases to engage regulators is a good place to start.Tweet
As originally published on Consumer Energy Report.