The Model & its Benefits
Utility (Gas & Electric) companies in the UK and many other countries use a unique pricing & collection model for billing their customers. The companies assume consumption and hence the amount due for the consumption for a defined period e.g. 12 months. This amount is then is then charged to the customer is equal monthly installments through direct debit. The bill is reconciled at defined interval either quarterly or six monthly against actual meter readings and the monthly bill is adjusted accordingly.
The Utility companies typically would use the number of members in household as a measure of ascertaining what the assumed consumption and bill should look like.
Another strategy used by Utility companies is to fix the tariffs for the services for a period of time, albeit for a small premium, so that the customer is cushioned from price increases.
This model has several benefits:
- The Utility Company is able to better forecast collections over a longer period of time
- Makes tasks such as payment by due date easy for the customer through the direct debit route
- As there is no manual intervention required in the process makes the task of the customer thinking of switching suppliers a thought that arises only in the event of a problem or billing discrepancies
- Price fixing for a period of time is a clever way of losing customers to competition by making the customer sticky to their services
With intense competition in the Retail market, customer loyalty – how to develop and maintain, is a top concern for Food Retailers.
Similar Industries
Food Retailers or Grocers such as Tesco, Asda, Morissons, Coop, Waitrose, Aldi, Lidl, SPAR & Netto in the UK and other similar retailers across the geography have several similar traits to the Utility Industry:
- An average basket analysis would show similar month on month consumptions similar to consumption patterns for Utilties
- Consumption is in linear proportion to the number of members in the household
- Product is largely undifferentiated from competition
- Is essential to the customers
This similarity lends to the idea that the Food Retailers can explore the pricing and bill collection models used by the Utility companies as an effective way of building customer loyalty and building confidence is collections over a larger time horizon.
Adoption of this model is a long drawn process and a major strategy shift to reap the utopian benefit of forecasting revenues for the Food Retailers. However, building customer loyalty using this strategy can be looked at more as short to medium term goal.
Favourable Trends
There are a few trends in the Retail Industry that today more than any other time in the past lend itself to adopt the Utility model:
- Essential food items becoming commoditized and undifferentiated
- Increase in the use of the internet channel for doing grocery shopping
- Strong adoption of multi-channel strategy by the retailers
- Increase in the delivery options and reduction in the overall delivery prices
- Efficiency being derived by Retailers from effective route planning and logistics
Unique Traits of Food Retailers
In applying the Utility model for Food Retailers there are a few unique traits and complexities that have to be looked at in adopting and adapting the model:
- Whereas the Utility companies can rely heavily on the number of consumers in the household, a food retailer would have to look at a few more parameters such as sex, children, location and other demographic details
- Frequency of re-pricing the consumption and reconciliation would be different for the Utility companies and food retailers
- Determining the contents of the basket for assuming the monthly charge and making it known to the customer clearly is of importance to avoid large discrepancies during checkout and reconciliation
- The Food Retailer can do a lot more cross-selling with the range of products available with them as compared to the Utility companies and hence promotions linked to this model have to crafted by the Food Retailers
Implementing the Idea for Food Retailers
The idea is a relatively simple one. Look at your customer’s typical consumption pattern and basket either through historical analysis or perceived consumption based on demographic details such as area, number of members in the household and other odd parameters.
Derive a value of the basket and extrapolate it for a period of time e.g. 1 year. Agree with customers a fixed amount every month that could be settled through direct debit. The customer buys groceries through the online channel without having to make payments for each transaction. The customers direct debits are reconciled against the actual value of purchases at set intervals e.g. every 3 months or 6 months.
What’s in it for the customer and for the Food Retailer?
The customer would want to see a clear benefit to adopt such a model. The Food Retailer can create and encourage customer participation through a number of strategies:
- Link the adoption of the model to increased benefits in the loyalty program. E.g. Tesco can give customers additional Club Card points for adopting the model.
- Offer customers discounted pricing for the products that they buy regularly and forms part of the basket used to arrive at their monthly payments
- Offer personalized promotions for the customer based on their buying behaviour through the model
- Easy movement in and out of the model
Retailers have much to benefit from the model:
- Build strong customer loyalty as customers volunteering to enter the model would find it more difficult to switch retailers
- Build confidence in their revenue forecasts as the number of customers in the model increase lending to increased investor confidence and company performance
- Increased revenues through cross-selling products through promotions and impulse buys
Looking at other Industries and models and practices being followed can throw interesting possibilities for Retailers. In times of economic downturn, customer loyalty and revenue forecasting have heightened importance and this model of adopting Utility companies strategies can be one solution towards an innovation for a Food Retailer.