Are utilities low on gas? 4 indicators they need to watch
This article originally appeared at RMI.
Recently, there have been a lot of questions around the uncertain future of utility business models. Can we definitively state that the current business model is dying? Could we have seen this possible demise sooner? What contributes to the end of a business model? We can look at four main indicators to help answer these questions.
Every company offers a value proposition, typically a product or service that enables the customer to do something better, cheaper, faster or easier. The company’s business model is its method of capturing value in providing that product or service — how it receives revenue, how it defines its customer base, how it obtains financing. There are four leading indicators to know if that business model is failing:
1. Product indicators
Product indicators usually revolve around technology. What is the difference between the last generation of your product and your new offering or competitors’ offerings? Is it an incremental improvement? Are you no longer able to provide significant enhancements to the offering? This is often the case, but not always identified as a major problem. Internal leadership generally will believe that they are providing a better product that their customers want. But are they really? It’s important to be honest and critical when looking for this early warning sign. When the next version of the iPhone is just a slightly better camera, a tad more memory and a marginally bigger screen, customers likely will become unimpressed and begin to view the iPhone as a commodity smartphone and thus expect price decreases.
2. Customer indicators
Customer acquisition is widely noted as the most difficult challenge in business, followed closely by customer retention. The related voice of the customer (VOC) is a well-known way to capture feedback from your customers, and your customer will tell you what they think. If a subset of your customers is defecting to a competitor or if your customers are complaining about your level of service, you have reached another indicator that your business model is in trouble. This again requires careful consideration of the details of the VOC, parsing through wants versus needs and understanding true pain points to make adjustments before you lose those customers.
3. Macro-trend indicators
Macro trends are the broad shifting context in which your company’s value proposition lives. They usually include a variety of demographic criteria, such as population groups, life spans, family composition and disposable incomes. Other facets include economic relationships, difference in government structures and diverse societial rules. While these trends are outside of your direct control, accurate tracking of them will help you to predict their eventual effect on your business model. The price of oil is a current macro trend that can affect a wide variety of businesses. While in the U.S. oil is not used to produce electricity, solar panel manufacturers’ stock prices have become correlated with the price of oil. Regardless whether such correlations are logical, understanding macro trends’ effect on your business model is a crucial indicator.
4. Financial indicators
It well can be argued that by the time your firm starts to see effects on its financial or key performance indicators, such as decreasing revenue, profit margins or stock price, it is already too late. It takes time and effort to shift a business model. Yet, even if you’ve missed the first three indicators, disciplined monitoring of financials is the most direct way to tell you with what sense of urgency you need to make a change. The percent change in these indicators over time will indicate how quickly your business model will become outdated.
Predicting the decline of newspapers
We can apply these indicators to any industry. Let’s look retrospectively at the newspaper industry. The first indicator was the product itself. Online content gained a significant edge over printed content because it could be updated immediately (when US Airways Flight 1549 landed in New York’s Hudson River, social media users on Twitter first broke the story), it could provide audio/video supplement and it could be distributed globally. The paper-based newspaper model rapidly was rendered obsolete by this metric. Yet this didn’t necessarily dictate the newspaper’s death, but rather indicated the need for a new business model.
The second indicator was customer acceptance of user-generated content. With the democratization of content — including the rise of blog sites and social media — newspapers no longer had a monopoly on news sharing. No longer did the customer care as much about who wrote content, but rather what the content consisted of.
The third indicator was the macro trend of an expanding Internet and mobile applications, a now obvious factor in hindsight that could have been easily overlooked during its infancy. If the Internet maintained low adoption rates and never took off, so to speak, then the product indicator becomes less of an issue because online content would not have challenged print. But we all know how that turned out (you are reading this blog post online, after all).
Obviously then, the financials followed — harshly, quickly and with no mercy. In just 30 years, one in five daily print newspapers went out of business.
The need for a new utility business model
Now let’s apply these indicators to electric utilities. First, let’s look at the product. To the end user and the end use, an electron created by a coal plant looks exactly like an electron made by a solar panel. Without differentiation in the market, electricity supply has become commoditized. This begins the indication of the need to either provide a different offering or alter the business model.
Now, what do customers want? Beyond reliability and affordability, many customers have made an explicit request for clean and renewable energy. The existence of viable and attractive customer choice can be proven by the growth of independent solar installers. The potential of customers going off the grid and providing their own power is rising, illustrating the need to acknowledge the voice of the customer, provide a better value and give customers what they want.
Additional macro trends in this space include governments tax incentives, the decline in pricing for new technologies and a declining growth rate in electricity consumption due in part to efficiency and rooftop solar.
As far as financial indicators go, utilities have seen dramatic swings in their annual returns, although this year many companies did very well. The utility sector exchange traded fund actually has had a decent return in the past 12 months. The utility sector has not yet seen a consistent deterioration of financial indicators, meaning there is still time to act, although for some the clock is ticking.
The fundamental concept that a kWh is a kWh needs to be revisited. Do you value having power to your refrigerator the same way you value having power to your TV? Would you like your appliances to give you choices to save you money? Would you pay a premium for renewably sourced power? Utility companies can do many things to change their relationships with their customers and to capture value in ways that do not exist today. It now becomes a matter of identifying that the old model can no longer survive and move on to the model that will allow utilities to thrive.