How can start-ups disrupt existing markets for the benefit of customers?
- 07 June 2016
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Marketers are taught that the customer is king. However, companies seemingly forget this principle by putting their own needs first.
This appears to be happening in the price comparison, energy and utilities markets. Why? Well, one of the first ports of call for anyone wishing to switch their energy provider is a price comparison website (PCW) or their incumbent supplier. Neither offers the customer the best deals or a transparent view of the market. Contrary to popular opinion, PCWs don’t always bring the best deals to the top of a customer’s search results. Quite often, unbeknownst to customers, PCWs are being paid commission by the energy providers, and so this influences what the customer sees.
From a marketing perspective, companies should ideally be as transparent about this kind of thing as possible in order to put the customer first. If PCWs and energy companies were more transparent, they’d benefit from more loyal customers. Transparency enables customers to know what they are really paying for and permits them to make better purchasing decisions. Arguably, an honest broker can attract new customers and retain existing ones more easily than those that keep the best deals and their business models under wraps. Yet, conversely, a lack of churn in a market can make the incumbent players complacent and care less about their customers.
Customer churn is typically something that most marketers want to reduce, but ‘switching’ – as it is often called when a customer changes provider – is in fact good for competition and potentially good for business. How? Well, competition should increase pressure on suppliers to have regular conversations with their customers. They should find out what customers’ pain points are and how they can be healed, what attracts them, and what offers will attract them or make them more loyal and profitable.
Take the energy market as an example, though, and you will find that there is insufficient competition to put suppliers on a knife edge, and so they don’t feel the need to be transparent when they offer their latest tariffs on a PCW. The price comparison websites also don’t seem to feel they need to be more transparent because their very existence depends on customers unknowingly paying commission on each deal they accept. It’s also a hassle for many customers to spend time searching PCWs for a cheaper tariff. As a result, nothing changes.
Regulating for change
Regulators such as Ofgem and the Competitions and Markets Authority (CMA) are nevertheless doing their best to change the industry, to make it more competitive. The CMA’s draft report, which was released on 10 March 2016 and updated a month later, aims to put customers first. Yet it highlights the need for more work to be done to make it easier for customers to switch suppliers. In fact, a statement from the CMA reveals: “Although competition has benefited those customers who have switched to competitively priced fixed-term deals, around 70% of the domestic customers of the six largest energy firms are still on the more expensive ‘default’ standard variable tariff (SVT).”
This means customers are missing out on potential savings – many could be saving up to £300 per annum by switching to a cheaper deal. “The CMA’s analysis also shows that, in total, customers could have been paying about £1.7 billion a year more than they would have in a competitive market”, explains the release. Other sources claim that consumers could even save £400 or more per year.
Citing the CMA’s report, personal energy shopping start-up, Flipper Community, claims that most energy consumers aren’t switching. The hassle of switching is one reason why many aren’t bothering. Traditionally, there were four tariffs per provider and with 43 energy providers in the market, this equated to 160 tariffs. But the CMA’s plans to rightly encourage more competition will raise this to over 800 energy tariffs. Marketers should, therefore, be looking for ways to simplify the process, make their billing more comprehensible and generally making life easier for customers.
A failure to treat customers well can be financially damaging. It can also damage customers’ trust in a brand. For example, the Financial Times reported in April 2016 that ScottishPower had recently been fined £18m by Ofgem for not treating its customers fairly when a new IT system was put into place. While a fine may not result from a customer searching a PCW, brand reputations and customer relationships could still be damaged. Conversely satisfied customers a likely to become brand advocates and be more loyal than those who’ve had a bad experience. If ScottishPower had done everything right, then it would have ended more positively and avoided a fine.
Marketing for change
Market incumbents are traditionally less innovative and more complacent than start-ups. There is, therefore, an opportunity to use a ‘marketing for change’ approach, to show that they can disrupt a market for the benefit of customers by putting them first. Many start-ups are also embracing technology, including the use of service automation and big data to ensure that customers know they are getting the best deal. Start-ups can also insist on offering customers more transparency than they are used to – perhaps by using online dashboards to show what they are saving, and by making sure that their bills are comprehensive and easier to understand.
Automation can also be used as marketing proposition because it can enable customers to switch, for example, energy suppliers without having to spend time manually searching for the latest deals. In my view, this kind of approach puts the customer first as transparency fully informs them, and it is certainly time that companies focus on their needs first as taking customers for granted is not inadvisable.
Advice for start-ups
No matter which sector they are working in, Flipper Community’s co-founder, Hilal Kanafani, offers the following advice to start-ups that wish to disrupt a market for the benefit of its customers: “The biggest mistake that start-ups make is to build something that nobody really wants, and so they should find a really big industry with problems that affect a lot of people and then develop a real solution to the problem that people can understand.”
In conclusion, he offers five market disruption tips:
- First of all, start-ups should look in the most boring place because dry markets, such as energy, are easier to disrupt.
- Secondly, entrepreneurs should have a healthy disregard for reality by testing their own assumptions – those that other people in the market might take for granted – to push out the boundaries of what is deemed possible and acceptable.
- Thirdly, start-ups should ‘build for customers’ because people will be using your product in the end, and the only way you can disrupt is by making people happier than your competition does.
- Fourthly, they should demonstrate a clear edge to differentiate themselves from the market’s incumbents.
- Lastly, start-ups should get help by finding likeminded people with more experience than you have. Having advisors and investors with existing market experience can enable start-ups to establish themselves, and it can enable them to successfully disrupt a market for the benefit of its customers.
He concludes that price isn’t everything. “The experience we offer is enhanced by making it easier to read bills, for example, or by correctly helping to set customers’ direct debit level; and so non-price related factors have to be considered to improve customers’ decision-making, and to allow them to choose to exclude suppliers they know to have a poor customer service record.”Back to all
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