Don’t dismiss collective switching so quickly

It was a pleasant surprise to read that Utility Week's panel of senior industry figures agreed with me on the potential of collective switching (Switched Off?, Utility Week, 22 June 2012). Sort of.

The panel noted it “should improve incentives on energy companies” and realised the “general movement of the market will make this happen”. Two-thirds “believed suppliers would not only participate, but would actually bid in decent energy packages”, because in “a competitive market this will provide good messaging for successful suppliers”. One even suggested it would “increase consumer power and involves strong negotiators on the consumer side”.

Alas, the meeting of minds didn’t last. Their prediction – that the collective switching movement would be short lived – was surprising only in the extent to which it was at odds with the sentiments expressed.

Collective switching would meet a premature end, they argued, because it would only engage active consumers and prove too much trouble to organise. Seventy per cent feared that non-switching customers would subsidise the bill discounts that collective switchers enjoyed.

To me, this reasoning suggests that members of the panel haven’t fully grasped why collective switching is set to disrupt the status quo.

For the consumer, finding a better tariff can feel like panning for gold: it’s difficult to know where to start, it can be time consuming and hard work. The chances of it paying off are slim. Furthermore, the old maxim “all that glitters” befits a market that is still recovering from a strong association with mis-selling.

Sure, there’s a rare breed of consumer with the inclination, time and confidence to find their way around a price comparison site and to secure the very best deals. But most consumers don’t – they remain “stuck” to their current supplier.

So, here’s my prediction: collective switching will have most appeal to, and draw the bulk of its participants from, that inert majority. It’s a constituency of millions and won’t exhaust its customer base any time soon.

It offers this group an attractive proposition of better outcomes for less effort. Where the status quo compels the individual to go it alone in seeking out the best value provider, collective switching compels suppliers to seek the custom of the group.

Rather than dying off, collective switching has grown steadily on the European mainland in the past four years. Intermediary services are expanding across both borders and sectors. Collective switching initiatives are attracting more and more people. The track record of the intermediary organisations in Europe (and beyond) contradicts the notion that organisational capacity will be a limiting factor.

So here’s another prediction: as collective switching grows, so will the number of bodies that will identify a commercial opportunity offering intermediary services. Don’t be surprised if one or more price comparison sites look to evolve in this direction.

Echoing a familiar, if somewhat uncharacteristic, refrain from the industry, the panel voiced concerns about price discrimination. For me, this is a red herring. The savings achieved will reflect the efficiencies inherent in the economies of scale collective switching offers – enabling providers to cut out the high costs of marketing, advertising and acquisition, rather than robbing Peter to pay Paul.

My final prediction is that as collective switching becomes widespread, suppliers will come to realise that engaging with a process that offers a block of consumers who are in the market with the intent of switching is a more efficient way of growing market share than conventional mass marketing strategies.

When the first peer-to-peer lending platform, Zopa, launched in 2005, banking analysts judged it to be “one of these things that could catch on but probably won’t”. Seven years on it has seen strong, consistent growth, enjoys high degrees of trust and has spawned a range of competitors. Similarly, collective switching might be easy to dismiss while it’s snapping at ankles, but it’ll be interesting to revisit the panel’s perspective once it starts chopping off at the knees.

This article first appeared in Utility Week’s print edition of 20 July 2012.

Richard Bates, director, consumer empowerment programme, Consumer Focus

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