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Why utilities should care about customer segmentation

Utilities continue to focus more on the customer these days: What do they want? What do they need? What can be done to establish lines of communication?

But, utilities still tend to lump all of their customers together into a single entity, as if they all want and need the same things. There is a growing trend, however, to separate customers into categories of smaller groups where the differences in those wants and needs—and how those differences impact the business—are more thoroughly examined. The pros call this customer segmentation.

Borrowed from years of use in more customer-interactive retail spaces, customer segmentation offers details that the more traditional “one big lump” view of customers cannot. 

“Ultimately, segmentation allows a utility to be customer-centric, delivering on customers’ wants and needs in their chosen forms of interaction,” said Stu Levy, a Washington, D.C.-based partner with Bain & Company who focuses on customer strategy in the utilities industry. And, segmentation has been core to Bain & Company since the firm’s establishment, with over 1600 customer segmentation projects to date across a variety of industries.

In this industry, understanding customer drivers doesn’t just help a utility improve service, it can help utilities cut costs, focus investments and shape new developments. After all, why build a widget for everyone if only one percent of your consumers want it? If you knew that it only appealed to one percent before development, would you have invested that money?

Customer segmentation tells you what the one percent wants, along with the other 99, in great detail.

Levy added, “I find segmentation comes up in almost everything I’ve ever done relating to customer strategy. Understanding the difference between customers, along with differences in economic value and the size of each segment are all critical to developing and implementing any strategy.”

Levy suggested beginning with that strategy planned out. 

“Start with the end in mind,” he said, noting that without that plan, without that focus, you’ve done a ton of work and built some nice analysis using a lot of money that doesn’t change a darn thing. How will this information be used? What are you trying to learn and why? 

Levy acknowledges that utilities face a unique issue that retailers do not when it comes to customers: Most utilities are regulated.

How does that impact segmentation? In the retail space, companies can use segmentation to move away from, push back or regroup customer segments. They can create markets where customers can be ignored or even rejected because they don’t bring the company money. Utilities don’t have the luxury of using segmentation analysis to focus their product only on beneficial market segments. They have a requirement to serve.

Given that regulatory requirement, why care at all about customer segmentation? This loops back to costs to serve and investments in secondary products.

Customer segmentation data can help you focus resources. For example, if you know that a large number of online-adverse, cash-preference consumers are concentrated in a single area of a metropolis, you could partner with a local grocery store chain, perhaps, to set up convenient cash payments, mitigating a number of potential past-due problems. Those are the details that customer segmentation can help you work out, even if you cannot determine customers to focus on for selling power, you can focus on how your customers pay for their power and make it easier on them and on you.

“Strategy is all about focusing scarce resources these days,” said Levy. “And, that’s not going to change. Is customer segmentation for utilities a little bit different than customer segmentation for American Express? Absolutely. But, there is a lot to learn from those non-utility industries and how well they understand their customers and their needs.” 

First lesson from those non-utilities: They satisfy segments instead of everyone. Yes, utilities have to serve everyone, but it’s impossible to fully satisfy everyone. And, that’s a lesson to learn with segmentation.


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