Art Sculpture by Chen Wenling
One of the many skirmishes in what may well subsequently be known as the energy wars opened up an unexpected front over the airways and column inches this morning. Apparently switching sites are the new enemy in the war on energy prices; whilst The Big Deal – a collective switching site, is the saviour. It is this kind of thinking that led to the demise of Phones4U in the mobile telephony business, thereby reducing customer choice in the market yet further; but more on that later.
First let us examine the central charge; which is that switching sites have a question that they ask you to answer which seems innocuous, and to which the only logical answer would be yes. An example of this question would be “Show me all the tariffs I can switch to today” with a tick box pre ticked. This tick effectively means that the comparison site will show you tariffs where it has agreements with the supplier of those tariffs to be able to process and get paid for any consumers that then switch to these tariffs. The question that the media should be asking is why do switching sites undertake this perceived sleight-of-hand given that in all other aspects they are very keen on transparency? The answer lies in the balance of power in the industry coupled with consumer behavioural norms.
If as a switching business you are forced to display all suppliers’ tariffs all the time then you become a free advertising window for suppliers. You are obliged to advertise their wares for free. It is a well-known phenomenon in the energy switching market that many consumers (sometimes as many as 90% of all visitors that do a comparison on site) use comparison sites to evaluate the market and then go directly to the supplier. This is despite the fact that there is NO possibility of the supplier selling a better deal direct. OFGEM prohibit this and despite any allegations to the contrary a supplier does not and cannot build a comparison sites commissions into their tariff as listed on comparison in order to create a different and more expensive tariff. However, once on the supplier’s website or on the phone to their call centre (both of which cost money to run I might add), the consumer is now exposed to a supplier’s selling model not a comparison model where OFGEM and the confidence code do not hold any sway. Caveat Emptor and all that. There is literally no savings upside in going direct and yet many consumers do so anyway. If the comparison sites do not have some way of showing suppliers that if they aren’t prepared to pay to acquire customers then the customer MAY not see their products; then what commercial power does the comparison site have?
It is also unfair to all the suppliers that do pay. Their commissions fund the existence of the comparison site (the creation of which is both complicated and expensive as many new entrants have discovered); and then along could come some unscrupulous supplier with very low prices (so low because they refuse to fund and therefore cost in any marketing or customer acquisition activity) who looks to simply piggy back off the model built by the comparison site and paid for by other businesses (suppliers). This unscrupulous supplier could insist on being listed at no cost to itself and then cream off all the customers because its cost base is lower and so are its prices. Spot the flaw in this model for 10 points. Meanwhile switching businesses are not allowed to provide advertising for energy companies (OFGEM prohibit this as well) so an advertising model doesn’t work and cannot pay for the site’s existence. The logical extension of this argument is that by pursuing this type of attack on the switching companies the media is running the very real risk that it will simply kill off comparison. A variation of this problem beset Phones4U and it is that exercise of power (telephony suppliers in that case) which killed the business and put thousands out of work. In what way does this advance the consumers cause?
By way of a quick commercial evaluation; switching sites typically earn up to £60 per dual fuel switch when switching online. Conversely in the bad old days of door knocking the bloke on the door would have earned £40; the marketing company he worked for would get paid £40 plus obviously there would be the other supplier costs of managing the channel and the acquisition. Now I am not advocating a return to door knocking; but I am pointing out that from an acquisition costs perspective online comparison can be very good value for money for suppliers so why wouldn’t they pursue this as a viable proposition?
Let us therefore turn to the collective switching model that has been held up as the “New” consumer champion model. I have no beef with the collective switching idea; in fact it has a valuable part to play in bringing about a behavioural change in the UK energy markets that should lead to a truly liberalised and fair market. It is not, however, some elixir of competitive life that will sweep all before it. A brief examination of the DECC report http://tinyurl.com/ooxuc9y into the benefits reaped by its £5 million sponsorship programme of collective switches in the UK makes for sober reading. Broadly, DECC paid out £2 in subsidy for every £1 saved by a collective switch participant. So the ROI would have been 100% better had they simply given 5 million households £1 each. So economically the model has some challenges but hopefully lessons were learned.
What has been manifestly true of all collective switches done to date is that almost none of them deliver the best deal in the market (and here I am caveating myself because the fact that I have never seen a black swan does not definitively prove that they do not exist!). Collective switches certainly don’t get full participation from the market and they definitely don’t show consumers all the options open to them. Were they to do so it is questionable as to whether they would have had much success actively selling their own collective switch solution if displayed right next to it were the other 13 deals in the market that were manifestly better than the “collectively negotiated” deal being hard sold by the collective switching business. This doesn’t mean collective switches are wrong or bad; as OFGEM have observed any model that can reduce apathy and get consumers switching to a better deal where otherwise they would have done nothing is to be applauded. Some consumers who would never switch on a comparison site have done so through collective switches and more power to their elbow I say.
However to claim that a process that shows only one solution or answer (the collective switch result) is somehow more transparent than online comparison sites; when the manager of the process knows it isn’t the cheapest solution in the market, is being disingenuous at best. The problem with only having one answer to a multifarious problem is that you interpret the facts to fit your answer. So if I can only get one supplier to give me a good price; and it is for a two year fixed deal; then I will become magically converted to extolling the virtues of a 2 year fixed price from that specific supplier waxing poetic about the certainty it gives in an uncertain world etc etc etc. In the world of excel this is called Goalseek – I know what my answer is; now give me the facts to support it! This is a dangerous road to travel. Fixed price energy deals are underpinned by a volatile energy market that moves down as well as up. Providing advisory services on fixed prices is not so very far removed from advising on and selling SWAPs – derivatives that earned themselves a very black name in recent times (because they were miss-sold not because they are bad in and of themselves). That is not to say that advice should not be provided; but I am willing to go out on a limb here and say that the companies running collective switches (or indeed price comparison sites in most cases) have almost no understanding of the markets that drive direction of prices let alone magnitude of movements and shouldn’t be allowed within typing distance of any communications purporting to provide any advice whatsoever to that effect.
I am as keen as anyone else in our market to ensure that consumers get a better and fairer deal; but picking a fight with other comparison sites and other companies trying to help consumers seems to me to be more about driving PR for my own model than any sense of justice I might feel on behalf of the consumer. Meanwhile, 6 big energy companies with 92% of the market are laughing into their caviar canapés as the comparison sites and other third parties, which are trying to give the smaller suppliers a fair hearing, tear each other down over the crumbs. Sad.