Powering an improved utility customer experience

To achieve this more effectively, utilities in developing countries should focus on the customer experience and invest in it across various stages of the customer journey. Such investments can help utilities reduce nonpayment, add and maintain customers in good standing, and educate new customers on their responsibilities to pay on time and maintain utility assets. Through these investments, utilities can strengthen their long-term revenue streams and reinvent themselves as customer-centric organizations.

This article presents a quantitative framework that electric utilities in developing countries can use to evaluate if and how to invest in customer experience initiatives. It does so by introducing developing country utility managers to a financial metric, comparing the customer lifetime value (LTV) and customer acquisition cost (CAC) when evaluating different types of CX investments. While this metric is commonly used across other industries and in developed markets,² in this article, we apply it to the utility context and analyze its implications for investment decisions. We also discuss a series of potential CX investments that utilities can make to recruit, educate, and retain residential and small commercial customers. We then apply the LTV/CAC framework to show how it can help quantify, evaluate, and prioritize these investments.

Equipping utility managers with a decision framework and tools to evaluate CX considerations can help them support their case in business decision-making across the organization. At a broader level, it can help utilities in developing countries evolve into more customer-centric organizations in a way that promotes financial solvency and foster happier, more satisfied customers on a stronger, more resilient grid.

Evaluating CX programs: Challenges and the need to shift to a customer-centric approach

The monopolistic adage “build it and they will come” is less applicable to utilities in developing countries with national service mandates, operational losses, and alternative power sources for customers, which have all reduced the reliability of long-term cashflows. Given this and other pressures on the balance sheets of these utilities, combined with the critical need for electrification in their service territories, the case for investing in the customer experience appears all the more compelling.

However, identifying and optimizing these investments is not easy as these utilities face many challenges. They typically struggle with high levels of aggregate technical and commercial (AT&C) losses stemming from electricity theft, nonpayment, fraud, and more. With high levels of AT&C losses, a portion of their customer base is consuming the utility’s product (electricity) but not generating any revenue. When utilities fail to generate enough revenue, they are unable to reinvest in infrastructure and systems, worsening the quality of power and their ability to serve customers, a potentially self-fulfilling downward spiral. Adding to this financial strain, many utilities also face pressure from the government and multilateral donors to connect large numbers of unelectrified households to the grid in both rural and urban geographies.

The organizational structure of these utilities often makes planning and undertaking CX investments more complicated. Utility companies both in the United States as well as in developing countries are typically organized by function and CX projects are typically implemented across business units. There is no naturally occurring unit to sponsor these projects, making the business case harder to justify across units and responsible cost centers difficult to identify. 

Utilities use a limited number of frameworks to quantitatively evaluate the financial benefits of CX investments— sometimes making it tough to justify and deploy such projects. In addition, while some utilities have dedicated account managers for large commercial and industrial clients, usually, there are no dedicated teams or protocols to manage CX initiatives for small commercial and residential customer classes. This can put an extra onus on utility managers trying to evaluate different types of investments in CX—also referred to as customer engagement projects or initiatives—to justify such costs to management.

At present, most developing country utilities use more traditional metrics—such as a discounted cash flow, capital asset pricing model, or a simple payback analysis—to evaluate investments.³ Our goal is to help shift their thinking from connecting and servicing customers as purely a “capital investment” (with smooth, stable long-run cashflows requiring little or no planned customer reinvestment) to better reflect the reality of an “electricity service” provided over an extended period.

As we demonstrate in this article, CX initiatives can be evaluated by applying a ratio of the lifetime value—all revenues and direct costs—to the cost of acquiring the customer (i.e., LTV/CAC). It is adapted from a common metric used in subscription-based business models⁴ (such as software as a service), where there is a similar business imperative to retain customers and have them utilize services over extended periods. Making an upfront investment to connect with customers may not be enough to retain them over the long term. Competition has made other options available to both residential and commercial customers in the form of distributed generation, a problematic trend for the traditional utility business. In some instances, a lack of continued investment may lead regularized customers to revert back to theft.

But here’s a caveat: We recognize that the LTV/CAC framework is a significant departure from traditional methods of utility investment evaluation and advise readers to apply the metric with the understanding that costs of capital and relative project risk are not immediately apparent in the framework.

How to choose CX programs

CX investments are investments in initiatives, processes, or programs that help shape customer behavior and improve the customer experience while driving an attractive return for utilities. There are many ways in which utility companies can shape CX projects—focusing on improving reliability, decentralizing customer operations, modernizing customer billing, and/or implementing energy-efficiency programs. CX programs can take the form of moving nonpaying consumers to paying customers (regularization) or as customer acquisition programs that develop mutually beneficial relationships starting at the time of connection. CX programs at utilities can be organized into one of the following categories:

Option 0: Infrastructure upgrades are physical upgrades to the distribution infrastructure that allow utility companies to deliver electricity more broadly, efficiently, reliably, and/or of a better quality to their customers. Infrastructure must be in place to deliver services and facilitate other CX investments—hence it is Option 0. This is the traditional approach most utilities take to improve the customer experience and represents the foundation CX programs can be built upon. Infrastructure upgrades include capital expenditure such as installation of line reinforcements, repairs to secondary and primary distribution lines, or subsidizing connection infrastructure (e.g., distribution poles, service line drops). These infrastructure upgrades, while being financially challenging, are usually mandated investments to provide electricity to ratepayers and are supported by policy, regulation, and utility cost recovery. Without infrastructure investments, utilities do not have a platform on which to innovate the customer experience.

Option 1: Social interventions are programs implemented by utilities for a specific set of customers to help improve their ability to pay or to elevate their financial and social standing. Such interventions might take the form of planned investments in communities of existing customers or in targeted, new customer segments as the utility connects new customers or tries to convince others to return to regularized service. Examples of social interventions include setting up a dental clinic and signing up new customers in the process or holding a fair with a government agency to help customers apply for official identification. Such projects are designed to help build trust and establish the utility as a partner in the community.

Option 2: Behavioral campaigns are initiatives that help assess CX needs and orient customer interface design (e.g., payment systems) to encourage or nudge customers to behave in a certain way. Examples of behavioral campaigns might include educating customers on electricity usage or setting desired behaviors as the default. They may include direct marketing campaigns that seek to appeal to customer reason and consciously shift behavior, for example, educating customers on ways to conserve energy. These efforts can manifest in marketing collateral, monthly bills, and other campaigns directed at target customer groups. They typically leverage information about the customer and the social context to tailor the utility’s services and messaging to customers.

Option 3: New technologies or software systems are information technology (IT) programs that allow utilities to better connect with customers’ needs and preferences and provide visibility into how and why these customers use electricity (e.g. smart customer interface software). These software applications augment aspects of customer acquisition and maintenance programs (i.e., signing up customers, billing, or locating assets and areas with high losses) and improve the utility’s insight into and ability to respond to customer needs.

Measuring costs and benefits of CX investments

Regardless of the level of innovation in any CX program utility managers want to implement, success can depend on whether it can be justified by sound financial calculus. Unfortunately, managers often struggle to explain to their leadership the reasons for upfront costs and ongoing expenditures in these programs.

All utilities have the tools to measure the costs, benefits, and appropriateness of investments in their capital infrastructure, technologies, and other business priorities. As mentioned earlier, this is typically done through a capital budgeting process or a simple payback analysis.

As the LTV/CAC framework and the following example illustrate, to enhance utility performance it is not only important to improve CX, but also to do it in a way that supports the drivers of the utility’s key financial metrics. This framework is not intended to supplant existing methods or internal processes, but rather translate the value of CX investments into the language of the utility's core business economics. This approach is intended to offer a new perspectiveusing a customer-focused financial metric to evaluate different types of CX investments for utility companies to consider.

The LTV/CAC framework

To apply this framework, we first define a streamlined set of inputs that can help quantify the different costs and benefits associated with CX initiatives. Using these inputs, utility managers can calculate a metric for evaluating the value of a CX investment. This metric is a ratio of the net lifetime value of customers retained (LTV) to the costs of acquiring those customers(CAC). Simply put, does the value of the customer over the life of their relationship with the utility justify the upfront cost of acquiring them?

The ratio includes straightforward inputs and can help managers estimate this metric for a targeted service area or customer segment. Figure 1 details each of these inputs and their role in shaping and influencing the LTV/CAC ratio. This metric allow for a standardized discussion within the utility and in developing countries at large, thus creating grounds for more nuanced conversations with international donors or other entities providing funding for utility companies.

Benefits and nuances of the LTV/CAC framework

One of the primary benefits of using the LTV/CAC framework to evaluate potential CX investments is that it can help utility teams think through the different components of a customer engagement program and identify which levers to focus on. This, of course, will generally depend on factors such as the goals of the investment, types of customers being targeted, financial health of the company, amount of capital available for the project, type of aid or assistance from international donors, and the political and/or cultural context. The idea, again, is not to supplant long-term financial planning models, but to add another metric to financially contextualize these projects from the customer perspective.

It is also important for the utility to define the specific customer type or segment before applying the framework. This is because different customers types—say, those who have never received electricity service vs. those who are illegally connected to the grid—will have different LTV/CAC input numbers. For instance, regularizing illegal users of electricity not only increases revenue but also reduces cost for a utility—a double impact on its bottom line that is not present during the acquisition of a new customer who has never used electricity service.

Utilities should also keep in mind that different types of CX investments can address the unique needs of different customer segments. While identifying programs, CX teams should consider these nuances to ensure that various customer types are identified, contextualized, and designed for in each project.

The LTV/CAC framework also offers CX teams a standard metric to compare the potential merit of different types of programs before taking them to international donors. Often, discussions with donors are based on a portfolio of project options. The CX team can use the LTV/CAC metric to evaluate the potential lifetime value of a project as well as the potential customer acquisition costs, thereby prioritizing and planning better for discussions with donors.

It’s worth noting again the omission of typical inputs used in utility investment decisions models—costs of capital, discount rates, risk premia—that are front and center in any discounted cash flow calculation. These traditional inputs are not to be found explicitly in the formula. The LTV/CAC ratio is not designed to generate a specific project value, but rather offers a relative decision metric between a set of comparable project options. Under this framework, future cashflows can act as relative proxies among investments, with similar timelines allowing for comparability among project options.

LTV/CAC framework in action: An illustrative approach

To illustrate how the LTV/CAC metric can be used to evaluate potential CX investments, consider a hypothetical utility, Electric Co., which is the sole provider of electricity to residential and commercial customers in a developing country. Its service territory, the hypothetical Circuit County, has a population of approximately 100,000 potential customers, 50% of whom are formally connected through a prior extension of the grid.

Unfortunately, funds for connecting the remaining customers ran out as government mandates require only a 50% connection rate along with reasonable proximity of the lines to the remaining population. As a result, many people have remained unconnected, burning local biofuels for cooking and, at times, connecting illegally to weak points in the utility’s network. The legal customers hold resentment for the illegal ones and are frustrated as they’re paying their fair share, but the latter receive free power and degrade the power quality. Also, the legal customers, who are new to grid-connected electrical service, are trying to understand how to maximize service quality and minimize their cost.

After hearing the legal customers’ stories at a local meeting, a county manager of Electric Co. is evaluating the costs and benefits of different types of investments for both connecting new customers and formalizing those who are illegally connected to the grid. Electric Co. is considering investments in each of these categories: a direct social intervention with both unconnected and connected households; a behavioral design and marketing campaign initiative; and procurement of a new customer interface software technology. In evaluating these options, the company also must keep in mind its mandate from the government to add 10,000 new connections by the end of the year.

Electric Co. decides to compare the LTV/CAC metric for each of the above-mentioned CX investments. The inputs for the LTC/CAC metric, as detailed earlier (figure 1), include revenue and costs per customer, retention rate, total number of customers added as a result of the initiative, and cost of the initiative. The nature of the investments (capital expenditure vs. marketing) will drive different types of costs, so those have been delineated as well.

Figure 2 outlines the estimated impact of each input in relation to the others as well as the impact on the numerator versus the denominator of the LTV/CAC ratio. The intent of this figure is to illustrate how the different components of the LTV/CAC ratio can be measured—positively and negatively—for different types of CX investments, and how those inputs work together to produce an overall ratio.

As discussed earlier, an infrastructure investment is Option 0 as such an investment must already be in place to leverage other CX investments. So, we have excluded the option from the LTV/CAC matrix above. As we see in the Electric Co. example, CX investments can quickly deteriorate if the actual customer experience is not managed. Expansion of the distribution network comes at a high direct cost in the form of capital expenditure and typically doesn’t include marketing costs. Despite this high investment cost, a comparable increase in revenue is not a guaranteed result.

Customers need to understand the terms of service first and be able to pair that understanding with an ability to pay for the upfront connection, electricity service, and fees. Where customers can pay for connections and service, infrastructure upgrades have the potential to add a significant number of new connections (and corresponding revenue) but are less likely to help regularize illegal customers. Electric Co. faces a mandate to not only connect a certain number of customers by end of the year, but also needs to realize a return on capital deployed. According to the LTV/CAC framework, Electric Co. should now focus on serving the customer and providing a competitive electricity service.

Social interventions (Option 1) are popular solutions deployed in many developing markets. A social intervention aims to drive higher revenue and gain new customers by providing a better ecosystem of social services paired with electricity service. For this CX intervention, Electric Co. is considering partnering with a nonprofit organization to provide health care services to customers of good standing. This intervention will bring some direct costs in the form of health care support to Circuit County citizens and marketing costs associated with educating potential and existing customers on the program and how to use it. The intervention will return value to the utility in the form of increased customer retention, resulting from the improved relationship between the customer and the utility as well as an increase in the ability for a customer to pay for service (e.g. healthy customers miss fewer days of work, are more likely to stay employed, and have more income to pay their utility bills).

Behavioral campaigns (Option 2) are similar to social interventions in that they usually don’t require significant capital expenditure but differ in their target audience. Generally, behavioral campaigns are geared more toward existing customers in the hope of nudging them toward preferred behaviors. Electric Co. is considering an energy-efficiency education campaign paired with an electricity bill management education session based on residential customer usage patterns in Circuit County. This behavioral campaign is expected to drive a modest increase in revenue (since customers will be better able to manage their monthly bill and, therefore, pay it more regularly) and generate moderate retention among existing customers. This initiative has little or no focus on connecting new customers. Costs associated with this intervention will largely be marketing related and directed at existing customers.

New technology systems (Option 3) come at a more modest cost as compared to a large infrastructure investment but have the potential to generate significant revenue and increased retention among existing customers. New software is one of the more appealing investments for Electric Co. as it may also require a certain level of investment in infrastructure upgrades to the grid, which Electric Co. is mandated to make in its service area in any case. This is because a user-friendly prepayment software can’t function without a significant grid extension.

It’s important to note here again that customer segmentation has a significant impact on these results. Defining the target customer type should be the first step to using the LTC/CAC framework. For our analysis, we have limited the segmentation to new and illegal customers, but a utility’s customers could include a mix of new customers, previously illegally connected customers, customers segments with highly fragmented income distributions, or divergent consumption profiles, to name a few. A careful customer segment analysis can help tailor CX initiatives for different communities and optimize capital deployment.

With a view to exploring different CX investments and their relationships with one another, we used the LTV/CAC metric to understand and compare the basic inputs and expected outputs for Electric Co. (figure 3). For the illustrative example, we used approximate estimations based on Deloitte’s experience working with developing countries and industry standards for a developing country utility, with Electric Co.’s profile. Based on these estimations, we arrived at metrics of roughly two to one for each social and behavioral interventions and three to one for technology solution investments.

Finally—especially in the case of capital investments—CX programs can help create a more reliable, long-term stream of cashflows from net new and newly regularized customers. As evident from our analysis, some CX program investments have higher costs or are more resource intensive to implement. But others, such as creating operational processes to better understand different customer types and address their concerns, require less capital upfront, yet can result in tangible long-term revenue gains.

Powering the customer experience

Utility companies in developing countries are facing new pressures, growing competition, and continued challenges related to an eroding customer base. There is a pressing need to justify to international donors and governments large-scale investments in increasing connections, and to regularize illegal customers to establish long-term revenue streams.

Utilities can do this by reimagining the customer experience and investing in its various aspects. While deciding on and prioritizing different areas of investment—from infrastructure and social interventions to behavioral campaigns and new technologies—they should keep an eye on the target customer type and segment.

The LTV/CAC framework can help them parse this space systematically and consistently. It can help utility managers compare the potential value of CX investments across customer types so they can take informed discussions along with the buy-in of their leadership. It can also help companies to create lifetime customers who are dedicated to the utility in the same way the utility is dedicated to them. This approach can help utilities in developing countries become more financially sustainable, customer-centric organizations with an increasing base of satisfied customers on the grid.