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.