There has been a lot of debate recently about collective buying and collective switching. What are they? How can they work? Can they save customers money?
With household budgets under increasing pressure, it’s right that Government, consumer groups, customers and energy companies look for new ways to keep energy costs under control.
Collective buying may, in the long-run, prove to be one such way. But, collective buying and collective switching are not one and the same thing, and there is a lot to consider before everyone can be confident either is a real solution.
The recent reverse auction by Which? – its ‘Big Switch’ – was an interesting first experiment in collective switching. Its aim was to secure a better gas and electricity deal for thousands of energy consumers using the combined leverage of around 150,000 customers who gave Which? their current tariff information. It produced a lot of food for thought around some key questions:
Can collective switching offer a new way to engage customers?
In my view, the reverse auction has not been a huge success.
Although nearly 300,000 registered their interest in taking part in the ‘Big Switch’, only 37,000 customers have started to switch supplier – which is disappointing when you consider that around 100,000 people switch energy supplier in Britain every week.
And, those making the switch as part of the ‘Big Switch’ are averaging savings that could have been achieved using an existing comparison switching site, such as uswitch.com or energyhelpline.com.
It also remains to be seen how many of the 37,000 are switching for the first time, and engaged as a result of this new way to buy, or whether mainly existing, regular ‘switchers’ took part. Around 90% of customers who initially registered did so via the internet, suggesting that the ‘Big Switch’ may have failed to attract customers who have limited (or no) online access, may be socially excluded, may have not switched before – and, therefore, may be most in need of a cheaper tariff.
Can collective switching be fair for all customers if collectives secure rates not on offer to other energy customers?
Not all customers will want to, or be able to, buy energy as part of a collective, as the deals secured by groups won’t necessarily suit all individuals for reasons of price, flexibility or additional energy efficiency support. In the Which? reverse auction, the winning bidder (Co-operative Energy) initially offered a cheaper deal to participants in the ‘Big Switch’ than those available to its existing customers and other potential new customers. Is it fair that individuals who feel they can’t take part in a group purchase are excluded from lower rates?
Can collective switching cut energy costs?
Buying agents, such as Which?, will, understandably, seek to recover the costs of the process – or even make a profit – from collective switching. For example, Which? could well have earned fees from its ‘Big Switch’ of around £1.5 million. Collective buying mechanisms could, if not designed well, create complex processes that are expensive for both buying agents and suppliers – ultimately leading to an increase in costs that would be borne by other customers not involved in collective switching.
Can collective switching deliver the best deal for customers?
The ‘Big Switch’ has shown it can certainly get customers a good rate, and around 37,000 have indeed made savings, but is that all customers are looking for? Global energy prices are expected to go up over time, and the cost of transporting energy and meeting the Government’s carbon reduction commitments are also increasing. The solution is for customers to use less of this increasingly valuable commodity, which is why companies like British Gas are offering customers many forms of energy efficiency advice, free home insulation and online energy efficiency toolkits. We believe strongly that energy efficiency support is a key element of what an energy supplier offers, and that customers should take this into account when choosing their supplier.
We also believe that customer service is very important to customers who demand – rightly – that energy suppliers becoming increasingly simple to deal with, offer fair treatment and are transparent in their actions and standards. There are a number of important customer satisfaction surveys – including Which?’s own customer service survey – that set out the differences in standards of customer service between energy suppliers. (It’s worth noting that two of the suppliers that won ‘Big Switch’ customers who couldn’t sign up to the Co-operative Energy tariff, First Utility and EdF, were ranked towards the bottom of the most recent Which? survey, coming 11th and 13th respectively out of 14 energy companies.)
We believe that customer service standards should be something customers can use to inform their decision when choosing a supplier. But, in the case of the ‘Big Switch’, neither energy efficiency nor customer service standards played a role in the auction, which was based solely on price.
What next for collective buying?
There are a number of technical and design issues that need to be addressed before the best buying mechanisms can be identified, ironing out the issues of not only regional cost differences, but also the differing needs and wants of customers who continue to want choices – for example: between fixed and variable tariffs; between pay types; and between online and traditional accounts.
The Which? ‘Big Switch’ was an interesting test of how collective switching might work in the energy market. We will continue to work with Government and consumer groups to explore the best ways in which collective buying might be used by customers – particularly community groups and those representing the most vulnerable sections of society – to achieve real, long-term benefits.
At British Gas, we wholly support the principle of innovation in the energy market and the ways in which customers buy energy. We want to continue the constructive debate about collective buying with all interested parties to find buying models that serve consumers’ best, long-term interests and not just those that provide a ‘quick fix’ for small numbers of customers.