Consumer market survey of last-mile communication services using PLC Monika Olsson 1, René Kamphuis Sydkraft Bredband, Tycho Brache Vej, AB 205 09 Malmö Monika.Olsson@fek.lu.se, URL:http://www.sydkraftbredband.com Energy research Centre of the Netherlands ECN, Business Unit Solar Energy, Renewable Energy in the Built Environment, P.O Box 1, NL-1755 ZG Petten, The Netherlands, Email: kamphuis@ecn.nl, URL: http://www.ecn.nl/ SUMMARY: This paper describes, in short, the results from a market survey performed during spring 2001 in the Netherlands A much more extensive analysis has been given in [1] The survey had a large response rate, which enabled us to make statistically valid conclusions for the whole Dutch market The aim was to: Investigate household member's interest and attitudes concerning services distributed by last-mile access techniques like PLC Explore the strategies for service offerings with a focus on distributed services, based on PLC only, or in combination with other access techniques as well as an exploration of capacity demands Draw conclusions what type of segmentation model is useful to analyze the market for communication service offerings Present an overall strategy advice based on the market survey and on the strategy models discussed in this report, as well as other market oriented deliverables The questionnaire, containing 30 questions, focussed on customer loyalty in a liberalised market, new possible services to be added by utility companies and the customer's assessment of energy issues, especially with regard to renewables The data are analysed using three different segmentation schemes A demographic, customer loyalty and decision style segmentation of the results is presented I Aim and focus The purpose of the residential customer survey was to find out the customer market expectations and attitudes on both existing and new services based on last-mile access using PLC communication that can be offered by an energy supplier in the future This helps in identifying new strategies for utilities to enter the PLC market as well as adding more value to their existing products and services PLC is a possible narrow band and broadband technique The capacity and transportation characteristics influence on which level service offerings can be made A classification of typical applications in this respect has been made in [2] Some energy companies want to offer any services - everything from energy related communication services to entertainment like games and film Others may see limitations to this and focus on only PLC as distribution technique for energy related communication services PLC is a fast growing technique and only a few years ago the broadband capacity was thought not to be competitive with other fast speed techniques Today, the development has made a significant step forward, although there are no guaranties that it is a successful technique for fast communication In current application trials, broadband transmission speeds in the Mb/s range are achieved Generally, capacity and high quality in the distribution of services are regarded to be vital issues for survival and expansion on the market when offering services II Energy companies in the communication service market Energy companies, when expanding their business to offering communication services start to compete with existing telecom and cable operators There are several strengths that the energy supplier can lean on when entering this communication market There are some weaknesses however, that can easily become limitations when taking the step into a market with other functions than the primary energy business The energy business has a solid financial background that makes them tolerant and stable as a new player in the communication market This is needed since the expansion is connected with major investments with long pay-off times Apart from future fiber to the home (FTTH) solutions, no dedicated infrastructure is present for bi-directional high-speed last-mile datacommunication accessing homes The existing electricity infrastructure is regarded to be a foundation to keep down the investment cost for building a PLC-based communication infrastructure Telecom operators have the same fortunate situation with a copper line to almost every household but no in-house network Cable companies in some countries with a high penetration of the cable TV network have a similar position Current ICT technology developments lead to standardization in a large number of application fields (telephony (VoIP), embedded control, gateways etc.) to the IPprotocol (Internet) Furthermore, Internet application functionality possibilities are increasing From a distributed file system, Internet is gradually evolving to a distributed computing platform This will lead to a radically different Telecommunication landscape in the coming years Having an always-on, secure broadband IP-connection infrastructure will give a large competitive advantage Large customer databases are a critical factor It is generally agreed that it takes five times more money to get a new customer than to keep existing customers satisfied and expand the service offerings to them The weakness with customer databases is, that these are simple databases with limited information about the customer In many cases there are only names, addresses, energy consumption and the spending data No other behavioral or satisfaction level is registered In a fast moving communicative world, knowing the customer behavior is important to be able to continuously develop market offerings in synergy with the market needs Energy companies already have existing resources within the organization like customer support that can handle a larger amount of customers, a sales organization, provisions for billing and to some extent marketing functions Energy companies have a good potential for building concepts together with other companies in strategic alliances They are attractive as partner for different actors in the communication and service industry since they are stable, often with good reputation and financial strength On the other hand, what can be seen as weaknesses are primarily the low experience in the ICT business and second their monopolistic background The deregulation process is transforming, step by step, the whole EU into a liberalized market Some countries like Sweden have already adapted fully to the free market mechanisms since 1999 The Netherlands is increasing the scope of the deregulated energy market segments in a stepwise fashion with residential users having a free utility choice in 2004 In this respect, they lag behind the telecommunication industry, which has moved earlier to a deregulated market and fierce competition Traditionally, there generally is a long decision process within the energy companies that hinders fast actions in the market As a last weakness, the low knowledge of working with new business models can be mentioned as a barrier for market introduction III Service characteristics All communication services have their special technical and functional characteristics, which make them complex to bundle if several are offered Some require higher delivery speed, others high security and some require thorough logging of consumption patterns One thing they all have in common are that they, in general, have the possibility to be provided with higher value within a controlled, secure narrow- or broadband network instead of reaching them from the open Internet The speed and response time on the Internet is not predictable, security is lower, unexpected bottlenecks in data transmission may occur A controlled, dedicated network can offer better capacity stability, quality and data storage and security than the open Internet When looking at the demand for bandwidth, the coming services are expected to demand increasing bandwidth over time; the more consuming the more bandwidth demand is Though, there is an open window between the higher bandwidth demand and the general Internet speed Energy companies can try to focus on services that are in between the highest capacity demand and still provide an extra value that Internet accessed services can not offer The aim does not have to be video-on-demand in the first market introduction The idea is to find services that can provide higher value than ordinary Internet right from the start One example would be a secure e-payment function of services provided by different service providers The quality and secure feeling would be experienced by the fact that the service providers co-operate together with the trustworthy energy supplier Even if the energy companies in general are known for their slow market movements, they are most regarded as a safe and trustworthy company from the customer perspective Among the services mentioned in [3,4] possible examples are IP-telephony, fast Internet access, distance working, interactive distance education, virtual reality games, program-forhire, e-commerce platforms, remote control of home facilities, streaming services, video conferences, public service, local information, 3D animations, video- and voicemail, music and other entertainment There are five main market issues: • • • • • Demand for services that already exist in the market but can be distributed via PLC or by other means One example would be music The only difference is how it is stored and how it is consumed Demand for new services – these services are difficult to market since no one has any experience with them until a critical mass of customer has started to use them The existence of infrastructure to the households – the household penetration can vary and the technical limitations then can limit some service offerings, depending on how they are distributed For example, if the services need intermediate storage it may not be economically feasible to offer them to all customers if they are in areas with lower penetration rates Existing knowledge within the Energy Company – expanding knowledge about communication services or working in alliances together with partners while focus is on the distribution This is an main strategic issue to decide before making marketing offerings Technique availability – what does the current technique provide and are there any coming upgrades that change the spectrum for service offerings The service types are not only connected to a given capacity minimum, they also require different payment methods Of course, all services can be offered in a package with one total fee, but this is not what the customers expect when they want to buy They prefer the possibility to choose and to use the services only when needed This puts pressure on the Energy Company to log the consumption by different parameters When working with service development or bundling it is vital to know what the company can invest and handle when forming a service strategy In [4] a discussion of how to approach such a mix is given IV Customer segmentation in an interactive age In the age of increasing usage of information technology and interactive functions, the tracking of customer behavior becomes easier as well as more important The traditional mass marketing concept is applied to reach a larger audience in mass media The sales performance can be seen as a function of both the number of exposures and the precision of which of these exposures result in actual sales If the amount of exposures is 10000 with a 2% precision/hit rate the result is 200 sales The residual 9800 exposures not result in any actual sales Some percentage could at least remember the ad This is a typical example of a mass marketing method where the precision is quite low Information technology has the potential to address individual consumer patterns and interests through the usage of electronic media Directly targeted offers can be sent to those consumers who really have the interest and the offer is reached with a much higher potential hit rate Today there are many buzzwords for the high precision marketing mechanisms, like oneto-one marketing, database marketing, interactive marketing and even more They all express the same idea viz to reach the consumer with a higher precision Segmentation variables are mainly grouped into four larger categories ([5]) geographic (region, city, climate, season and more), • demographic (age, gender, income, family, profession and so on), • behavior (buying pattern, type of satisfaction, usage frequency, brand loyalty and more) and • psychographic (lifestyles, social circumstances, personality and more) Demographic variables are most commonly used (Danaher & Rust 1992), but they not give information about the individual behavior and personalities within the group Behavioral variables are most important, since they provide knowledge about the customers’ actual buying patterns[6] This is not enough however Behavioral variables give information of what the previous behavior was, but not the what the coming behavior will be The next step is trying to understand the motives behind the actual buying action, which can help to predict a future buying pattern Also, the psychographic variables give additional information about the personality differences among customer groups In this survey, three of the four main types of segmentation variables were used First the traditional and common demographic segmentation is done As a second base, we use the behavioral segmentation process with loyalty and satisfaction parameters Last, we explore a powerful and promising new segmentation based on a theory of the way me make decisions in our every day life both privately and in working life The decision style base belongs to the psychographic variables category and mainly reflects different personalities in different situations V Market survey in the Netherlands The market survey was carried out in the Netherlands, because the power distribution network has the topology to introduce PLC The number of connected households to a transformer station is in the order of few hundreds The distributed connectivity is via underground connections with outage rates resembling those of telephony Furthermore, Dutch utility companies are known to be innovative in developing new services and market niches Competing infrastructures are ubiquitous in the Netherlands in the form of cable and POTS networks The usage of the Internet and the prospected increase therein is large All these factors make the survey also representative for future developments in the European situation V.1 Survey method and representativity The survey was prepared with one pilot test to make sure that the respondents understood the questionnaire In the pilot test it was also assured, that the questionnaire gives answers to fulfil the purpose of the market study Finally, it provided a test for validation of the style segmentation analysis tool V Demographic segmentation The survey was done in the Netherlands among people drawn from a database with addresses in the Netherlands A mail survey was conducted with 10 000 questionnaires sent out to the Dutch household market Persons registered as the main inhabitant were addressed There was a 15,81% response rate A total of 67,5% of the response group has access to Internet either only from home, at work/school or both at home and work/school The age group of 30-39 has highest access rate, 70,9 %, to the Internet from the home Of all persons within the groups from 20-59 years, more than 60% have Internet access at home The Internet penetration is quite high in the Dutch market and triggers the usage of new narrow-band and broadband based services However, the market is still expecting everything on the Internet to be free It takes time to change this attitude and it also pushes the demand for good, usable services that work better than existing substitutes distributed by other media If video-on-demand is supposed to be competing with existing VHS/DVD movies, the service must beat the perceived value of the existing media The quality may not be lower, the price has to be compatible, the convenience of only downloading and not go to the movie store must give this additional value V Loyalty segmentation Four major loyalty behavior groups were found: • Satisfied Loyal: They are highly satisfied and have a low intention to change energy supplier The most loyal customers • Satisfied Potential Mover: Satisfied, but has an interest to change supplier, even if they are highly satisfied • Unsatisfied Low Involvement/Captured: they are not satisfied but though has low intention to move A false loyalty pattern occurs • Unsatisfied Mover: are both unsatisfied and have a high intention to change supplier This group show the weakest loyalty, if any, and contains the most movable customers The loyalty segmentation showed how to prioritize loyal or non-loyal groups Working with loyalty management systems keeps the company updated with the information of how loyal each customer is V Decision style segmentation Decision style segmentation [5,6] was found to be a very useful segmentation tool for understanding the behavioral pattern behind the attitudinal answers Decision styles also showed clearer differences in attitude and answering patterns where demographic results failed to provide significant differences among groups The results show clearly showed a difference between the operating style and role style VI Some conclusions We were able to draw major conclusions from the market survey and put them in a summary of advice for energy companies when bundling and offering PLC distributed services An important implication is that the customer does not care what access technique there is behind the services that are offered! The main thing is that the distribution of the services is functioning Then, the focus is on what value the different services offered are worth to each customer Not only the household itself, but also the individual consumer The primary reason to leave the current energy supplier is the high level of the energy prices Low customer service is the second reason and too little information given is the third ranked reason to change supplier Ondemand and other possible communication services were among the lowest ranked ones Basic services like energy and telephone are most wanted Always online Internet was highly ranked as well The lower ranked services had one thing in common and that is that they are not widely used in the household market of today Customer's habits and needs are not developed yet and this means a market push is needed as mobile telephony had years ago People have simply no experience with more sophisticated multimedia based services and their substitutes are available through other media like TV, CD’s, videos, DVD's to a suitable market price Even if the correlation results were not of very high significance, a price sensitivity pattern was found between green energy prices and telephone/Internet prices The higher price one is willing to pay for the telephone rates, the higher is the probability that the customer is willing to pay 5-10% higher, green, energy prices A similar pattern exists for Internet rates as well as for telephone rates The higher price one is willing to pay for the Internet access, the higher is the probability that the customer is willing to pay even 15-20% higher energy prices If the intention is to offer telephony or Internet with a higher market price than average, the advice is to find customer groups where the price sensitivity for green energy is low These customers have a high probability to belong to the Satisfied Loyal group in our decision style segementation, which also shows, in general, a lower price sensitivity PLC was least known of the mentioned access techniques This is vital when introducing the technique in the market The advantages PLC has above other techniques are important to use in marketing efforts to enlarge the market knowledge of the technique VII Critical factors for success of services offered Energy companies have, seen from a customer perspective, some important strengths when taking the step into the information technology and communication business Knowledge about them triggers the possibility to develop them into value creators: • • Energy companies are often regarded as trustworthy companies with financial strengths, which is a strength compared to many dotcom companies that now suffer from a low level of trust due to many bankruptcies Integrity and security of personal information is weighed high generally in the market Many customers are afraid of giving away their personal data to an unknown company The Energy Company can work with its strengths as a stabile, trustworthy company and, by adding an information/integrity policy to the customer, they probably can strengthen loyalty of several movable customers However a thorough understanding of the differences between households as well as understanding differences of the individual behavior is crucial Energy companies may not have the marketing function, skills and organization required in the existing organization The market is far from mature The slow changing of consumer behavior on the market (resistance of adapting new techniques and price levels) will demand tolerant market players References [1] Olson, M and R Kamphuis Market survey of last-mile communication services using PLC PALAS IST-1999-11379 ECN-C-01-092 ECN, Petten 2001 [2] Kamphuis, R and C.J Warmer Deliverable D6 Software architecture requirements for Powerline Communication as a Last Mile Local Access (Final Version 1.0, september 2000) PALAS IST-1999-11379 Available as ECNreport ECN-C-01-006 [3] Ottosson, H., H Akkermans, J Dickinson, D Hines, S Host, R Kamphuis, G Lindell, P Nicholson, P Sweet and C Warmer, Deliverable D5: State of the art and initial analysis of PLC-services PALAS IST-199911379 Version 2.0, June 2000 Available as ECN-report ECN-C-00-092 [4] Sweet, P., H Akkermans, M Olsson Deliverable D7: PLC Service Business Model Development and Market Survey Instrument PALAS IST-1999-11379 Final Version, 29 December 2000 Available as ECN-C-01-037 [5] Peter J.P & Olson J.C (1996), Consumer Behavior and Marketing Strategy, Irwin Report from Schablondelegationen (18-062000), Svenska Kraftnät, www.svk.se [6] Larsson R., Schönknecht J., Sweet P., & Driver M., (1999), The Customer Side of Energy Saving Activities: Exploring Attitudes and Interest on The Karlshamn’s Energy Market In Ottosson H., & Akkermans H (Eds.), The KEES Project, Energy Efficiency in Deregulated Market Malmö, Sweden, EnerSearch AB