Introduction to Pricing Transparency

Lesson 2: Pricing transparency - What do you tell your customer when they ask how your price point is determined?
Lesson 2: Pricing transparency – What do you tell your customer when they ask how your price point is determined?

Why is that the price?”

 

Have you ever had to explain the reason for your prices to a customer? What would you say if they asked? As sales specialists, it might be hard to explain the price-point, as there is limited information available with little to no opportunity to learn more. Questions like this might seem unusual now, but the time is coming when this kind of question will be the norm.

We have all noticed - there have been huge changes in the energy market, and changing roles for stakeholders too. A totally new approach to the sales process is now demanded - one which provides a self-service consumer with easy energy market access by means of a valued consultant.

That’s you.

This new ‘active’ position of consumers in the energy market, means we need to offer a new kind of service, with expertise as a major component. To be a pricing expert, more knowledge about pricing is needed.

We’re going to delve into this issue, to uncover the basis for the price-point, find ways of explaining it to customers (in a way that makes sense to them), and explore the implications for all parties.

The value of expertise

More control is being placed on the consumer and this has tremendous implications for the role of the sales department who has the most contact with them. Among a number of components, the largest change is to the sales process and the approach in selling to customers.

The sales role is experiencing a shift away from a standardised structure of sales calls and visits, with everyday tasks creating pains for salespeople. There is a need for sales professionals to gain more knowledge about the market to accurately provide advice and become an expert to strengthen the relationship.

To become an expert, it is imperative to be aware of and learn about the factors affecting the buyer’s decision, i.e., the price-point. Customers take into consideration different pricing structures; this is facilitated by the upstream of technologies and resources easily accessible to make the comparison. Customers can compare based on market prices as well as by competitors. If you are able to properly explain to them the figure you have on offer, (specifically the difference between market price and yours), it will place you in a better position than your competition.

What determines the price point?
Components of a business energy bill:

These percentages showcase the breakdown of a ‘typical’ business energy bill, detailing the proportional contribution to cost per stakeholder. It will of course differ from country to country so it’s not an exact breakdown. Nevertheless, it helps to provide an explanation to your customers about the makeup of a price point, which will instill transparency.

What is a price point?

The price point is the value (price) on offer of the product at the time of purchase, which is determined by variable shifting demand in response to pricing and availability of alternatives.

It represents the best, most market-efficient price (within the constraints of the market) and includes a variety of costs and mark-ups.

The price is ultimately determined by the trading department who procures the energy commodity from the wholesale markets and generators at the procurement price and then adds on their mark-up percentage. This mark-up covers the risk of an imbalanced portfolio for the supplier.

The procurement price is determined by three factors:

  • Wholesale market prices: This is based on supply and demand structures and operates on the basic principle that price varies in line with supply and demand. The base price for wholesale energy is also dependent on when you buy it, for example by buying ahead. This could mean locking-in a lower price for the future consumption levels. Of course, this can however be affected by numerous conditions such as macro- as well as micro-environmental and geopolitical issues. These include changes in the weather/temperature and changes in energy sources such as the move to renewables. It will be the issue for the retail company to predict when the cheapest price will be and when best to offer it.
  • Micro-environment developments: As mentioned above, operating in such a volatile market means it's prone to unpredictability, with a handful of factors swaying the price-point. The effects of changes in oil, gas and coal prices all influence the market as well as the impact of renewable energy supplies. A significant amount of electricity, especially in the UK, is powered by gas therefore a shortage in gas will in turn significantly increase the electricity prices and thus wholesale market prices. Another major component will be the sustained move towards renewable energy sources. The increasing reliance on offshore wind and solar energy poses uncertainty, especially in regard to price as this source of energy is unpredictable. This then means prices will increase when renewable energy flow falls short. Lastly, the effect of carbon pricing structures which places a levy on carbon pollution aims to reduce carbon emission and drive investment in renewables. The EU Emissions Trading System (2003) places this cost of carbon on power generators, which then trickles down to businesses and homes with the cost continuously increasing year by year.
  • Product portfolio: The final factor determining price point is how well-balanced the retail company’s portfolio is. Suppliers with a larger portfolio (and hence more customers), can take advantage of the reduced risk associated with it. The bigger the portfolio, the less chance of an imbalanced portfolio. This means in turn; they can realise a reduced risk in their price-point markup which would allow them to drop their prices. By doing so, this will improve their competitive position in the market further enhancing their portfolio growth. This growth can be facilitated by the help of digitised services (such as Jules) which automate transactions to keep this risk at a minimum.
Why this is important: Implications for Sales
4 Key Questions for Energy Sales professionals to ponder:
  1. 1. Is the customers' energy profile benefiting the retail organisation's product profile balance, or is it doing the opposite?
  2. 2. What is the price point comparison for the customer? Are they comparing it to last year's price, a wholesale price found on the internet, or an actual price given by a competitor?
  3. 3. Is the customer actually comparing 'apples with apples'? Make sure the customer is comparing the same contract duration, same volumes, and service provision, instead of only comparing the commodity component.
  4. 4. Does your Sales Team want to pursue total and genuine transparency with the price components? This would include commodity price, balancing risk premium, financial health premium (non payment), etc.

Retail organisations rarely find this information accessible but understanding these factors might help you in making recommendations to your customers. This is especially important when winning new clients, and it will strengthen your company’s position in the long run.

Consultancy-model sales

Customers in today's market have easy access to tools and information for comparing offers between suppliers. For this reason it will make it harder to sell, but it also means sales organisations will need to break down barriers between themselves and their customers by becoming more transparent, and thereby gain their trust. By doing so, customers will become more confident in you and their buying decision.

This will also mean sales professionals must become the customer’s advisor; becoming their partner in the buying decision by offering up your knowledge and expertise to help them make the best decision. By gaining their trust this relationship will become so much easier and will ensure you cultivate a loyal customer base.

By shifting from a sales team that merely sells a commodity to a sales team that sells a service, you become a valuable consultancy. This customer-focused bespoke service will help you gain a competitive advantage and strengthen a position in the market  - all from tweaking your sales process and relying on your industry knowledge.