Utility Reduces Churn and Boosts Profits

BCG worked with a major European utility to design a strategy that would reduce customer attrition in the face of intensifying competition.

A leading European utility, one with several million residential customers, faced a challenge common to many established players across the utility arena: stem the tide of rising customer defections amid growing competition. Upstart competitors were attempting to woo the utility’s residential customers with very aggressive discounted pricing and other incentives. The utility was concerned about both the potential loss of revenue and, critically, the possible impact on the company’s ability to maintain profitable growth.

To effectively address the problem, BCG believed the utility needed to do two things. First, it had to better understand at what points in the customer life cycle it was most vulnerable to customer attrition, and what the triggers for those losses were. Second, the utility needed to design a comprehensive set of measures that would maximize its chances of retaining customers at each point.

Personalized Measured to Prevent Churn

Working together, BCG and the utility developed a thorough understanding of what the churn-triggering events were along the customer life cycle for the utility’s different customer segments. Critically, we also developed an advanced knowledge of what the utility’s options were at each point and which actions stood to have the greatest impact on customer retention, as well as the company’s bottom line. We developed this knowledge and these actions through rapid iterations and prototyping; measures were designed, tested, and adjusted as necessary in compressed cycles.

The measures were highly personalized. For a customer who was identified as likely to defect due to a relocation, for example, the utility could offer to transfer the customer’s existing contract and allow him or her to keep all bonus entitlements. For customers identified as highly price-sensitive and thus high-churn candidates, the utility could combine scheduled price increases with special offers and take particular care in how price increases were communicated. For customers identified as high-churn risks following receipt of a higher-than-average bill or a request for an additional payment, the utility could offer to provide more accurate installment payment to avoid such instances in the future and/or communicate proactively with such clients and offer them financial incentives in exchange for contract extensions.

BCG established an internal organization that was focused on implementation and creating and running a project management office; designing and launching pilot projects to confirm the measures’ targeted impact; continuously reevaluating and refining measures; and optimizing churn-prediction models.

The impact of implementation on the company’s business and financial performance was ultimately significant. Customer churn was expected to be reduced by 15% to 20% once implementation was fully completed, customer retention costs fell to approximately 30% below customer acquisition costs, and two-year net margin NPV per retained customer increased to 20% above the NPV of a newly acquired customer. And the utility had a viable means of better defending its customer base against attackers and ensuring profitable growth going forward.

Power and Utilities