Freezing energy prices

Much to everyone’s amusement, after the gnashing of teeth and wailing of…mouths, I guess… following Killerband’s conference speech, people have been pointing out that energy suppliers allow you to freeze your prices yourself.

I think it’s important to have a laugh. And don’t we laugh here? But also to be po-faced and serious. So I thought I’d discuss this. So why are energy companies whining so much about Ed Miliband’s proposal when they offer something equivalent? Well, I’m glad you asked.

Companies can either lose customers, retain customers or acquire customers. Losing customers is usually bad, but not always. I’ve definitely dealt with customers who buy low margin products then eat up hours of my time. Fuck those guys. But generally speaking losing customers is a cost.

You might think that acquiring customers was awesome. But not necessarily. In a perfectly competitive market firms are pretty ambivalent about acquiring more customers or selling more. Their profits won’t change since, in a perfectly competitive market [1], it is all competed away.

However, the real world much more closely resembles one of monopolistic competition. There are limited firms, so they don’t compete as fiercely as we assume and products are not identical so people can’t switch firms so easily. In energy, effectively, the product is identical although the customer service might differ. However there aren’t many firms.

They want to win customers, but that means tempting someone away from another firm providing a near identical product. That’s expensive because you either have to offer something identical for less, or spend lots of money tricking people into switching supplier.

This is what makes keeping customers so awesome. You roughly know how much you can want to spend acquiring a customer and this gives you a ceiling for what you’ll spend to keep an existing customer (more or less).

This is where the price freezes come from. If E.ON [2] offer to freeze your prices for two years and you say yes, that’s great. Sure they might miss out on a couple hundred quid, but you’re theirs now. Trapped. Your loyalty is assured at a modest cost.

You can turn this to your advantage. Work out how much a firm spends to acquire a new customer and you’ve got your negotiating position. That’s why you can negotiate with telecoms operators or TV providers so easily. Their product is cheap to supply, but customers are expensive to acquire so they’re happy to negotiate. Worth bearing in mind when you’re next on hold.

This what makes David Cameron’s reaction to British Gas’s price increase so interesting. Nothing prevents you switching within the system, but there’s no leaving the energy grid (unless you’re Tom and Barbara). You can mitigate price increases, but these company’s are regulated utilities and that means their shareholders (your pension funds) need a return. If we all switched to cheaper tariffs prices would go up more. It’s a not-so-merry merry-go-round.

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[1] Which don’t exist, no, before anyone points it out.

[2] Other energy suppliers are available.

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