To answer that question, this week we’re taking a closer a look at what it takes to disrupt a market and how that might apply to the world of energy.
An obvious but fundamental question is what does it mean to disrupt a market? The Harvard Business Review put out a great article last year covering this topic, and their definition acts as a good place to start:
“Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.
Let’s break that down, and draw out the analogies with energy
“Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses.
This is clearly the stated aim of any new entrant, and when it comes to energy, the concept of incumbent businesses couldn’t be more pronounced – this means the big 6, which every new entrant will have in their sights.
[…] incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, […] exceed the needs of some segments and ignore the needs of others.
This is an interesting one, and is where the nuances of the energy market start to come through. When it comes to energy, a good chunk of profit is derived from a dormant customer base that’s stuck on a standard variable tariff. This goes counter to the idea that an incumbent businesses efforts are focussed on its most profitable customers, and is why the CMA has tried to introduce the contentious concept of data sharing with the competition. In doing so, the CMA is attempting to artificially create disruption in the market, but it’s clear from consumer and industry reaction that this does not tackle the underlying problem – lack of customer engagement.
Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price.
Again, another interesting divergence from the norm. It’s undoubtedly true that there’s a untapped segment of the market out there for new entrants to target, but it’s clear from the switching stats that no one has genuinely cracked this segment open yet. Switching is up, but it’s just as likely to be within the established players as it is a move away from them.
This is a strong indicator that a true disruptive innovator is yet to make their mark on the energy industry, and is where analogies with the definition of disruptor stop.
The HBR definition of a disruptive innovator highlights two foot-holds from which disruptors start their climb to the top
Low-end footholds – an opportunity for disruption that arises from the incumbents paying too much attention to their most profitable/demanding customers, and ignoring their less demanding ones
New-market footholds – this is where disruptors create a market where none existed previously. In other words, they turn nonconsumers into consumers.
Low-end footholds do exist in energy, and have been utilised this year and last by new entrants whilst prices sat at historic lows, but given the current volatility in wholesale prices it’s going to be difficult for new entrants to undercut incumbents, and more to the point the proactive price conscious consumer is in the minority.
In the context of energy, it’s new-market footholds that rings the most true. Nonconsumers here means those disengaged customers stuck on SVT’s, and so this is the space that new entrants need to target if they’re to truly disrupt the industry.
The financial sector has some great examples of disruptors taking advantage of new-market footholds to turn nonconsumers into consumers.
In the world of fintech (financial technology) companies are using modern tech to enable mobile transactions, peer-to-peer banking and lending, and even entirely digital banks. These concepts have won over millions of new consumers by tapping into a customer base that wasn’t being served by traditional banks.
Atom Bank is one such example – Atom Bank will be the UK’s first mobile-only bank that offers all its services through a smartphone app. The bank aims to allow consumers to personalise the entire customer experience, from customisable logos to face and voice recognition when logging in.
Put simply, the industry needs to tackle the issue of engagement and to disrupt the dormant sector of the market – those on SVT’s – with a new-market foothold that uses innovation to turn the dormant nonconsumers into active consumers.
So if you’ve got a disruptive innovation, get in touch with us today to see how we can help you enter the market and make a difference.