January 2020
56% (nearly 10 million households) of ‘Big Six’ energy customers are on default, Standard Variable Tariffs (SVT’s).
Over 5 million of these households have been on SVT’s for 3 years or more, with over a third (34%) having never switched at all.
Why have so many consumersneverswitched energy supplier and why are so many unwilling, or unable to do so?
1/ The ‘Unwilling' – As above, this segment pays the highest price for their energy and would like to pay less, however they encounter real, or perceived barriers which prevent them from doing so. Whether they have no internet, or phone access, do not have a bank account, are vulnerable, lack the necessary skills (including language skills), knowledge and awareness, or are physically limited through meter and tariff types (Economy 10, 12, 14 etc), many feel there is insufficient support for them to engage with the energy market
The differential between the average price of SVTs for the 'big six' suppliers and the cheapest tariff in November 2019 increased to £304.
2/ The ‘Unable’ – As above, this segment pays the highest price for their energy and would like to pay less, however they encounter real, or perceived barriers which prevent them from doing so. Whether they have no internet, or phone access, do not have a bank account, are vulnerable, lack the necessary skills (including language skills), knowledge and awareness, or are physically limited through meter and tariff types (Economy 10, 12, 14 etc). Many huseholds argue there is insufficient support for them to engage with the energy market and therefore feel excluded.
3/ The ‘Never’ switched – Are also paying the highest prices for their energy. Ofgem indicate that over a third of UK households (34%) have never switched energy supplier. In addition to the conditions outlined above levels of trust in energy suppliers, price comparison websites (PCW’s) and third party intermediaries (TPI’s) is likely to be low further contributing to a feeling of isolation and inertia. For too many households and communities the ‘social norm’ is not to switch energy supplier.
Do you remember when you first became aware you were able to switch your energy supplier? Or when you became aware others were doing it?
The role of price comparison websites
For those that are able to access them 'price comparison websites' (PCW’s) provide a tool to facilitate energy switching, but how well do they really work?
PCW’s and energy switching markets are driven by consumer activity. Successful switches generate sales which in turn provides a revenue for PCW’s and third party intermediaries (TPI’s). PCW’s and TPI’s invest into marketing in order to draw consumers to their services, however in the majority of cases is the consumer who first decides to seek out a service.
It is estimated that nearly 1 in 5 households (19%) switched energy supplier in 2019. Whilst this is expected to be the highest recorded annual result (full figures to year end are expected in March) it is clear that the market widely fails to engage the majority of customers. As commercial, for profit organisations, little investment is made in identifying and servicing excluded and vulnerable groups.
As standard variable tariffs are the highest cost and therefore most profitable tariff type for energy suppliers there is little, or no incentive for energy suppliers to offer additional support to consumers to change either. Legislation does dictates that energy suppliers display tariff information on a customer’s bill indicating if there is an alternative tariff available that is cheaper than the customers current rate. However, this is clearly ineffective , easily overlooked and rarely acted upon (based on the consistently high number of consumers which remain on default variable tariffs).
There are a range of reasons why consumers disengage from the energy market, and why they feel unable to switch.
Over the coming weeks I intend to explore a range of these barriers and seek solutions to them. In the following section I want to consider some of the limitations of PCW’s and how it may be possible to address them. Whilst there are many external factors prevent consumers from reaching PCW’s some of the shortcomings and barriers are actually by-products of the requirements laid out by the regulator Ofgem, such as how energy tariff information is displayed, and the focus on savings, or ‘rewards’ rather than framing choices around losses and the price of inaction.
Two areas I would like to highlight in this article are 1/ Loss aversion and, 2/ Analysis paralysis.
1/ Loss Aversion and reframing.
In cognitive psychology and decision theory, loss aversion refers to people's tendency to prefer avoiding losses to acquiring equivalent gains.
Lack of knowledge, awareness, and understanding around energy and its pricing create an environment of fear and anxiety for many. The rewards associated with choosing a new tariff and supplier are deemed insignificant in comparison to the perceived risks and perceived potential losses of making a poor choice.
In reality actual losses really come through inaction, however this is not obvious in the way that the majority of comparison services are structured.
The value we attributed to perceived losses have been shown to be disproportionally higher than the value associated with comparable rewards and thus structuring price comparison results to focus on savings, rather than losses actually discourages action.
PCW’s encourage almost no consideration of the real cost of a customer’s current tariff and instead draw attention to possible savings. This is an abstract concept and does little to encourage a timely response as the customer perceives they are not in a position of disadvantage.
If the results of a price comparison were to be reframed in such a manner as to focus customer’s attention on the cost of taking no action, they would likely be more successful.
Rather than PCW's using the current standard terminology which states; “Based on the information you have provided we estimate that your energy spend for the next 12 months will be £1250” and is displayed in small print at the top of the page (as shown below)
Messaging would be more likely to prompt positive action if it was larger (the most important statement on the page) and used different terminology, for example;
“Based on the information provided not changing your energy supplier or tariff today is estimated to cost you £1250 over the next 12 months. You could reduce this loss/cost to as little as £844"
A simple question could then be presented;
"Would you rather pay £1250, or £844 for you energy over the next 12 months?”
To choose £1250 click here – return to menu
To choose £844 click here – proceed to further information and switching screen
Further consideration should also be given to the behavioural economic EAST model (describing Easy, Attractive, Social and Timely actions) and its application in this context.
2/ Analysis paralysis
Paralysis through analysis occurs when an individual or group of processes presents too many results for consideration. The cognative load of analysing all of the information overwhelms an individual and creates a scenario where it becomes too much of a burden to make a decision. In effect, we become "paralysed", meaning that no solution or course of action can be decided upon. A situation may be deemed as too complicated because there are too many choices to consider, or the choices are too complex to easily compare.
When confronted with too many choices (especially under a time constraint), many people prefer to make no choice at all, even if making a choice would lead to a better outcome.
Analysis paralysis and the ‘paradox of choice’ therefore also contribute to inertia. Hick’s Law (or the Hicks-Hyman law), named after British and American psychologists William Edmund Hick and Ray Hyman, describes the time it takes a person to make a decision as a result of the possible choices they have. As the number of choices increase, then the decision time also increases logarithmically. With hundreds of available energy tariffs to choose from it is almost impossible to make a timely decision meaning that switching tariffs is often deferred and ends up being delayed indefinitely.
Many consumers visit a PCW, complete a comparison, reach the results page and take no further action, some are simply checking for peace of mind, however many reach the crucial decision and are paralysed by choice. Conversion rates at this stage are often less than 10%.
Using a process of filtering through small sequential decisions on the way to reaching the results page could increase conversion rates significantly. Filters could be applied through a series of questions such as;
"Would you like your electricity to be from 100% renewable sources; Yes, or No?"
"Paying by direct debit is typically costs 10% less, would you like to pay by direct debit; Yes, or No?"
Reducing the overall number of outcomes until only a small number of options, or choices are displayed would increase the likelihood of the consumer being able to make a timely decision.
Conclusion
Millions of consumers visit and successfully navigate price comparison websites each year and benefit from finding competitive tariffs.
Millions more could also benefit through easier access and improved customer journeys. Removing barriers, reframing questions and streamlining current price comparison tools is one way to use behavioural science to simplify the energy switching market and help encourage engagement.
By removing obstacles and confusion it may be possible to help those that have previously felt unable, been unwilling, or have never switched to access cheaper, greener and more sustainable tariffs.
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