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How a utility company achieved superior margins while significantly enhancing its corporate image
R. Eric Reidenbach Ph.D. Published: 03/04/2010
“Our corporate mission is to deliver the ‘Best Value in Energy and Related Services,’” according to a large Midwestern electric and gas utility company. This is a mission statement, which after a minor modification (just change the industry), could be posted on any boardroom wall and inserted into any number of CEO speeches. But this company actually put its mission statement into practice and reaped the rewards by becoming a superior value provider. Six Sigma marketing was the tool the company used.
Six Sigma marketing is a fact-based, disciplined approach for growing market share and top line revenues in targeted product/markets by providing superior value. It uses a modified define, measure, analyze, improve, control (DMAIC) process, similar to the one employed by traditional Six Sigma, to focus on people, products, and processes to enhance or improve value.
The company began by focusing on the key markets or segments that it was serving and the products that these segments use. The intersection of a product and market is the competitive arena in which organizations compete for revenues and market share.
This utility served a number of different markets with electricity and gas:
In the measure stage, the focus was on how the different targeted products and markets defined value. The utility company created a value model, shown in figure 1, that captured the value definition for the electricity/small-business product market, a large revenue contributor. This was done through a combination of focus groups to identify the different attributes of quality, image, and price, and a survey of small businesses that comprised the product/market.
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| Figure 1: Value model for electricity/small business |
The model provided a wealth of information. First, as top managers suspected, the most important part of the value equation was the price component (.71) with quality accounting for about a third of value. This means that to improve value they had to do something that changed their actual price or perception of price. This would have the biggest effect on value.
Price was a latent dimension made up of the following attributes:
To small businesses, price was more than a simple rate that they paid for electricity. Managers factored into their definition a sense of competitiveness, fairness, affordability, and predictability. It was discovered that these businesses were judging the utility’s price by comparing it to what they believed others outside the service area were paying. In other words, this was more of a price perception problem than an actual problem based on pricing policies.
Quality was also a complex component comprising two critical to quality (CTQ) factors. A billing factor:
And what they called an advising factor:
The company found that it received only average performance scores on the billing and advising attributes.
First, the company published a comparison of its rates relative to those of other utilities outside their service area. This comparison revealed that the rates it was charging were, in fact, competitive and fair, and the rates it charged for specific services were in line with other utility companies. In addition, they provided small businesses with information about factors that were affecting their rate structure and their estimate of when and how these factors might affect their costs.
The billing process required a significant revamping.
The problem resolution issues were mapped and changed to make it easier to reach someone who could provide help. In the mapping process, managers identified several areas where inaccuracies could occur and changed them.
Billing was made simpler and easier to understand.
Billing was provided in a format that small-business people could use in tracking costs. Previously, it was formatted for the benefit of internal utility accountants and not the customer.
The advising issue was more complex. Managers had a minor outreach program, but it was more of a selling function than an advising function. This changed and they adopted the following improvements:
The utility company didn’t want this to become a cure de jour program, so its biannual monitoring focused on how the changes were working. Adjustments were made where necessary. Employees and managers were able to internalize the Six Sigma marketing process, weaning themselves from the consultants, and modifying the approach as they became more competent and capable. An audit by the consulting firm indicated that they had actually made improvements on the initial system. Lessons learned from the electricity/small business product/market were translated to the other product/markets with the necessary modifications to accommodate the different definitions of value.
“The value models enabled us to save millions of dollars on outage management, more effectively manage customer perceptions of rate increases, and significantly enhance our corporate image in the small business sector,” according to the company’s marketing manager. [Six Sigma marketing] provided the methodology and discipline for gathering input from our customers, analyzing how to define value, tying value attributes to key customer processes, and finally, measuring and tracking ongoing performance against these attributes.”
Additionally, the company achieved superior margins through value-based cost reductions. It propelled them into the top tier among utilities in the J.D. Powers Customer Satisfaction rankings and doubled their stock price during the next four years.
R. Eric Reidenbach, Ph.D., is the developer of Six Sigma marketing a disciplined and fact-based approach to growing market share in targeted product/markets by creating and delivering superior value. His book, Six Sigma Marketing: From Cutting Costs to Growing Market Share (ASQ Quality Press, 2009), has been described as the next generation of Six Sigma. His book Listening to the Voice of the Market: How to Increase Market Share and Satisfy Current Customers (Productivity Press, 2009) was released November 2009.
Reidenbach is currently the director of the Six Sigma Marketing Institute. Six Sigma Marketing is a fact-based disciplined approach to growing market share in targeted product/markets by providing superior value. For a free pdf of his new book Best in Marketing: The New Imperative for U.S. Manufacturing go to www.6sigmarketing.com and go to the contact page.
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