Electricity retailer – from liability to asset

ANTON BERGKVIST JOHAN LINDROTH

Master of Science Thesis

Stockholm, Sweden 2016

Elhandel –

från motgång till tillgång

ANTON BERGKVIST

JOHAN LINDROTH

Examensarbete Stockholm, Sverige 2016

Elhandel –

från motgång till tillgång

av

Anton Bergkvist Johan Lindroth

Examensarbete INDEK 2016:46

KTH Industriell teknik och management

Hållbarhet och Industriell Dynamik

SE-100 44 STOCKHOLM

Electricity retailer –

from liability to asset

by

Anton Bergkvist Johan Lindroth

Master of Science Thesis INDEK 2016:46

KTH Industrial Engineering and Management

Sustainability and Industrial Dynamics

SE-100 44 STOCKHOLM

Examensarbete INDEK 2016:46

Elhandel – från motgång till tillgång

Anton Bergkvist

Johan Lindroth

Godkänt

2016-06-16

Examinator

Cali Nuur

Handledare

Saara Hollmén

Uppdragsgivare

Sustainable Technologies Fund

Kontaktperson

Jonas Almquist

Sammanfattning

I det rådande energilandskapet finner elhandelsbolag svårigheter att differentiera sig från varandra, detta på grund av ökad konkurrens och politiska regleringar.

Elenergihandelsmarknaden står inför ett paradigmskifte.

Syftet med denna studie har varit att undersöka hur ett modernt elhandelsföretag handelsföretag kan undvika nuvarande och kommande svårigheter inom

marknaden och vilka riktningar de ska välja för att förbättra sin lönsamhet.

Studien har genomförts genom att använda en kvantitativ och kvalitativ metod.

Den kvantitativa metoden användes för att kartlägga alla elhandelsbolag som finns i Sverige idag och samla in data för att analysera dess lönsamhet. De mest intressanta företagen som identifierades i den kvantitativa datainsamlingen valdes

sedan ut. Med dessa företag utfördes sedan strukturerade intervjuer.

Från den kvantitativa datainsamlingen konstaterades det att el med förnyelsebart

ursprung var upp till fyra gånger mer lönsamt än att sälja el med kärn- och fossilt ursprung. Trots det kunde det fastställas att den totala lönsamheten från elhandel är förvånansvärt lågt. Från urvalet visade det sig att 50 procent av alla

elhandelsbolag hade ett rörelseresultat på mindre än en miljon kronor för de två analyserade åren, för dessa är den genomsnittliga lönsamheten ca 0.28 miljoner

kronor.

Från den kvalitativa datainsamlingen konstaterades det att de som arbetar mer aktivt med produkter och tjänster som kan relateras till energi eller välgörenhet och

lojalitetsprogram uppnår ett högre rörelseresultat. I intervjuerna uppgav de utvalda elhandelsbolagen att vinsten fortfarande är låga (det tar minst fyra år innan en

kund blir lönsam) och att den mest lovande lösningen är att expandera verksamheten med produkter tillsammans med tjänster, servitization. Om elhandelsbolag ska expandera sin verksamhet med att sälja produkter tillsammans

med tjänster relaterade till elektricitet, servitization, bör de också positionera sig med en viss konkurrensstrategi (kostnadsledarskap, differentiering, fokus) och rikta

sig till en särskild målgrupp. Grupper som har identifierats tillsammans med dessa konkurrensstrategier är exempelvis de som vill spara pengar (kostnadsledarskap), miljövänliga/ teknikentusiaster (Fokus) och de som är mitt emellan

(differentiering).

Nyckelord: Elhandelsbolag, lönsamhet, positionering, konkurrensstrategi,

servitization, homogen produkt

Master of Science Thesis INDEK 2016:46

Electricity retailer – from liability to asset

Anton Bergkvist

Johan Lindroth

Approved

2016-06-16

Examiner

Cali Nuur

Supervisor

Saara Hollmén

Commissioner

Sustainable Technologies Fund

Contact person

Jonas Almquist

Abstract

Electricity retailers have difficulties to differentiate themselves from each other, due to increased competition and political regulations. The electric energy trading

market is facing a paradigm shift.

The purpose of this study has been to investigate how a modern electricity retailer can avoid current and forthcoming difficulties within the market and what directions

they should choose in order to improve their profitability.

The study has been conducted using a quantitative and qualitative approach. The

quantitative approached was used to systematically describe all electricity retailers that exist today in Sweden and collect data for analyzing how profitable they are. Structured interviews were later conducted in order to gather qualitative data from

the most interesting companies from the quantitative data collection.

From the quantitative approach it was found that selling electricity from guarantee

of origin was approximately two to four times more profitable than selling nuclear and fossil produced electricity. The total profits from electricity trading alone is surprisingly low. From the quantitative data sample, it was shown that 50 per cent

of the electricity retailers earn less than one million SEK and their average profitability is approximately 0.28 million SEK.

In the qualitative study it was concluded that those who had succeeded with higher profits were working with services along with the electricity trading. Examples of such services are charity and loyalty programs. It was stated in the interviews that

the profits are still low and will remain low if solely rely on electricity trading. It takes at least four years for a customer to be profitable. The most promising

solution to avoid getting stuck in the middle is to expand their business with products together with services, servitization. If the electricity retailers should expand their businesses with selling products together with services related to

electricity, servitization, they should also position themselves with a certain competitive strategy (cost leadership, differentiation, focus) and target a specific

group. Groups that have been identified together with these competitive strategies are those who wants to save money (cost leadership), environmentally friendly /

technology enthusiasts (focus) and inbetweeners (differentiation)

Key words: Electricity retailer, profitability, positioning, competitive strategy, servitization, homogenous product

Acknowledgements We would like to thank all electricity retailers who participated in this study. Without your participation this thesis would not exist. We are extra grateful for Björn Dahlberg, Lars Elfström and Åke Persson who voluntarily participated in the

in-depth interviews.

We would also like to thank our supervisor Saara Hollmén for her good inputs and reflections throughout the entire thesis. Another person we would like to thank is Jonas Almquist at Sustainable Technologies Fund for his knowledge and

contributions.

In addition, we would also like to express our gratitude to Pär Blomkvist and the thesis groups that participated in the seminars and gave us constructive feedback.

Contents

1 Introduction 1

1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.2 Problematization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1.3 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1.4 Research Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1.5 Delimitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1.6 Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1.7 Outline of thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

2 Method 5

2.1 Research design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2.2 Data collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

2.3 Data analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2.4 Reliability, validity and generalizability . . . . . . . . . . . . . . . . . . . . 9

3 Review of electricity market, business strategies and positioning 11

3.1 The electricity market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

3.1.1 Actors on the electricity market . . . . . . . . . . . . . . . . . . . . 11

3.1.2 Pricing of electricity . . . . . . . . . . . . . . . . . . . . . . . . . . 12

3.2 Positioning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

3.2.1 Competitive strategies . . . . . . . . . . . . . . . . . . . . . . . . . 14

3.2.2 General value positioning . . . . . . . . . . . . . . . . . . . . . . . 17

3.2.3 The marketing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

3.2.4 Product life cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

3.3 Growth strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

3.3.1 Customer retention and satisfaction . . . . . . . . . . . . . . . . . 22

3.3.2 Servitization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

3.3.3 Ansoff matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

3.4 Potential products in the electricity retailing market . . . . . . . . . . . . 25

4 Empirical study and analysis 28

4.1 Study of profitability electricity retailers in Sweden . . . . . . . . . . . . . 28

4.2 Strategy and positioning maps of electricity retailers . . . . . . . . . . . . 33

4.2.1 Positioning and growth strategies for electricity retailers . . . . . . 34

4.2.2 Positioning within servitization . . . . . . . . . . . . . . . . . . . . 41

5 Discussion 49

5.1 Implications of findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

5.2 Future research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

6 Conclusions 51

7 Appendix 59

7.1 A, Profitability electricity retailer companies . . . . . . . . . . . . . . . . 59

7.2 B, Relationship between profitability, customer base and sold volume of

electricity retailer companies with correlations . . . . . . . . . . . . . . . . 60

7.3 C. Answers from structured interviews . . . . . . . . . . . . . . . . . . . . 63

List of Figures

1 Data collecting process. (Collis , J., Hussey, R. 2013) . . . . . . . . . . . 6

2 Survey template sent to marketing managers, sales managers and CEOs . 7

3 Illustrate the four different actors in the energy system. (Svenska Kraftnat

2016a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

4 Illustrate the possible market share in relation to Return on investment

and differentiation/cost leadership. (CIO 2016) . . . . . . . . . . . . . . . 16

5 The table demonstrate different approaches within different areas of the

company regarding marketing depending the current phase of the company,

product or service. (Uggla 2006) . . . . . . . . . . . . . . . . . . . . . . . 21

6 Illustrate the Ansoff’s four different growth strategies. (Ansoff 1957) . . . 24

7 The price development of solar panels in Sweden excluding taxes (Johan

Lindahl 2016) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

8 Illustrate the relationship between profitability, customer base and sold

volume for the year 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

9 Illustrate the relationship between profitability, customer base and sold

volume for the year 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

10 The determination coefficient, R2, in per cent for the entire analyzed en-

ergy map. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

11 Visaulize a zoom of the cluster in Figure 7 over the cluster, hence the four

extreme cases are ignored . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

12 Visaulize a zoom of the cluster in Figure 8 over the cluster, hence the four

extreme cases are ignored . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

13 The determination coefficient, R2, in per cent for the cluster of retailers

from Figure 11 and 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

14 The chart illustrate the average profitability of different production sources

for the year 2013 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . 32

15 A strategy map for electricity retailers to become more competitive. . . . . 34

16 A strategy map for electricity retailers to become more competitive by

choosing differentiation as strategy. . . . . . . . . . . . . . . . . . . . . . . 38

17 A strategy map for electricity retailers to become more competitive by

choosing differentiation as strategy. . . . . . . . . . . . . . . . . . . . . . . 41

18 A strategy map for how the electricity retailers should position themselves

in order to become more competitive. . . . . . . . . . . . . . . . . . . . . . 42

19 A strategy map for electricity retailers to become more competitive. . . . . 51

20 A strategy map for how the electricity retailers should position themselves

in order to become more competitive. . . . . . . . . . . . . . . . . . . . . . 52

21 Illustrate the relationship between profitability, customer base and sold

volume for the year 2013 with correlations . . . . . . . . . . . . . . . . . . 60

22 Visualize a zoom of the cluster for 2013 with correlations . . . . . . . . . 60

23 Illustrate the relationship between profitability, customer base and sold

volume for the year 2014 with correlations . . . . . . . . . . . . . . . . . . 61

24 Visualize a zoom of the cluster for 2014 with correlations . . . . . . . . . 61

25 Compilation of interview questions and answers, question 1. - 2.1 . . . . 63

26 Compilation of interview questions and answers, question 2.2 - 3.4 . . . . 64

27 Compilation of interview questions and answers, question 3.5 - 5. . . . . . 65

28 Compilation of interview questions and answers, question 5.1 - 5.4 . . . . 66

29 Compilation of interview questions and answers, question 5.5 - 7 . . . . . 67

1 Introduction

The purpose of this chapter is to provide the reader with background knowledge regarding

the paradigm shift the addressed market is facing and why actions needs to be taken in

order to stay relevant and competitive in the future. The problem will be formulated

along with the purpose of the paper, research questions will be presented as well as the

delimitations. At the end of the chapter the contribution to the research field will be

stated.

1.1 Background

In the early 20 th century Sweden began to get electrified. In order to enable the electri-

fication, line network concession were given for transmitting high voltage of electricity

from the production plants to local regions. From the local regions, area networks con-

cession were given for distributing low voltage of electricity to supply end consumers.

The consequences of the line network concessions and area network concessions resulted

in regional and local monopolies. A consumer of electricity could only buy from the

local electricity distributor who had area network concession of that specific area. This

approach was implemented to ensure the grid owners return on investment, due to the

high investment costs. (Bergman 1997)

Over time, the construction of new electricity networks decreased and therefore there

was no longer a need for local and regional monopolies, hence a new system was re-

quired. The Nordic countries agreed to create a common electricity market with free

trading between the countries and Norway was the first country to deregulate their

electricity market in 1991. Energy producers sold the generated electricity, to what we

know today as, Nord Pool which is a power market that offers energy retailing, clearing

and settlement. Electricity retailers procures electricity from Nord Pool and sell it to

end customers. (Nord Pool 2016) In 1992 Sweden declared to deregulate the electricity

retailing market and the proposal came through in 1996 when Sweden joined Norway in

free trading cross borders. (Svensk Energi 2016)

The overall goal with the deregulation of the electricity market was to increase the

competition and decrease the price of electricity for end customers. (Regeringen 1991)

By this time there were 221 different electricity retailers in Sweden and due to the in-

creased competition and free trading, electricity retailers had to cut their margins and

hence reduce the profits down to prices that has been converging towards the margin

1

production cost. (Staten 2004)

Due to the high competition and difficulties to differentiate the homogeneous product

electricity, have resulted in a decrease of electricity retailers to approximately 120 com-

panies in 2016, according to results of this study. One might argue that a decrease of

electricity retailers would result in decreased competition as well. However, due to the

increased availability of information from comparison sites allow the end consumer to

compare different electricity contracts effortlessly and therefore has increased the com-

petition even more.

Electricity retailers are also indirectly affected by the European targets called 20-20-20

and were introduced in 2007 by leaders of the European Union. The 20-20-20 targets are

a common agreement between the countries within the European Union, which together

are suppose to reduce their greenhouse gas emission with 20 per cent until 2020 compared

with 1990 levels. In addition, 20 per cent of all the energy should origin from renewable

sources and the energy efficiency should also be improved with 20 per cent until 2020.

However, all countries has a individual target and Sweden has already fulfilled its goals.

Although Sweden has committed to reduce the greenhouse gas emissions with 40 per cent

until 2020 compared with 1990 levels. (European Union 2016) Electricity retailers are

affected indirectly by this policy, while they might have to offer end consumer of energy

with electricity that has an origin from renewable sources and help end consumers to

reduce their energy consumption.

1.2 Problematization

Political regulations, increased competition and difficulties to differentiate from each

other are drivers for a paradigm shift in the electricity retailing market. Electricity re-

tailers are indirectly affected by political regulations and need to adapt to them as well as

the environmental issues in order to be competitive in the future. There is an absence of

knowledge and experience regarding how electricity retailers can distinguish themselves

from one another when the main product they offer, electricity, is homogeneous.

1.3 Purpose

The purpose of this study is to investigate how a modern electricity retailer can avoid

the current and forthcoming difficulties within the market. Furthermore the study will

search for alternative directions in order to improve the profitability in year 2020 and

beyond due to the targets set by European Union.

2

1.4 Research Questions

In order to investigate the addressed problem the electricity retailing market is facing, a

number of questions first needs to be answered. In the following paragraph such questions

are presented;

• Main Question Towards what directions should an electricity retailer develop their

business in order to improve their competitiveness in the year 2020?

• Sub-Questions To answer the main research question, three sub-questions are needed

to be answered. Those are:

· RQ1 What characterize a profitable electricity retailer?

· RQ2 How can electricity retailers position themselves when their products is

homogeneous?

· RQ3 Can a general strategy be developed to meet the requirements from different

customer segments?

Electricity retailers have recently started do differentiate from each other by offering

one hundred per cent renewable electricity which is referred to as ”Guarantee of origin”

to the end customers. (EU 2009) Since offering guarantee of origin to the end consumer

is a way to differentiate it would increase the profitability. Therefore a hypothesis has

been stated and was tested by the researchers assuming that:

”Electricity retailers that offer their customers electricity with guarantee of origin are

more profitable that those who do not.”

1.5 Delimitations

This thesis is delimited to investigate electricity retailers in Sweden, since the study

will be conducted in Sweden. Data collection is delimited to electricity trading when

evaluating how profitable the various companies are in the current market environment.

It is not possible to interview all electricity retailers in order to answer the purpose

of the research, therefore a sample of the most outstanding companies in respect to

profitability, amount of customers and sold volume have been compiled and interviewed.

Another delimitation is that the researchers do not consider any new products or services

to be introduced and disrupt the market within the time frame.

3

1.6 Contribution

There is a gap in the literature regarding how electricity retailer can differentiate them-

selves from each other and what the characteristics are for a profitable electricity retailer.

This study will contribute to the literature regarding how electricity retailers can dif-

ferentiate from each other and how profitable they are in Sweden. The study will also

contributes with concrete proposals and ideas for alternative directions for electricity

retailers to develop their businesses in order to be competitive in year 2020. In addition

the thesis will provide information regarding what the characteristics are for a profitable

electricity retailer.

1.7 Outline of thesis

The thesis consist of six chapters.

In chapter one, introduction, the background was presented together with the pur-

pose, research questions, delimitations and the contributions of the study.

In chapter two, Method, describes how the research study was conducted. It presents

the research design, the data collection approaches, how the collected data was analysed

and also a discussion about the reliability, validity and generalizability of the study.

In chapter three, Literature review, presents the electricity market in general, posi-

tioning and growth strategies. Literature about positioning and growth strategies was

used for analysing how an electricity retailer should be competitive in year 2020.

In chapter four, Empirics and analysis, the results from the quantitative and qualita-

tive study is presented together with the researchers own analysis.

In chapter five, Discussion, the implications of findings will be discussed as well as

future research.

In chapter six, Conclusion, the main research question is being answered.

4

2 Method

In this chapter the methodology used in this study will be presented. Firstly the research

design of the study will be explained. Later on the data collection methods and- analysis

methods are described and at the end of the chapter a discussion regarding the reliability,

validity and generalisation of the study will be presented.

2.1 Research design

The purpose of this study was to investigate how a modern electricity retailer should

develop their business in order to be more profitable in year 2020. To achieve the pur-

pose of the study, a main research question was formulated, although the main research

question require a broader knowledge within a couple of areas and hence four sub ques-

tions was formulated.

In order to fulfil the purpose of this study the main questions together with the sub-

questions needed to be answered. In this study an explanatory study was used together

with a case study approach.

The explanatory study was mainly used to answer RQ1. It was used to investigate

if there is a relationship between variables in order to form the hypothesis stated in

the introduction chapter. Data was independently gathered from different electricity

retailers and was later compared with each other in order to find common variables.

The case study approach was used for answering the other two research questions.

A case study is used when a single phenomenon will be investigated. Different kinds

of methods is used to obtain in-depth knowledge. A case is defined as a particular

business, event, person, process, group of workers or another phenomenon. In this

research the researchers investigated a particular business, the business of electricity

retailers. There are four different types of case studies and the one the researchers used

was the illustrative case study. The definition of illustrative case study is when a research

attempts to illustrate new and possibly innovative practices that could be adopted by

companies (Collis , J., Hussey, R. 2013).

5

2.2 Data collection

In this sub-chapter the different data collection methods that were used in order to an-

swer the different research questions will be described.

Data collection for RQ1

As stated earlier an explanatory study was conducted for answering the first research

questions. This part of the research leaned towards a quantitative approach. A quanti-

tative study collects empirical data for a phenomena using statistical or mathematical

techniques. (Given 2008) The graph below illustrates how the researchers collected the

data for research question one.

Figure 1: Data collecting process. (Collis , J., Hussey, R. 2013)

The study was started by compiling a list in excel with every electricity retailer. A

list of all electricity retailers could be found at the website www.elskling.se. (Elskling

2016) The list was not accurate, while some of the electricity retailers had been bought

by others. To investigate if the electric retailing company was active and not had been

bought by other companies could be verified through the website www.allabolag.se.

(Allabolag 2016)

6

When the list of all electricity retailers was compiled, the variables for the study were

collected.

The variables that were collected was: total turnover, EBIT (Earnings before inter-

est and taxes), number of electricity customers and total amount of electricity sold in

gigawatt hours for the years 2013 and 2014. Since the study began before the annual

reports of 2015 commenced, the researchers decided to exclude the year 2015 from the

study.

The researchers searched for these variables in each of the electricity retailers annual

reports. Often two or more variables were missing. Approximately one of thirty annual

reports had all of the variables. When the variables could not be found, the next step

was for the researchers to call all the electricity retailers. The people the researcher

contacted were sales- and marketing managers or CEO:s. Some of them did not want

to share these variables but most of them agreed to provide the information if they

remained anonymous. Some of the electricity retailers started to sell electricity in 2015

and therefore these companies could neither participate in the study. Therefore the list

presented of how profitable electricity retailers are today are presented with a number

instead of their brand-names. A small table was made in advance that could be sent to

the respondents email addresses after the researchers had talked to them and agreed to

participate in the survey. The table of questions sent to the employees at the electric

retailers can be seen below:

Figure 2: Survey template sent to marketing managers, sales managers and CEOs

A note in the end of the mail always stated: ”Note that the variables is only for elec-

tricity retailing”. When the researchers searched for the variables in the annual reports,

the variables could be found but in most cases the figures were presented for electricity re-

tailing along with other products and heating. In some cases, the numbers received from

the sales- and marketing managers did not seem reliable. If such was the case, then the

researchers followed up the errors. The problem could mostly be explained due to sales-

7

and marketing managers did not see the units in the table, like total turnover in [MSEK].

From the collected variables, the average sales price of electricity could be calculated

as well as the profitability per kWh. The electricity retailers were split into several

segments, for instance in terms of size which is evaluated by the number of customers

and the amount of sold GWh. Furthermore other segments to divide the companies into

were guarantee of origin and profitability. Calculating the average profitability was con-

ducted in order to test the hypothesis that electricity retailers that offer their customers

electricity with guarantee of origin are more profitable.

Data collection for RQ2 and RQ3

From the quantitative data that was collected, some interesting findings were found. The

companies that were most outstanding were contacted and asked if they could participate

in an interview with the researchers. The researchers used a structured approach, which

means that all the questions were prepared in advance. The researchers sent an email

containing the questions in advance so those who participated could prepare for the

interview questions. There were three interviews with three different electricity retailers.

One interview were over the phone and two interviews were face to face at their offices.

The interview that were conducted over the phone, were with a company that are located

far away from where the researchers are and those who were closer to the researchers

were done face to face. All the interviews were recorded and transcribed. There was

also one structured interview with a company that is working within service and product

related to electricity retailing. Furthermore there were three unstructured interview, two

of them regarding options how different combinations of products and services could be

used within their specific sectors. The third unstructured interview was conducted with

the CEO at a new started electricity retailer regarding different electricity contracts.

2.3 Data analysis

There are four different ways to analyse the data: thematic analysis, narrative analysis,

discourse analysis and quantitative analysis. (Blomkvist,P., Hallin, A. 2015)

The data that has been gathered for RQ1 has been used in order to do a quantitative

analysis. The approach for doing a quantitative analysis is suitable when quantitative

data has been collected. The data that was collected in the interviews for answering

RQ2 and RQ3 was analysed by using a thematic approach. The data that was collected

were categorized and sorted out in excel.

8

2.4 Reliability, validity and generalizability

In this sub-chapter the reliability, validity and generalisation of the study will be dis-

cussed.

Reliability

Reliability is about the credibility in the findings of the research and if it will be the same

results if the study was repeated. (Collis , J., Hussey, R. 2013) The researchers need

to ask themselves if the evidences would stand up to a scrutiny process. (Raimond 1993)

For answering RQ1 the collected data delivers high reliability, because the people that

was contacted were sales- and marketing managers who works with collecting such vari-

ables in their daily work. However, as mentioned earlier sometimes the numbers that the

sales- and marketing managers had given did not look reliable. In order to strengthen

the reliability, they were followed up and an explanation could be drawn that the man-

agers did not see the units in the table, like total turnover in [MSEK]. The reliability

of the collected data decreases because some of the electricity retailers wanted to be

anonymous. The response rate from the electricity retailers have been around 50 per

cent, which is a bit low. However it is a large sample and general conclusions could be

drawn.

The data collected for answering RQ2 and RQ3 delivers high reliability. The struc-

tured interviews that was recorded, transcribed and how the answers would be written

in the thesis was mailed to the participants. They responded to the mail and some minor

changes was made.

Validity

Validity is to which extent the findings of the research reflects the phenomena under

study. (Collis , J., Hussey, R. 2013) According to Coolican a test is valid if it measures

or demonstrates what the researchers think or claim it does. (Coolican 1992)

After compiling the list of electricity retailers the researchers can draw the conclusion

that there is no longer high profitability in only selling electricity. This was confirmed

by what was stated in the interviews and therefore the validity is high.

Generalizability

Generalizability is about to which extent the research findings can be extended to other

9

settings or cases.

This study has been delimited to Sweden and electricity retailers. The results of what

directions an electricity retailer should expand their business could be generalizable to

other electricity retailers that have a similar electricity market situation as Sweden and

a deregulated electricity retailing market. The results may be generalizable to other

settings that has a deregulated market together with homogeneous products, such as

petrol filling stations. Electricity is a homogeneous product and petroleum is also a

homogeneous product and it is a keen competition in both industries to get customers.

10

3 Review of electricity market, business strategies and

positioning

In this chapter relevant literature for the thesis will be presented.

3.1 The electricity market

This chapter will give a general introduction how the electricity market is built and

identify the various actors that are present in the market. Furthermore the researchers

will present the actual cost of electricity for end consumers and what the most common

different contracts that are offered by the electricity retailers.

3.1.1 Actors on the electricity market

Most people have come in contact with electricity in their everyday life, for example

when lighting a light-bulb or charging their phone. In order for this process to work a

number of actors and operations needs to cooperate simultaneously. In fact, in order to

light a lightning bulb connected to the grid, the energy lighting up the lamp will have

to be produced at the very same moment. First the electricity needs to be generated

and this is done when a generator is in motion in a power-plant. When the electricity is

generated it needs to be distributed to the households. The electricity is distributed to

the households through power-lines/grids. (Svenska kraftnat 2016b)

The actors in the electricity market can be divided into four categories as seen in the

figure below:

Figure 3: Illustrate the four different actors in the energy system. (Svenska Kraftnat 2016a)

11

Electric energy consumers

The electric energy consumer extract electricity from the grid. The consumer of elec-

tricity sign a contract with one of the electricity retailers in order to buy electricity. A

contract between the grid-owner and the electric energy consumer is also signed in order

to pay the transport of electricity. (Energimyndigheten 2016)

Electric energy producers

The producers that usually own the power-plants generate electricity and transmit it

into the grid. When the energy has been transmitted it gets sold to the power market

Nord Pool or directly to the consumer. (Energimyndigheten 2016)

Grid owners and system administrator

The grid owners have the responsibility to transmit the electricity from the power-plants

to the consumer. The system administrator, Svenska Kraftnat, has the responsibility

to have the electricity system in balance, which means that the production/import of

electricity have to meet the consumption/export in the system. (Energimyndigheten

2016)

Electricity retailers and balance-responsible

An electricity retailer can be both supplier of electricity and balance-responsible. The

electricity retailer procures power from producers and/or the power market Nord Pool

and sell it to the consumers. The electricity retailer can also produce electricity and

therefore act both as a producer and as a supplier of electricity. At every point where

electricity is extracted from the grid there need to be a balance-responsible. To have

balance-responsibility means to have economical responsibility of having production and

consumption in balance. (Energimyndigheten 2016)

This thesis will focus on the electricity retailers.

3.1.2 Pricing of electricity

When receiving the electricity bill the end consumer will at the end find a total amount

to be payed. This amount however is divided into five different costs that are specified

in the end consumers electricity bill. These cost are presented below:

• The electricity cost

• Network fee

12

• Energy tax

• Value added tax

(Energimyndigheten 2014)

There is solely one cost in the electricity bill that the end consumer actually can affect,

namely the cost of electricity. This cost can be affected when choosing electricity retailer

and selecting electricity contract.

The network fee is payed to the local grid owner to transmit the electricity to the

households. (Energimyndigheten 2014)

The energy tax is regulated by the state and is set for one year at the time. The

current cost for 2016 is 0.293 SEK/kWh and in some municipalities 0.193 SEK/kWh.

(Energimyndigheten 2014)

Value added tax is also regulated by the state and is set to 25 percent of the total

cost. (Energimyndigheten 2014)

The part of the electric energy price that is of interest for this thesis is the actual

electricity cost. The most common different contracts for the electricity retailers will

now be explained.

Electricity cost with variable price

The actual electricity cost follows the movement on the power market Nord Pool. The

average monthly electricity price at Nord Pool is the base of the electricity cost with

variable price. A contract of this kind means a certain risk for the consumer even though

the electricity retailer is barely affected. For instance when there is shortage of electricity

the price will increase dramatically. Although, there are also advantages, for example

when there is an over production of electricity the price will decrease. (Ramqvist, P.

2011)

Electricity cost with fixed price

The actual electricity cost has a fixed price over a certain period. The most usual periods

are 1,2 or 3 years. The advantage for the retailer with fixed price is the possibility to

increase profitability if the electricity price drops. (Ramqvist, P. 2011)

13

Electricity cost at current rate

The electricity cost at current rate is the price the consumer pay when they have not

made an active choice of electricity contract. The price follows the movement at Nord

Pool comparable to electricity cost with moving price but to a considerable higher cost.

The consumer can not choose to have electricity cost at current rate, it only occur when

moving into a new household and no active choice of contract has been made. (Ramqvist,

P. 2011)

A mix of electricity cost with variable price and fixed price

The electricity cost is, as the name states, a mix of fixed price and moving price. The

consumer pays a certain amount of the consumption to a variable price and the rest to

a fixed price. For instance if the consumer prefers a variable price during the summer

and a fixed price in the winter. (Ramqvist, P. 2011)

Electricity cost with guarantee of origin

Certain electricity retailers offer contracts where the electricity is produced specifically

by renewable sources such as wind and hydro power. There are many different types of

environmental contracts that the electricity retailers offer. Lately some companies have

for instance introduced solar energy contracts. (Ramqvist, P. 2011)

3.2 Positioning

Positioning is about when a new company or brand position themselves in the minds of

consumers. They have to create something different about the brand, product or service

in order for the consumers to be aware of them and stake out a bit of territory. (Uggla

2006) The theories will be adopted in the Empirical Study and analysis in Chapter 4.

3.2.1 Competitive strategies

There are generally three main types of competitive position strategies. The three gen-

eral competitive position strategies are:

• Focusing

• Cost leadership

• Differentiation (Porter 1998)

Focusing

A certain segment is the focus in this competitive position strategy. The brand or com-

14

pany focus on a certain part of the market instead of the whole market. This strategy

will lead to only a few people will love the company or product. One example is the

company Select Travel who only offers exclusive travels to consumers with special desires

that can not be met at the mass-market or the more differentiated actors. (Uggla 2006)

Cost leadership

The cost leadership strategy is established on having low distribution- and production

costs in order to create economies of scale. Economies of scale is when production in-

creases the average cost per unit decreases and this results in that big companies are

more profitable (Businessdictionary 2016). Companies adopting this strategy concen-

trate on cost efficiency to ensure as low production- and distribution costs as possible

in order to offer their customers the lowest price on the market. Hence the company

need to have a strong cost control in order to keep their prices low and be successful.

It can be difficult to handle this strategy with success since it is easy to copy low price

concepts. (Uggla 2006)

Differentiation

This strategy is used when a company want to offer their customers something addi-

tional compared to current products or services and therefore charge customers a higher

price for these added features. In this strategy the company want to create a positive

experience for the customers that their competitors do not satisfy. It can for example

be a new technical innovation or a product that has an advanced shape and design.

One example is the company Boomerang who works with advanced design combined

with high qualitative fabrics with unique fibres in their clothes. The company creates

a unique demand-curve where they have the possibility to charge their customers more,

since it is a more advanced product. (Uggla 2006)

If there is no difference between the companies it will lead to a price competition. It

is no other option to avoid price competition if companies do not offer customers some-

thing different or something in addition (Aaker 2004). Aaker states:

”There is considerable logic behind the importance of differentiation. If a brand fails to

develop or maintain differentiation, all brands will start to look the same to consumers,

and price will become the dominant decision determinant.” (Aaker 2004)

15

Stuck in the middle

The graph below shows how a company can be positioned. The right side refers to a com-

pany that has a high market share and use the cost leadership strategy. The company

sells many different kinds of products and services at a low price with low profit margin.

Their motto would be sell everything to everyone. On the left side of the graph there

are companies using differentiation or focusing as position strategies. The company sells

services or products that are unique but to a considerable higher price. The products

and services that the company sells has a high profit margin, but a lower market share

compared to cost leadership. A company will be stuck in the middle if it tries to use

more than one competitive strategy and hence would not be as profitable. (Lundqvist,

O., Albertsson, S. 1999)

Figure 4: Illustrate the possible market share in relation to Return on investment and differentiation/cost

leadership. (CIO 2016)

A company that has used the differentiation strategy is Apple. They have sold a lot

of products to many people, but their product range is narrow. Due to Apple’s extreme

differentiation to a specific niche they have been able to maximise their profitability.

(Herbert 2015)

A company that has used the cost leadership strategy successfully is Walmart. They

have very low prices and can sell everything to everyone who enters one of their stores.

Walmart has maximized their cost leadership and have managed to become the largest

retailer in the world and therefore have a massive return on investment. (Herbert 2015)

16

According to (Stanton 2001), the stuck in the middle theory as well as the theory about

competitive strategies has been adopted in the Australian electricity retailing market and

has been well adaptable. In the study it was proven to be possible to identify the various

positioning strategies, low-cost i.e cost leader, focus and differentiation. In the journal

nine of the fourteen electricity retailers were identified as cost leaders, three were using

the differentiation strategy, one was considered to use focus while one was stuck in the

middle. Hence the theory would be adaptable in the Swedish electricity retailing market

as well.

3.2.2 General value positioning

Kotler and Armstrong refer in their publication from 2004 that Jean-Noel Kapferer

states:

”Consumers typically choose products and services that gives them the greatest value.

Thus, marketers, want to position their brands on the key benefits that they offer relative

to competing brands.” (Kotler, P., Armstrong, G. 2004)

Value can emerge in relation to competitors and consumers on the market. Within

marketing management there are nine possible value positions and four are desirable for

the marketer. They are:

• More for more

• More for same

• Same for less

• Less for much less. (Uggla 2006)

More for more

In a market there is always a small group of consumers who always desire something that

other people do not have. For example an exclusive travel, a more expensive car or a

finer perfume. The marketers should not believe that this small group of individuals are

more interesting or better, it only signals that they want something more exclusive. The

value position strategy “more for more” is about to offer the market a premium product

to a much higher price. It is about having high margins and have loyal consumers. Some

companies or brands that have succeed with this strategy are: Rolex, Grand Hotel, Mont

Blanc, Select Travel etc. (Brady, D. 2004)

17

More for same

This value position strategy is about to give consumers something more or more exclusive

for the same price. It aims to compete with the brands in the extreme luxury-segments.

It is about giving consumers a similar promise as the more exclusive brands in the value

position strategy “more for more”, but to a lower price. Toyota have used this strategy

when they introduced the premium brand Lexus. Toyota communicated that consumers

for the first time got more value for the same amount of money. Kotler stated it was

perhaps the first time a 72000 dollar car could be traded for a Toyota car that costs

36000 dollar. (Kotler, P., Armstrong, G. 2004)

Same for less

Many consumers wish to maximize the value of their money and therefore seeks for bud-

get alternatives on the market. Almost everyone wants to get same quality to a lower

price, consumers wants to make a good deal. To offer same quality to a lower price is

extremely attractive from a consumer’s perspective. The value position strategy “same

for less” is trying to offer consumers the same quality as other brands or companies to a

lower price. One example is 7-eleven who has created the beer Santiago with this strat-

egy. Santiago has the same positioning as the beer Corona and other similar brands,

but to a lower price. In order to maintain the same for less strategy, companies need to

compromise on factors such as service and production. (Uggla 2006)

Less for much less

The low price strategy less for much less relies on removing every possible cost and only

focus on the absolute foundation of the product or service. For example within air trav-

eling, the service on the airplane can be cut down. Furthermore air travel companies

can remove rebookable air tickets and only serve food and beverages for additional costs.

This strategy uses the price as the competitive weapon, but can be a vulnerable strategy

in the long run, since the strategy is easy to replicate. One typical company that have

embraced the value position strategy less for much less is Ryanair. They only offer the

air travel and have removed everything else. (Uggla 2006)

As stated earlier, electricity is a homogeneous product. This signify that electricity

will not be adaptable to the different general value positioning strategies. However the

theory can be used with products and services related to electricity.

18

3.2.3 The marketing mix

Philip Kotler states that the marketing mix is a set of marketing tools that are control-

lable. These tools are product, price, place and promotion that is “mixed” by a company

in order to receive the desired response from the targeted market. (Kotler 2001)

This theory will be used when analysing products and services related to electricity.

Product

Product is a confused concept, but in marketing it is defined as everything that can

satisfy a need. In this definition it can therefore be a service, a physical product or

even an idea that can be marketed. Within marketing the term ”product” is sometimes

associated with offering, which describes how a service or product is positioned. There

is always something on a market that constitutes an offering, hence nothing can be ex-

cluded from this definition. The traditional concept of product involves quality, service,

name, attribute and guarantees. (Kotler, P., Armstrong, G. 1996)

Price

The price of a product or service indicates to some extent the quality. A high price would

imply that the product has high quality, while a low price would signal less quality. Price

is defined as what the consumers pay for the product or service along with additional

costs, for example insurances. In a market with perfect competition the price is set by

demand and supply. The price is a function of the single firm marginal cost. This means

that firms or companies cannot set the price themselves to compete in a market with

perfect competition. The starting point of all marketing is how the consumers experience

the product. The only way for a company to entirely set the price themselves is when

they act in a monopoly market. (Uggla 2006)

Place

Another highly important factor in marketing is what is referred to as ”place”. The

concept of place includes distributors, retailers, location, storage and transport. It has

a strategic impact, while it prevents future possibilities to reposition the brand. (Uggla

2006) The place can be compressed or expanded in positioning, for example by inte-

grating units to get a wider range of products or services. (Young 2001) Within the

distribution theory, a sales channel is defined as a set of organizations that are depen-

dent on each other and is involved in the process of making a service or product available

for consumption. (Stern, L., Ansary, A.I, Coughlan, A.T 1996)

19

There are in general two distribution principles:

• Intensive

• Selective

Within intensive distribution the product or service goes through all possible channels

to make it available for as many people as possible on the market. While selective dis-

tribution focuses on a certain channel in order to reach out to a specific city or region.

(Uggla 2006)

Promotion

Promotion is a tool that the marketer can use in order to communicate an offering. Some

of them are:

• Commercial

• Event marketing

• Word of mouth

• Personal selling

• Sales promotion and point of sales merchandising. (Uggla 2006)

3.2.4 Product life cycle

The product life cycle has four different phases, those are:

• Introduction

• Growth

• Maturity

• Decline (Anderson 1984)

Henrik Uggla states that there is more or less an optimal product, promotion, distri-

bution and price strategy in each phase of the product life cycle.(Uggla 2006)

20

Figure 5: The table demonstrate different approaches within different areas of the company regarding

marketing depending the current phase of the company, product or service. (Uggla 2006)

This theory will also be used when analysing different products and services related

to electricity.

Positioning in the introduction phase

In the introduction phase there is an extensive work to establish a trustworthy position

on the market. It is the same for brand-extensions and new products as well. Kapferer

who is a well known brand identity researcher describes that many companies underesti-

mate the amount of work that is needed to establish existing brands into new categories.

Kapferer means that if the brand is well known it does not mean that the brand has a

trustworthy position in a new category. The overall goal during the introduction phase

is to establish a market position. The product or service need to have high quality in

order to achieve a successful marketing. The promotion in the introduction phase is to

establish knowledge and identification on the market. The brand also need to establish

a distribution network for the product or service so that consumers can access it. The

price is low or high depending on to what degree the product or service should penetrate.

A high price often means a low penetration of the market and a low price often means

a high penetration of the market. (Uggla 2006)

Positioning in the growth phase

The overall goal in this phase is an expansion of the targeted market. The focus is to

reinforce the brand and expand the consumer segment. (Rajagopal 2004) In this phase

the products and services weaknesses needs to be found and also analysed whether the

services and products can be better both from the consumers and distributors perspec-

21

tive. The price in this phase needs to be set efficiently in relation to the competitors on

the market. Extreme discounts and sales promotion in this stage is not to recommend

while it creates ambiguity of the brand. (Uggla 2002)

Positioning in the maturity phase

A strategic goal in this phase is to reposition which is an alternative course of action.

Repositioning in this phase can create relevance for brands that earlier had a burden

in the minds of consumers. A reposition can be incremental or radical. (Uggla 2006)

The product or service needs to adapt to the attributes consumers have in order for the

brand to strengthen their new position. During the promotion new attributes needs to

be communicated and have a good offer in all channels. (Rajagopal 2004)

Positioning in the decline phase

The positioning in the decline phase can often be seen to have a more reactive than

proactive characteristic. It can be seen that the brand has an image of a typical cash

cow product and the consequences of this is to capitalise on a product or service for

investments that has an uncertain future. The reactive strategy assumes that there is

a variation of products and services that gives the brand a width and do not only rely

on just one product or service. If the brand does not have a variation of products or

services, there is a risk that the brand becomes extinct. (Uggla 2006)

3.3 Growth strategies

In this chapter the growth strategies for companies will be described. The first growth

strategy is to have strong customer satisfaction which will lead to high customer retention.

The second strategy is based on the Ansoff matrix which will later be explained.

3.3.1 Customer retention and satisfaction

A company’s long term competitiveness is according to Hennig-Thurau and Klee, de-

termined by the key drivers of the services and products offered by the company along

with customer satisfaction. (Hennig-Thurau 1997) In recent years the general trend of

marketing has changed towards a relationship marketing, compared with the traditional

transactional marketing approach. (Gronroos 1994) Transactional marketing is a busi-

ness strategy with insignificant customer relationship and aims to maximize the sales of

products and services. This strategy is often referred to as “one off” sales. Relationship

marketing is a business strategy which aims at retaining and maintain a relation of com-

mitment, where commitment is the willingness for one partner to stay in a relationship

22

with another partner. (Fruchter 2009)

Customer satisfaction is necessary for retention of customers, therefore the number of

companies adopting this approach of relationship marketing is increasing. Kotler states

that the key to customer retention is customer satisfaction. (Kotler 1994)

In a study conducted by Anderson, Fornell and Lehmann, they question if there are

economic benefits for companies to improve their customer satisfaction and how cus-

tomer satisfaction correlates with market share. They conclude that the higher the

market share a firm has there is a downward trend in customer satisfaction. In their

sample no firm has both high customer satisfaction and high market share. Increases in

market share will probably be associated with decreases in customer satisfaction. They

also conclude that firms who achieve higher customer satisfaction will increase their eco-

nomic returns. If customer satisfaction increase with one point it will have a net present

value of 7.48 million dollars over five years for a common firm in Sweden. (Anderson

1994)

In a study conducted by Cai, Deilami and Train found that the most important factor

in the electricity market is service reliability. Their sample showed that 83 per cent

of business customers and 76 per cent of the residential customers would not switch

suppliers if the other supplier has more outages but offered a price discount. Customer

service is the second most important factor, where approximately 50 per cent of the

surveyed customers said they would not switch to another supplier who offered fewer

services. Renewable resources and conservation programs were not as important as the

previous stated factors. Less than 40 per cent of business customers and approximately

40 per cent of residential customers would not switch to another supplier if they did not

offer renewable resources or conservation programs. (Yongxin Cai 1998)

3.3.2 Servitization

Servitization is according to Vandermerwe and Rada a market strategy which involves

market packages or bundles of customer focused combinations of services, goods, sup-

port, knowledge and self-service. There is a trend today that almost all industries on a

global scale apply servitization, because of deregulations, globalization and competitive

pressure. By combining products with services it creates more value for the customers

and it also creates a dependency between the company and the customers. (Vander-

merwe & Rada 1988)

23

3.3.3 Ansoff matrix

In a paper from 1957 the market strategic Igor Ansoff presents four basic alternatives

for a company to grow. They can grown through market penetration, through market

development, through product development or through diversification. The four differ-

ent market strategies can be applied as single alternative paths for a company to grow,

however a frequently encountered strategy for successful businesses are a mixture of the

different strategies except from diversification, which requires a different kind of knowl-

edge, expertise and technology. (Ansoff 1957)

Figure 6: Illustrate the Ansoff’s four different growth strategies. (Ansoff 1957)

When companies decide which strategy to choose, there are commonly two different

approaches to adopt in order to execute the strategy. Those approaches are trend anal-

ysis and disruptive forces analysis. According to Ansoff the trend analysis is basically

determined through a total GDP analysis as well as estimates of the total industry

growth, yet these analysis are highly uncertain due to lack of possible ways to assess

changes in the business environment. Hence companies are encouraged to perform sev-

eral different forecasts or scenario analysis. The second approach to determine which

strategy to adopt is the disruptive analysis which evaluates different outcomes if a certain

event occurs. These events are usually probable to occur, although difficult to estimate

when they would take place. (Ansoff 1957)

If the trend analysis or the disruptive force analysis proves to imply that a company

should diversify there are three different opportunities to explore. The first opportu-

nity is generally implied for manufacturing companies who purchase parts to assemble

the final product. In which case the company can broaden their production in a strat-

24

egy called vertical diversification. It refers to produce the assembly part themselves.

Although, these parts are likely to deviate from the company’s ordinary business and

implies therefore a new mission and new products. The second diversity strategy is hor-

izontal diversification and refers to a company to use their existing expertise, economy

and market to develop new products beyond their current market. Lateral diversifica-

tion is the third opportunity which unlike horizontal and vertical diversification aims to

enter new markets with new products and entirely opens new possibilities. (Ansoff 1957)

Ansoff argues that choosing a diversification strategy depends on what reason a com-

pany have decided to reach their objectives. For instance, a vertical change could for

instance improve the current production line whilst a horizontal change could help ad-

vance into new markets. Lateral changes on the other hand could be to avoid devastating

changes in the entire industry they operate in or to broaden the technical knowledge

within the company. Furthermore there are quite precise descriptions when a company

should not use the specific opportunity. (Ansoff 1957)

3.4 Potential products in the electricity retailing market

The various products that are available in the global market can be divided into the

following categories.

• Micro production is a small-scale renewable energy production technology. Solar

power is ofter associated with roof mounted panels, however there are many other

applications of the technology. For instance there are garbage cans with solar

panels on top that provide a motor with electricity to compact the garbage which

result in reduced emptying frequency. The traditional solar system have in recent

years grown rapidly. (Department of energy and climate change 2011) The cost

of solar panels have dropped dramatically and are still decreasing (Johan Lindahl

2016).

25

Figure 7: The price development of solar panels in Sweden excluding taxes (Johan Lindahl 2016)

The electricity that we use in our life is in the form of alternating current. The

solar panels generate direct current and therefore needs to be converted to alter-

nating current before entering our houses. There are two types of inverters, central

inverters and micro inverters. The benefit with micro inverters is that if one solar

panel is defected it will not drag down the performance of an entire solar array.

(Maehlum, M.A 2014)

• Energy storage uses forms of energy such as kinetic, potential or chemical energy

to store energy that will later be converted to electricity. These storages can

for example be used to supply peak electricity demand by using electricity that

has been generated during periods with lower demands and hence balance the

supply and demand. (California public utilities commission 2010) One example of

Kinetic energy storage is the Flywheel which store energy with an angular speed

of a spinning mass. When charging, the flywheel is spun up by a motor. The

flywheel spins at high velocities in order to store as much rotational kinetic energy

as possible. The motor that spins up the flywheel will act as a generator during

discharge, the rotational energy that is stored in the flywheel will then be released

in order to produce electricity. (Haisheng Chen 2009) A flywheel can store from 3

to 133 kWh (Castelvecchi 2007)

Potential energy storage are when energy is stored through differences in altitude,

there are for instance pumped hydro electric energy storage which is a technology

that uses electricity to pump water uphill to be stored. Later the water will be

26

released back down through a turbine and the energy will be recaptured. The

capacity is depending of the altitude and the size of the reservoir. (Levine 2003)

Chemical energy storage however is a non-motion storage and are used in every

day life as batteries. Batteries consists of two electrodes, a positive cathode and a

negative anode. Between the electrodes there is a porous separator. The separator

and electrodes are placed in an electrolyte solution in order to support the chemical

reaction. When a battery is discharged an internal chemical process occur. Ions are

moving from one electrode to the other through the electrolyte. This means that

one electrode generates ions and the other electrode consumes the ions. During

charging of a battery, the process is reversed. Depending on how this process is

carried out will impact the performance of the battery. (Cope & Podrazhansky

1999)

• Energy efficiency are products that are used to decrease the consumption of energy.

Some of them are:

· Geothermal heat pumps By replacing electric resistance heat with geothermal

heat pumps in the residential sector it can reduce the electricity use with

more than 2 per cent. (Nadel, S. 2016)

· Air heat pumps have been shown to be one and a half to three times as efficient

as electric resistance heating. This because a heat pump moves heat instead

of converting it from a fuel. (U.S department of energy 2016a)

· Smart plugs gives the end customer a better control of the energy consumption

in the household by for instance enable the consumer to switch ”on and off”

devices in the house when you are not home. This can save both money and

energy. (Vattenfall 2016)

· LED is very energy efficient, it consumes 75 per cent less energy and lasts for

25 times as longer than conventional light bulbs. (U.S department of energy

2016b)

27

4 Empirical study and analysis

The empirical study is conducted to apply the different theories into real life scenarios

by using observations to evaluate the potential of the market. The observations may be

used to identify alternative products and services to introduce into the market.

In the introduction chapter a hypothesis was presented assuming that if an electricity

retailer would exclusively offer their customers renewable electricity, the overall profit

would increase. Furthermore according to the Stuck in the middle theory a homoge-

neous product would increase in profit in case of cost leadership. That would conclude

that there are two factors that could increase the profitability, namely the number of

electricity customers and the total sold volume. In the empirical study this hypothesis is

being tested and evaluated if there are any other correlations between the different key

drivers for increasing an electricity retailer’s profitability. Secondly the observed data

was used to conduct in depth interviews with the most outstanding companies found

during the quantitative data collection.

4.1 Study of profitability electricity retailers in Sweden

In this sub-chapter the quantitative data will be presented. This chapter presents the

empirical data and analysis to RQ1

Choice of Key Drivers

In order to define the key drivers for a profitable electricity retailer, theories regard-

ing homogeneous products have been evaluated. Electricity is a homogeneous product

which, according to the Ansoff matrix, would result in choosing market penetration as

the marketing strategy. However, in order to be successful with market penetration

it require a large focus on cost leadership which can be achieved through selling large

quantities or having a very large customer base. Although these two are likely to have a

high correlation. In the present electrical retailing market an increasingly amount of ac-

tors have decided to exclusively offer their customers electricity with guarantee of origin

which would therefore also be a key driver. Lastly since the study examine profitability

there are a couple more key drivers that are interesting for this project; namely economy

indicators such as total turnover and the earnings before interests and taxes (EBIT).

Through these key drivers it would be possible to calculate the profit and average cost

per kWh.

28

Description of the electricity market in Sweden

Approximately 50 per cent of all the electricity retailers were participating in the survey

and the respondents were either sales managers, marketing managers, CEOs or CFOs.

They were contacted by phone and asked to participate in the data collection, then they

would receive a mail with instructions and a table were they could enter the requested

data. The result can be see in the table below. Most of the participants requested

anonymity and have therefore been assigned with a name which represent the quantity

of electricity sold.

In Sweden, approximately 50 per cent of all electricity retailers exclusively offer their

customers guarantee of origin in their energy mix. Which can be seen in the sample of

the researchers data collection, see Appendix A. These companies will be identified with

the color green in the following graphs and non-renewable sources are colored grey, the

actual electricity mix can be seen in Appendix A with the percentage of the various origin

sources. In Figure 8 the profitability in respect to the amount of electricity customers

and the amount of sold electricity is presented for 2013.

Figure 8: Illustrate the relationship between profitability, customer base and sold volume for the year

2013.

The bubble chart above clearly shows that there is a linear relationship between

amount of customers, sold volume and the profitability. The more customers a retailer

29

gets and the larger volume they provide the more profitable they seem to become. The

trend of increased profitability in relation to the amount of customers and sold volume

can also be seen in Figure 9 which illustrate the profitability for the various retailers for

the year 2014.

Figure 9: Illustrate the relationship between profitability, customer base and sold volume for the year

2014.

Figure 8 and 9 illustrate the relationship of the profitability which is visualized by

the size of the bubble in relation to the number of customers on the horizontal axis

and the sold quantity on the vertical axis. It seems like there is a linear correlation

between the different key drivers, hence more customers or larger sold quantity result

in more profitable companies. Hence the determination coefficient, also known as the

linear relationship, R2, for the two years was analyzed and the result can be seen in the

table below. In Appendix B, the linear relationship can be seen with deviations from a

customized straight line.

Figure 10: The determination coefficient, R2, in per cent for the entire analyzed energy map.

The factors presented in the table above are high enough to determine that electricity

30

sales are following the theory of economies of scales. Although there is a large cluster of

electricity retailers with small quantities of sold electricity and few customers. In Figure

11 and Figure 12 a zoom of the cluster with those companies can be seen.

Figure 11: Visaulize a zoom of the cluster in Figure 7 over the cluster, hence the four extreme cases are

ignored

Figure 12: Visaulize a zoom of the cluster in Figure 8 over the cluster, hence the four extreme cases are

ignored

The linear correlation between the size of the bubbles, sold amount of electricity

31

and amount of customers seems even more obvious for smaller companies, hence the

determination coefficient was calculated to prove that smaller companies have a larger

impact on the profit if the amount of sold electricity and amount of customers increase.

The determination coefficients were as followed:

Figure 13: The determination coefficient, R2, in per cent for the cluster of retailers from Figure 11 and

12.

It is clear how the relationship of increased amount of customers and sold quantities

are related to higher profitability. It can also be assumed that exclusively offering renew-

able energy to their customers will also be a driver for increased profits. The hypothesis

was tested and the result is presented in Figure 14 where the average earnings per kWh

of electricity from different orients is presented.

Figure 14: The chart illustrate the average profitability of different production sources for the year 2013

and 2014

32

The result from the study has proven that the hypothesis was correct. In fact the

profitability of guarantee of origin is approximately two to four times as profitable as

nuclear and fossil produced electricity. Although, the profitability is larger with renew-

able production source in comparison with other production sources, the actual EBIT is

surprisingly low and seems not to be able to carry the entire company by itself. Therefore

in depth interviews with the most successful companies were conducted. The companies

were found in the bubble charts in order to identify the most outstanding companies to

collect information from. The companies that were chosen were high profit companies

that in some way distinguished themselves from the other retailers.

4.2 Strategy and positioning maps of electricity retailers

In this sub-chapter the result from the qualitative data collection will be presented to-

gether with a strategy and positioning map. This chapter presents the empirical data

and analysis to RQ2 and RQ3

When the hypothesis was tested through the quantitative data collection it was proven

that guarantee of origin is more profitable to sell than other energy sources, in fact it

was up to four times as profitable as electricity with fossil origin. According to Ake

Person, Head of electricity sales manager at Skelleftea Kraft, the findings are unique

and have never previously been discovered. Although in the data collection it was also

noticed that almost fifty per cent of those companies that answered the survey had less

than one million SEK per year in profits with an average of 0.28 million SEK per year.

Thus it became interesting to evaluate what made the more profitable companies supe-

rior on the market. By using the collected data and analysing the bubble charts, three

outstanding companies were asked to participate in in-depth interviews. The requested

interviews were required to possess great knowledge within energy retailing i.e. CEO of

electricity trading, sales managers and customer developers were asked to participate.

The interviewees received a mailing in advance with the questions that would be dis-

cussed in order to prepare their answers. The interviews lasted for approximately one

to two hours and were either conducted through personal meetings or through telephone.

The following is a description of the selection of interviewees.

Firstly it was noticed that there was a relationship between higher profits and large

amount of sold electricity and many customers. Therefore those companies that inter-

ested the researchers the most were those companies that differed the most from the

linear relationship and had an relatively high profit compared to equally sized compa-

33

nies. The interviewees were called and asked to participate in the study, they had all

been contacted before during the quantitative study. Two of the interviews were held

at their head offices and one was held over the phone where the call was recorded. The

answers have been compiled and can be seen in appendix C.

4.2.1 Positioning and growth strategies for electricity retailers

The researchers have identified a number of different ways to increase profits in the

electricity retailing sector. Being an electricity retailer requires a focus on either differ-

entiation or cost leadership. In the following sub-chapter an evolved form of Figure 15

will be presented.

Electricity is a homogeneous product and have encountered many challenges in finding

profitability according to Lars Elfstrom, CEO for electricity trading at GEAB. He also

states that the electricity market has for far too long been solely focusing on offering the

lowest possible electricity price. Furthermore he states that the competition has grown

even stronger due to increased accessibility of information and many companies do not

know how to position themselves on the market.

When electricity retailers do not know how to position themselves on the market, this

goes in line with the theory of ”stuck in the middle”, where Lundqvist and Albertsson

(1999) refer to as: when a company tries to use more than one competitive strategy and

hence will not be as profitable. There are basically two alternative approaches to avoid

getting ”stuck-in-the-middle” when being an electricity retailer, namely cost leadership

and differentiation

Figure 15: A strategy map for electricity retailers to become more competitive.

34

Cost leadership

In the following paragraph, the branch Cost leadership in Figure 15 will be explained in

detail.

The electricity market in general is leaning towards the cost leadership strategy accord-

ing to Lars Elfstrom and confirmed by Bjorn Dahlberg, customer development manager

at GodEl, as well as Ake Persson, Head of electricity sales manager at Skelleftea Kraft.

It is not possible for all 120 retailers to offer the lowest electricity price all at the

same time. According to Aaker (2004) all brands will look the same to consumers if a

brand fails to develop or maintain differentiation and the price will become the dominant

decision determinant. Based on what Elfstrom, Dahlberg and Persson states that the

whole market leans towards the cost leadership strategy and what Aaker (2004) states,

the conclusion can be drawn that all electricity retailers start to look the same from

the perspective of the consumers. The characteristics for a retailer to succeed within

cost leadership is mainly that one has to sell electricity from guarantee of origin, since

it has been proven to have a higher profitability, and sell it to a large customer stock as

well as maximize the volume. In order to be able to reach out to such large amount of

customers they would need to have at least a national width and not only focus on local

markets.

According to Dahlberg, it seems to be difficult to grow organically beyond 100 000

customers, and hence an easy way to increase the customers stock after reaching 100 000

customers is to buy other retailers. Elfstrom explains, Appendix C, that many larger

companies buy smaller actors with a local market appearance in order to penetrate that

market. Retailers with a local market appearance have the possibility to reach out to

approximately 80-90 per cent of the local market, which a company with a national

appearance could hardly do. Therefore, to successfully grow beyond 100 000 customers

with the goal to become cost leader those companies should become ”Glocal”, global

with a local market appearance, Appendix C.

By buying smaller companies the company is actually buying the customer stock and

have the possibility to lower the over head costs per customer. In addition, it is very

costly to have unloyal customers, hence Elfstrom and Persson believes that it is very

important to lower the registration cost by introducing new technology, every new cus-

tomer cost roughly up to 1 500 SEK according to Persson and have a payback time

35

up to four years states Elfstrom, Appendix C. In addition Elfstrom mentioned that the

electricity sector is currently lagging behind regarding adopting new technical solutions

which could reduce the over head costs. Elfstrom confirms that large savings can be

made by transferring a lot of the administrative work to the customers, for instance

when changing contract when moving, although Dahlberg states that GodEl has done

the opposite, Appendix C.

The retailer should be responsible for the entire movement of the electricity subscrip-

tion or let customers manage everything themselves. In addition, the most common

reason why customers change electricity retailer is due to lack of contact according to

Elfstrom. One way to communicate with the customers and hence prevent them to

change retailer is by having interactive invoices, Persson explained. For instance by

showing the customers how they have consumed their electricity - when and where. Al-

though there is generally a low trust towards electricity retailers, according to Dahlberg

who explains that one way to earn more trust from consumers is to exclusively offer

fair contract, which is important to grow organically. Dahlberg states that by remov-

ing the contracts at current rate would increases trust towards the electricity retailer.

Bjorn Dahlberg explained that the most transparent contract to offer the customers is

a variable price with a fixed monthly fee. Thus ensure the customers to always pay the

spot price plus a given additional charge. Some retailers provides hidden fees in their

contracts and refer to them as ”risk premiums” and describe these contracts as sales at

purchasing price, which could be categorized as a type of contract with variable price

states Lars Wikman, CEO at Nykoping Vattenkraft.

To summarize the identified solution to succeed within cost leadership is to offer cus-

tomers all around the country electricity with guarantee of origin at the lowest possible

price and grow organically up to 100 000 customers. They should also use new technol-

ogy in order to lower the over head costs and have an interactive web page as well as

invoice to maintain continuous contact with the customer. When a company within cost

leadership has organically reached about 100 000 customers they could start penetrating

various markets by buying smaller local actors in order to achieve high market shares in

those locations and thus achieve economies of scale.

36

Differentiation

The second approach to avoid getting stuck in the middle is by differentiating, according

to figure 15. In order to differentiate within electricity retailing, one have choose how

to differentiate. In the following paragraph, various differentiation approaches will be

presented.

According to the quantitative data collection, many retailers seems to be stuck in the

middle, they have low volumes, small profitability and few customers. These companies

seems to be awaiting for the electricity price to increase, believing that the profitability

will increase along with it. However, according to Elfstrom, Dahlberg and Persson the

profitability would not increase in case the electricity price became higher, rather the

opposite. Elfstrom states, if the electricity price got higher then the customers would

become more price sensitive and hence demand a higher competition in the market.

According to the researchers the companies with an unsustainable strategy, low profits,

are encouraged to use the second path according to the ”stuck-in-the-middle” theory -

differentiation.

The three companies that were interviewed have differentiated themselves in different

ways. Differentiation is referred to by Uggla (2006) as a strategy used when a company

wants to offer their customers something in addition, in order to create a positive ex-

perience that their competitors do not satisfy. This approach has been confirmed by

Dahlberg as a promising strategy to avoid getting stuck in the middle, in case extreme

expansion is not possible. Conclusions can be drawn from the qualitative data collection

that the most promising approaches to differentiate one self is to offer various products

and services that are somehow related to electricity retail. In Figure 16 which is pre-

sented below, various possible approaches to differentiate are presented.

37

Figure 16: A strategy map for electricity retailers to become more competitive by choosing differentiation

as strategy.

GodEl has differentiated themselves by donating their profits to charity. Skelleftea

Kraft has differentiated themselves mainly through branding but also by being the only

electricity retailer in Sweden to have an exclusive contract with Tesla Cars where they

provide electricity to their Super Chargers. In addition, Skelleftea Kraft has also made

a public challenge against the largest electricity companies to compete on the national

market. GEAB has differentiated themselves with having local market appearance but

primarily by offering their customers a variation of products and services in different

combinations and are taking full electricity responsibility towards their customers. Lars

Elfstrom states that GEAB has been successful in offering their customers products with

additional services, in order to assist the customer even further.

In chapter 3.4, different potential products in the electricity retailing market was de-

scribed within different categories. Here follows a description what the conditions are

for these categories, according to the interviewees.

• Micro production According to Elfstrom and Persson during the interviews regarding

micro production, there are new innovative solar systems that are mounted directly

on the ground and track the sun throughout the day with an increased efficiency.

Yet, there are large price barriers towards the end customers, both Dahlberg and

Elfstrom mentioned during the interviews that the government need to be more

38

clear with their incentives in order to provide more safety on the solar energy mar-

ket in Sweden.

• Energy storage According to the interviews, Dahlberg, Elfstrom and Persson are

unanimously optimistic for the potential of energy storage, especially the battery

solution. They believe that battery solutions in a combination with solar panels

could result in entire new markets to emerge.

• Energy efficiency According to Dahlberg, the low electricity prices is holding back the

energy efficiency products. Another problem according to Persson is that there are

a lot of energy retailing products but almost no one buy these products due to other

priorities in life.

The penetration of energy related products are fairly new in Sweden but have accord-

ing to the in depth interview with Dahlberg, Elfstrom and Persson a huge potential in

the future.

Another way to differentiate from each other is by offering different services, in the

following bullet list some of the encountered services from the interviews are presented.

• Charity has been an efficient way to differentiate in the market, companies like GodEl

promise their customer that the entire profits will be donated to charity. GEAB

on the other hand offer their customers the opportunity to donate an additional

part of their bill to charity of choice. This type of service contributes to greater

emotional relationship between the client and the retailer.

• Loyalty programs was introduced to benefit loyal customers because it has been proven

to be costly for the retailers to lose customers. By benefiting loyal customers re-

duces the chance that they change electricity retailer.

• Behaviour changing services During the interviews with Persson and Elfstrom be-

haviour changing services such as Greenley was mentioned. Greenley is a company

that provides households with a deeper understanding of their energy consump-

tion through a mobile application which can result in a change of energy behav-

ior according to Fredrik Hagblom, product manger at Greenley, in an interview.

Greenely does not use any hardware but is instead analyzing the consumption

39

through data they recieve from the grid owner. By analyzing the consumption

pattern Greenley can provide the consumer with an overview of their consumption

behaviours and compare it with neighbours in order to give concrete proposals

of improvement by visualizing the action in a comprehensive and understandable

way.

Regarding charity as a service, it can be profitable for an electricity retailer and it

can also strengthen the customer retention. However in order for an electricity retailer

to grow with charity as a service it is important to balance how much that should be

donated to charity and how much of the profit the electricity retailer can keep.

According to Elfstrom, the most promising solution to reach out with these products

and services to the end customers is through servitization, hence provide a service along

with the product. He also mention that servitization will create more value for the cus-

tomers and create a dependency between the company and the customers. This goes in

line with the definition of Vandermerwe and Rada (1988), market packages or bundles of

customer focused combinations of services, goods, support, knowledge and self-service.

According to the researchers, servitization will increase the customer retention due to

more contact between the customer and the electricity retailer.

When introducing various products and services one have to decide for whom the

products and services are suppose to reach out to. The theory of competitive strategies

can be adopted to even further differentiate and to satisfy various customers’ specific

requirements, according to the researchers. In Figure 17 the different competitive strate-

gies are shown, they are Focusing, Cost leadership and Differentiation.

40

Figure 17: A strategy map for electricity retailers to become more competitive by choosing differentiation

as strategy.

In summary, in order to succeed within differentiation, it is a necessity for electricity

retailers to offer their customers more value than merely the homogeneous product elec-

tricity. This can be done by offering customers different products and services that can

help the end consumer to get a better control of their electricity consumption. It is also

suggested to use servitization as strategy to facilitate the introduction for the consumer

but also to increase the relationship with them. However, the electricity market is fairly

new at introducing new products and services. Therefore the following sub-chapter will

focus on how these products and services could be positioned in order to reach out to

the Swedish private market.

4.2.2 Positioning within servitization

The following paragraph will handle the objective in research question three, regarding

how these products and services could be positioned successfully.

The previous part of the chapter has been handling the question how an electricity re-

tailer should develop their business in order to be more competitive within the energy

market. An electricity retailer can either choose to offer the cheapest electricity price

and become cost leader, or differentiate through offering various products and services.

Figure 17 summarize what previously has been observed. In order to find a strategy

for how these products and services should be positioned, a positioning map has been

41

developed by the researchers, see Figure 18. The following chapter will describe the po-

sitioning for each strategy (focus, differentiation and cost leader) for promoting different

products and services. In this case, cost leadership refers to offer the cheapest price

possible for the products and services and should not be mistaken for cost leadership

regarding selling the homogeneous product electricity that was presented in the earlier

sub-chapter.

Figure 18: A strategy map for how the electricity retailers should position themselves in order to become

more competitive.

In order to be successful in positioning the services and products in chapter 3.4 (po-

tential products in the electricity retailing market), one have to decide for whom they

are positioned. Whether it is for those with very specific requirements, i.e. tailor made

solutions, or if the targeted groups requirements are mainstream or anything in between.

42

Cost Leadership within servitization

The first competitive strategy is cost leadership and concerns offering the lowest price

possible of products and services to the end customer mention Uggla (2006). This strat-

egy would focus on turning products into commodities. First thing to be recognised

in this target group is their urge to save money. Being environmental friendly while

doing so would just be a bonus. Therefore, in order to succeed within cost leadership

the company would have justify if the products or services are economically sustainable.

Therefore according to the theory general value positioning, the products and services

would be defined as ”same for less” or ”less for much less”. These companies using

the cost leadership strategy could for instance provide a web shop with the best energy

efficient products on the market, such as LED lamps, water boiler, vacuum cleaners,

smart plugs etc. In addition the web shop could also provide solar panels and offer them

along with installation to a competitive cost. The customers are generally very price

sensitive and the channels to be used are those reaching out to the mass market, such as

television commercials, radio commercials and social media. This strategy will always

strive towards offer the best price possible and day by day broaden the market, when

discussing the theory of marketing mix. It will be very important for the company to be

able to communicate all the new benefits of the products, theory about the product life

cycle, and provide information regarding new regulations that might affect their con-

sumers habits. For instance if batteries would be economically sustainable. It would be

very important to have a strong brand which is associated with energy commodities that

will lower the consumers energy consumption because they would sell the same type of

products as Global actors like Media Markt.

The main advantage of being cost leader is the accurate market penetration, when the

products and services that previously have been sold start to get saturated, new markets

would have to be established, according to the theory of Ansoff. Such new market could

be reached by removing the investment barriers, according to the researchers and adopt

a leasing solution. By doing so more households and companies will be able to do the

investment. Furthermore the researchers, suggests to introduce battery solutions to ex-

isting customers when it becomes economically sustainable, due to the current subsidy

system. Hence make the product development to be introduced as stated in the Ansoff

theory. The last developments stated by Ansoff is diversification. Diversification can be

achieved through introducing new products that are different from existing ones. Ac-

cording to Ake Persson one such product is smartflower, which partly have an integrated

battery and simultaneously produce solar energy in a highly efficient manner.

43

Differentiation within servitization

The second competitive strategy, is differentiation. This strategy focuses on unusual

target groups but where the solution is scalable, thus many customers with similar de-

mands. According to the interviewees, such solutions can help the company to increase

the customer retention by offering them the possibility to donate to charity. The cus-

tomer could choose to whom the donation should go. Two different strategies have been

identified regarding how to raise the money, either as in GodEls case, where the prof-

its are donated or as in the case of GEAB where the customer can choose how much

they are willing to donate for every kWh they purchase. By having regular mailings to

the customers with follow ups regarding how much money that has been raised to the

choice of charity, the customer retention will increase. Another way to increase the cus-

tomer retention is by encourage loyal customers in terms of loyalty programs. It could

for instance be to provide them with various offers on the products and services that

the company provides, but it could also be to offer campaigns on other stores, which

according to Elfstrom is the strategy used by GEAB where they offer their customers,

for instance, a discount on the local grocery store. However it could also be a bonus

system where every kWh is given one bonus point which could be used in the web shop.

For instance, one kWh could be equal to one point that is worth 0.02 SEK to purchase

products or services from the internal web shop. That would result an average of 100

SEK per year for an household with district heating that consumes 5000 kWh per year

(Energiradgivaren 2011).

During the study another target group has been identified as a promising target group

within differentiation. This target group has been entrusted to soon grow according

to Kjell Gustavsson, electrical engineer at Statens Fastighetsverk, in an interview and

whose needs have to be satisfied. Examples of such target groups where scalability can

be adopted within energy servitization are target groups such as those who are off-grid,

wants to go off-grid and those who are forced to go off-grid. However it will be difficult to

differentiate and gain a competitive market position, since both focus and cost leadership

challenge the positioning from two different angles.

• Those who already are off-grid and those wants to supplement the grid have a smaller

demand on the reliability than those ”who are forced to go off-grid” or ”those who

wants to go off-grid”. This target group could for example be overnight cabins,

i.e. hunting huts, cottages etcetera where they in general are not dependent on

electricity but might install it out of comfort. Hence they should be targeted

44

with the general value positioning ”same for less”. This group could be targeted

through magazines and with concentrated commercials ahead of seasons with in-

creased sales and foremost take advantage of the availability of the customer base

and sending direct commercials to their electricity customers and also follow up

with calls to promote the new advantages of the suggested products and services,

when discussing the theory about the marketing mix. It will be highly important

to have an accurate positioning so that customers can identify the purpose of prod-

ucts and services and not get confused with cost leadership and focus. Hence, the

existing products and services should continuously be evaluate for weaknesses and

have them fixed in order to promote new improved benefits for new customers,

when discussing the theory about the product life cycle.

According to Henning-Thurau and Klee (1997) in the literature review, a com-

pany’s long term competitiveness is determined by the services and products of-

fered by the company along with the customer satisfaction. This target group is

fairly close to cost leadership and could increase the chance to succeed if more

services were added to the products and hence increase the customer retention.

Another niche target group according to Daniel Lundgren, transport manager at

IL Recycling, are trash stations with various demand of emptying, depending on

the season. Daniel said in an interview that the trash station at ”Storfallet” has

a season that last for a few months each year. Each time they are emptying the

trash station cost IL Recycling approximately 8000 SEK due to long distances,

which has to be done at least 6 times during the season. By electrify the station

in order to allow it to compromise the trash would at least reduce the number of

times it has to be empty by over fifty per cent. Hence, IL Recycling would save

approximately 25 000 SEK per year in emptying costs. This solution would only

require a battery and a few solar panels.

• Those who wants to go off-grid are for instance those who build accommodation

with all-year-around living, therefore they require a normal energy consumption

in order to have pleasant temperature along with other comforts such as fridge,

freezer, television and lights etc. This target group could be compared with the

focus group below, although this target group require a very precise calculations to

be able to maintain a normal living during the winter period. To succeed with the

calculations of the energy demand and to meet the requirements during the winter,

45

the electricity retailer would have to know the heat losses in order to compensate

them. Therefore, it would be wise to cooperate with construction companies that

are specialised in building energy efficient houses. Since this strategy is scalable the

pricing for building these installations would be less then the tailor made solutions

in the focus group, therefore the general value positioning, would be ”more for

same”. The products would have to be high end and reliable, as they are suppose

to providing the entire household with electricity, all year round. Due to the pric-

ing ”more for same” it is not recommended to produce the products and services

itself, but instead procures high end products on the global market. By purchasing

large volumes would reduce the average price per product and avoid expensive R

and D costs, hence be able to offer better price to their customers. The target

group would be those who live outside a society, do not have access to electricity

and where it would be costly to connect the house to the electricity grid. These

solutions could for instance be relevant for islands being populated, properties far

from society and hotel or restaurant located high up on mountains with year round

activities. In order to reach out to these customers, the best promotion channels

are social media, events and word of mouth.

When entering the growth phase in the theory about product life cycle, the goal is

to expand to other target group. Such target groups could for instance be refrig-

erated transport that already have electricity supply from fossil fuels and wants

to go green. Potential target groups are for instance heavy trucks and container

ship. In order to succeed with such new target group, it will firstly have to be

evaluated for flaws, such as reliability of the isolation from the sun. One flaw of

solar energy is the reduced efficiency when the panels gets shaded, therefore in

order to manage this market one have to realize how to overcome the threat of

partial shadows. One solution could for instance be micro inverters, see chapter

3.4. By using micro inverters the reliability of the entire system would increase.

This could have been a potential customer even today, however the weight and

the size of the batteries that would have to be integrated to the truck are to large

and to heavy with toady’s technology. When the reliability of these systems are

high enough to implement in the transport sector, the customers would have to

be informed, and hence new channels to reach them would have to be adopted.

For instance, in order to reach out to the truck transportation sector one could

contact the production companies of the trucks and initiate collaboration with the

manufacturer. The maturity phase is well beyond the time frame for this thesis

46

and are therefore left for the reader to evaluate how to secure the market.

• Those who are forced to go off-grid are for instance residence where the grid is weak

and needs to be replaced but where it is not economically viable, mentioned Kjell

Gustavsson in the interview. The electricity grid that connects many Swedish

islands in the archipelago are getting old and it is very costly to lay new transmis-

sion lines. This target group will demand high quality of the products in order to

maintain reliable access to electricity, whether they are off-grid or not. This target

group would not be willing to compromise for any worse solution. The pricing

for this target group, according to ”general value positioning”, would be ”more

for more” and can be compared with the price to lay an entire new transmission

line. This target group are close to the focus group, however one great difference

between the two positioning strategies are the genuine interest of new technology

among the group that is targeted in the focus positioning strategy. Therefore no

extravagant add-ons are required to satisfy this target group, only to make sure to

have a reliable access to energy whenever needed. These groups could be targeted

through preventive work by having a dialogue with the network owners who are

responsible for cable installation to these islands and promote their solutions, when

discussing the theory about marketing mix. Before this target group get saturated

they would have to expand and secure new markets. The closest groups to expand

towards would be to challenge the Focus groups in Figure 18, but they could also

offer cheaper solutions to find market shares in the other two differentiated target

groups (those who already are off-grid/those who wants to supplement the grid

and those who wants to go off-grid), when discussing the theory about product life

cycle in the growth phase.

Focus within servitization

The Focus strategy is positioned towards those with very specif requirements, according

to the theory about competitive strategies. The focus group within servitization can

be identified as either very environmental friendly or having a great interest in technol-

ogy. Furthermore these target groups are very keen in the subject and should be offered

”more for more”, in order to satisfy their specific requirements. The electricity retailer

that distribute this service should be flexible, knowledgeable and take the customers

requests into consideration in order to fulfill the request. This strategy will require more

effort from the distributor and more knowledge and hence offer a top segment solution.

According to the theory, ”market mix”, a retailer who is targeting the mentioned focus

group should offer high quality and exceptional service for a higher price in order to

47

meet the requirements from the customer. In order to have an accurate promotion of

the products and services, a selective segmentation should be adopted. One have to

be able to define who is the customer. As earlier stated, the segment for these prod-

ucts and services are generally people with an environmental friendly profile or having

a great technical interest. They could be reached through events with focus on these

target groups and word of mouth, hence the importance of exceptional service. Lastly

these groups could be targeted through magazines with environment and technology in

focus.

The first action an electricity retailer needs to do when entering this niche market is to

develop a strong brand and highlight themselves as technically innovative and knowledge-

able in order to gain a trustworthy position, when discussing the theory about product

life cycle. When the company is entering the growth phase the entire goal is changed to

expand into other targeting groups, as the previous target group is becoming saturated.

Companies will have an advantage against their competitors since they already have ex-

perience in the market. Although, in order to maintain the advantage, the products and

services are needed to be evaluated for weaknesses and have them fixed. Such weaknesses

could for instance be complicity in usage, since the previous target group was techni-

cally interested and most likely better at monitoring them. The new customer segment

should be addressed with the new and improved benefits of the products and services

and keep barriers against competitors by having a competitive pricing. When enter-

ing the maturity phase the retailer should make sure to secure the market by lowering

prices, however it is probably difficult to add any more attributes since the target group

is originally described as ”focus”, whom by nature is interested in all the new technology.

48

5 Discussion

In this chapter the implications of findings and future research will be discussed.

5.1 Implications of findings

The researchers found that it was most profitable to sell electricity from guarantee of

origin but many companies seems to be “stuck in the middle”. From our sample it was

shown that 50 per cent of the companies earn less than one million SEK and the average

profitability is 0.28 million SEK. In order to increase the the possibility to be more

profitable the electricity retailer needs to differentiate themselves through products with

services, servitization. As shown earlier each electricity retailer can choose a competitive

strategy (focus, differentiation, cost leadership). The implications of these findings is

that electricity retailers need to extend and reorganise their organisation. The more

people that are working in an electricity retailing company, the more difficult will it

be to reorganise the organisation. The products that they can offer their customers

are for example more energy efficient products such as: LED lamps, smart plugs and

water boilers. This will result in decreasing profits for the electricity retailers in terms

of sold electricity. However the margins from electricity retailing have been proven by

the researchers to be small, which means that larger margins probably could be made

from selling energy efficient products. If electricity retailers do not start to sell these

products someone else will. Companies like Clas Ohlson and Media Markt have already

started with selling these products. But the electricity retailers have an advantage since

they have a customer base that they can reach easily and can add some kind of service

to the products such as installation and better warranty periods.

5.2 Future research

This study investigated towards what direction an electricity retailer should develop

their business in order to improve their competitiveness in year 2020. It resulted in that

the electricity retailer should either focus on selling electricity from guarantee of origin

which was up to four times more profitable than other origins and take on a leading

position in cost leadership or they should focus to differentiate themselves in a certain

segment with products together with services. If the retailers choose the path products

with services, servitization, they should also position themselves with a certain compet-

itive strategy (cost leadership, differentiation or focus).

49

The researchers have analyzed what kinds of groups/individuals that could be tar-

geted within each and one of the competitive strategies in servitization. However future

research needs to be done in order to evaluate deeper what kinds of groups or individuals

that exist today and should be targeted for each competitive strategy. Future research

also needs to be done about the market potential of each competitive strategy within

the servitization.

As stated earlier the researchers found that selling electricity from guarantee of origin

was up to four times more profitable than other origins. Future research needs to be

done deeper in order to evaluate why selling electricity from guarantee of origin is two

to four times more profitable than the other origins.

50

6 Conclusions

The purpose of this study was to investigate how a modern electricity retailer could

avoid the current and forthcoming difficulties within the market. Furthermore the study

would search for alternative directions in order to improve the profitability in year 2020

and beyond. The main research question to fulfilling this purpose was:

Towards what directions should an electricity retailer develop their business in order

to improve their competitiveness in the year 2020?

The low electricity price is caused by high competition and uncertainty how to differ-

entiate, therefore there are small or no profits in energy retailing alone. However offering

solely electricity with guarantee of origin at a variable price with a fixed monthly fee

would increase the profits and the trust towards the electricity retailer and hence in-

crease the customer retention. Furthermore companies need to differentiate themselves

in order to create a unique market positioning. Servitization has been evaluated as a

solution to increase the profitability within the electricity retailing sector. A strategy

plan to differentiate from other electricity retailers with various products and services

have been created, the strategy plan can be seen in Figure 19.

Figure 19: A strategy map for electricity retailers to become more competitive.

51

According to Figure 19, implementing servitization can be done by various strategies,

Figure 20 describes different target groups and how they can be approached.

Figure 20: A strategy map for how the electricity retailers should position themselves in order to become

more competitive.

If an electricity retailer would follow the above strategic plan it would result in in-

creased possibilities to differentiate itself in the market and ultimately create a business

with greater profits.

52

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7 Appendix

7.1 A, Profitability electricity retailer companies

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7.2 B, Relationship between profitability, customer base and sold volume of

electricity retailer companies with correlations

Figure 21: Illustrate the relationship between profitability, customer base and sold volume for the year

2013 with correlations

Figure 22: Visualize a zoom of the cluster for 2013 with correlations

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Figure 23: Illustrate the relationship between profitability, customer base and sold volume for the year

2014 with correlations

Figure 24: Visualize a zoom of the cluster for 2014 with correlations

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62

7.3 C. Answers from structured interviews

Figure 25: Compilation of interview questions and answers, question 1. - 2.1

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Figure 26: Compilation of interview questions and answers, question 2.2 - 3.4

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Figure 27: Compilation of interview questions and answers, question 3.5 - 5.

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Figure 28: Compilation of interview questions and answers, question 5.1 - 5.4

Figure 29: Compilation of interview questions and answers, question 5.5 - 7