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
60
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
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