Understanding profitability: Why some customers are hot and others are not
- Electric Power Research Inst., Palo Alto, CA (United States)
Gone are the days when utilities would boast how many new customers were being added to their system annually-regardless of whether they were in fact profitable to serve or not-as if bigger was always better. In a not too distant future, and with the liberalization of the business environment, some utilities may no longer wish to serve certain customers on their systems, while at the same time aggressively wooing other customers. With the anticipated arrival of competition and erosion of utility franchise service areas, the electric power industry will gradually evolve into a mode where customers will be segmented into finer groups and evaluated based on their expected profit margins-theoretically the difference between the revenues expected from them and the cost of serving them. Understanding this basic concept, and the mastery of the art of arriving at the correct profit margin for each market segment, will be essential to overall business profitability and survival in the future. In practice, however, many utilities are ill-prepared to accomplish such fundamental analyses correctly and consistently because they do not have the correct analytical framework, the right information, or the right tools to perform the analysis. This paper will outline the fundamentals of market segmentation and evaluating customer profitability. It will also illustrate how to balance the cost of serving a customer with the revenues derived to produce a {open_quotes}reasonable{close_quotes} profit margin in each market segment. EPRI has developed a software tool specifically designed to assist utility analysts perform this type of work. Other ongoing research in the area of profitability analysis is also described.
- Research Organization:
- Electric Power Research Inst. (EPRI), Palo Alto, CA (United States)
- OSTI ID:
- 254471
- Report Number(s):
- EPRI-TR-106232; CONF-960330-; TRN: 96:002542-0018
- Resource Relation:
- Conference: 1996 EPRI conference on innovative approaches to electricity pricing: managing the transition market-based pricing, La Jolla, CA (United States), 27-29 Mar 1996; Other Information: PBD: Mar 1996; Related Information: Is Part Of Proceedings: 1996 EPRI conference on innovative approaches to electricity pricing: Managing the transition to market-based pricing; PB: 347 p.
- Country of Publication:
- United States
- Language:
- English
Similar Records
Making industrial energy efficiency mainstream and profitable: Where public benefit and private interests intersect
Profitability primer: a guide to profitability analysis in the electric power industry