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Managing prepaid customers: 5 lessons for utilities

Energy companies are struggling with prepaid service offerings just as the telecommunications industry did many years ago. Before coming into energy, I spent more than half of my career in finance for the telecom industry — so I know there are many lessons to be learned from there.

My career in telecom began with a family-owned payphone service, when selling prepaid long distance cards was a way to leverage location relationships and increase revenue. Moving on to Ernst & Young, PowerTel, and LecStar, I observed major telecom carriers experimenting with prepay offerings. Over a decade, I watched the telecom companies evolve as they tackled the challenges of prepaid services.

Here’s what electric utilities can learn from telecom.

Rule #1 Payment Network

Make it easy for customers to locate authorized payment centers and must offer payment options, cash being the most crucial. Prepaid customers are frequently underbanked and make multiple cash transactions during a billing period. To make it work, you must:

  • Have a robust network of authorized payment centers.
  • Avoid unauthorized payment centers where hidden fees apply.
  • Accept payment options — cash, check, credit cards.

Rule #2 Reduce Call Volume

Prepaid customers check their account balance many times during a month, possibly every day. This drives up call volume so, with a customer service call averaging $5 in costs, utilities should consider ways to cut back. Some smart choices are:  

  • Leverage a caller ID system that prompts the IVR to play the current balance.
  • Designate and train customer service reps to handle prepaid customer calls.
  • Consider text alerts to push out account information.
  • Offer a prepaid customer portal that includes balance information.
  • Consider forecasting energy use based on a 5-day weather forecast.

Rule #3 Look at Your Rules

Prepaid customers will work your practices to their advantage, often making just the minimum payments to avoid the cut-off thresholds.

See if your utility can set appropriate rules about

  • Shutting down a customer after a certain time of day or late on a Friday.
  • During bad weather.

Rule #4 Plan for No Demand Elasticity

Demand elasticity is a macro-economic principal. For instance, when gas is cheap, consumers drive more and purchase less fuel-efficient vehicles resulting in increased spending for fuel. The opposite is true when gas prices increase.

Powertel tried to entice customers to increase their monthly wireless spend. They concluded that prepaid customers would only spend a set amount regardless of the price per minute. Therefore, there is no demand elasticity for prepaid services.

If a utility has a prepaid energy efficiency program, customers are not likely to change their spending pattern regardless of the price of a kilowatt-hour.

Rule #5 Lower Monthly Spend

PowerTel found that prepaid customers spent approximately 10 to 15 percent less than post-paid customers because they

  • Are more budget conscious and have limited funds to spend on any service.
  • Make purchasing decisions every time they replenish their prepaid account.

A February 2016 study by the Distributed Energy Financial Group showed that prepaid electric customers exhibit similar spending patterns to the Powertel findings.

While prepaid customers are a challenge and costly to manage, understanding their profile and adjusting business practices to accommodate them will help you do better. At a minimum, remember that prepaid customers are likely to make frequent, small payments in cash; work unwritten rules to their advantage; and avoid any increase in energy use.