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Creating Markets: Partnering with Value Creators in Sales Channel

February 2004 Partnership

For many executives, the question of sales channel selection and management is framed as a question of determining the best means to create a conduit for reaching end customers. Framed in this manner, distribution channels are examined with a focus on driving the maximum flow-through of product from the producer to the end customer. In managing distributors, executives deploy a mixture of carrots and sticks; carrots to reward distributors for improving sales of their product or service and sticks to punish poorly performing distributors. Framing sales channels in this manner may be historically standard, but there are more fruitful approaches.

In partnerships with utilities, MeterSmart provides commercial and industrial (C&I) submetering solutions through hardware and services. They make, sell, and install commercial and industrial submeters and meters, then automatically read the meters and communicate the meter reads. For MeterSmart, the framework of carrots and sticks for managing distribution channels is inappropriate. Instead, their framework focuses on joint value creation.

There are distinct issues that drive the relationship between MeterSmart and electric power suppliers away from that of a distribution agreement and towards a joint value creation agreement. These issues are (1) the source of the value of C&I submetering, (2) the source of the value to power suppliers in partnering with a submetering solution company, and (3) the source of the value to end customers of using the offerings of the utility and MeterSmart.

Value of C&I Submetering

Submetering a C&I load allows the utility and end customer to collect data on the location and timing of power consumption. For instance, by partnering with a utility, an automobile plant can separate the consumption demand of different production areas and office units, and monitor their consumption in real time. The value of submeter level consumption data is created when managers of the commercial or industrial facility are able to make economic decisions based upon this information. To make an economic decision based upon submeter data requires the creation of another business process. For submetering, this second business process is a demand-response program managed by the partner power supplier.

Demand-Response programs in electricity markets hold the promise of using market forces to improve the match between demand and potential supply. To fully release the power of market forces to match supply and demand, three key elements must work in tandem: (1) consumption must be measured in real time; (2) prices must vary in real-time; (3) the consumption demand and price signals must be communicated between the power supplier and the end customer.

MeterSmart, a Hunt Power L.P. subsidiary initiated in 1999, helps large C&I customers of utilities address the first issue: measuring demand and communicating it to both supplier and customer. But this is only half of the solution. The other half must come from the cooperation of electric power suppliers.

Electric power suppliers have to create, market, and implement demand-response programs. Their demand-response contracts will incorporate time varying prices to encourage the shaving of demand during peak loads in exchange for lower prices during off-peak periods. Submetering solution providers like MeterSmart are a required ingredient for electric power suppliers in delivering demand-response programs in order to enable end customers to monitor and manage their consumption. But the sale of a demand-response program to an end customer isn’t a sale of submeters nor is it a sale of contract to provide power with a time-varying price, rather it is a joint cooperative sale of a demand-response program for providing electric power with both of these ingredients.

Value to Power Suppliers

Electric power suppliers are well aware of the value of demand-response programs. Through demand-response programs aimed at shaving demand during peak load periods, they can better manage their asset infrastructure and improve asset utilization. When it comes to structuring the demand-response initiatives, utilities are challenged by balancing their needs with those of their end customers.

“For any type of system to work, you have to have that economic balance between the utility and their [end-customer] company”, said Mr. Dan Price, President of MeterSmart. Demand-response programs fail when the economics are out of balance. The power supplier must improve profits and customers must actually save. Within the joint-value creation framework, MeterSmart works with power suppliers to strike the appropriate balance.

In structuring and rolling out demand response programs, MeterSmart supports utilities in marketing to C&I customers, determining their baseline consumption, and calculating the end customer’s savings from participation in the demand-response program. This helps utilities to create the offering and communicate the value of the demand-response program. It also helps utilities capture value from the demand-response program.

Once a demand-response program is sold, MeterSmart then provides a second source of value to the utilities by measuring and reporting the consumption data. The size of this value is related to the load drawn by the C&I customers. For most power suppliers, C&I customers have the highest loads. As such, managing their consumption data is equivalent to managing the sales data at the highest volume cash register. As Mr. Price stated, MeterSmart is an independent “steward of their data.” For the power suppliers, MeterSmart delivers value in the form of trust in reliably reporting consumption data for billing.

Value to End Customers

Commercial and Industrial customers are currently becoming aware of the newly created potential for demand-response programs to lower their overall utility bill. Through monitoring consumption loads and price signals, C&I customers can shave loads during peak periods when prices are highest and increase loads during off-period times when prices are lowest.

For end customers to capture the potential value of demand-response programs, managers within the C&I customers require price signals, consumption measurements, and flexibility in consumption patterns. While price signals are created and communicated by the power supplier and consumption measurements are taken and communicated by companies such as MeterSmart, flexibility is in the hands of the C&I customer.

Flexibility in consumption patterns for C&I customers comes in many forms. For non-critical loads, customers can shave incremental demand simply by turning off the load. This approach has been taken with HVAC equipment in office buildings. For critical loads, C&I customers can shift their consumption pattern to draw power during off-peak periods. This approach has been taken with some midsized manufacturers that can run different parts of their production line at different times in the day. A third approach taken by some is the use of distributed generation facilities. Combined turbine gas generators can be powered up during peak demand periods to enable a C&I customer to shed the load drawn from the power supplier and create power internally.

When all three parts (consumption data, price signals, and flexibility) of a demand-response program are available to the end customer, they can derive value from participation.

Cooperative Market Development

At this point, the value proposition of demand-response programs for all parties has been elucidated. Meter makers make money from the sale of meters and the management of meter data. Power suppliers improve their cost structure by lowering peak demand and improving asset utilization. C&I customers discover a potential avenue to lower their utility bill.

The above description of the market for demand-response programs implies that no party can reap the benefits of this approach unless all three parties participate in the development of the value. The reality of the need to jointly create and market the value of demand-response programs precludes the concept of traditional distributors as conduits for reaching customers. Instead, it forces the framework of creating partnerships to jointly develop a market opportunity. From my conversation with Mr. Price, it is clear that MeterSmart grasps the gulf between the two frameworks and has embraced the joint value creation approach.



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

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