Market view: Five water market myths

As competition in the water market draws near, there is a deluge of information available to customers – but not all of it is accurate, says Tony McHardy.

There’s a real buzz about the water market. With just months to go until the introduction of competition, new information is coming thick and fast from a number of quarters.

It’s easy to get lost in the vast amounts of data, facts and opinion put out every day – and that situation is only going to get worse as we draw closer to April 2017.

A lot of the information is genuinely useful. But among the screeds of material there are some “facts” that don’t quite add up.

There are five, in particular, that I think have to be addressed if customers are going to understand how our new market is going to work. After all, it will be a completely new experience for everyone and, to get the most out of the newly-formed market, customers will need as much accurate information as possible.

The net and gross margins available on every site are 2.5 and 8 per cent

A lot of people believe this, but it isn’t true. Gross and net margins vary across the market according to the region, tariff band and retailer’s cost to serve. Depending on these factors, gross margin can be anywhere between just above 0 and 30 per cent, and retailer costs to serve have been observed at anything between 1 and 9 per cent.

Why does it matter? Essentially it sets out how much value can be passed on to customers in the form of savings and whether a retailer can sustain the level of discounts and added value services available. In most cases, a retailer’s cost to serve will also dictate whether that service can be maintained in the long run.

My advice: remember that it’s not a one-size-fits-all approach to margin and query the quote you’re given. Really explore what is possible when it comes to pricing to help ascertain whether you believe the retailer can reliably sustain the service to you.

“We’re offering you a fixed price until 2021”

The only way a water supplier could offer this is by second-guessing the annual retail price index for the next five years. On the face of it, making such a commitment could raise serious questions about the financial sustainability of a water retailer; unless the customer is paying a grossly inflated price up front that includes the retailer’s risk premium.

However, the reality is that there will most likely be small print in the terms and conditions of your supply agreement that allows the retailer to vary prices annually, which is the most common approach, but that may not be what you think you’ve signed up to.

Be sure to check your terms and conditions and the price you’re paying before being drawn in.

I can evaluate the offer based on the estimated retail price, because everyone is quoting on the same wholesale price

Everyone has their own interpretation of how wholesale charging applies on a site-by-site basis. While you might think all retailers are competing on a level playing field, unless they have the experience and technical application expertise, they most likely are not.

Engage with your supplier to ensure it understands the wholesale charging scheme and is transparent about the retail margin on offer, and how they are going to service your business.

It’s tempting to think that your water supplier should know everything, but it’s quite possible it doesn’t. In particularly complex cases, it could be worth bringing in an independent party to assess your evaluation methodology.

For example, it is much safer to compare unit rates, because this is how you will be charged by the successful retailer, rather than estimated annual bill figures, because the assessments can be done on a different basis.

The easiest way to save is to switch supplier

The difference between suppliers’ prices might be only 1 or 2 per cent. The bigger prize is in reducing your consumption and optimising your charging by working with a knowledgeable and experienced water retailer, which could save you 10 per cent plus without breaking a sweat.

So don’t forget that you are picking a partner to support you in water management for the longer term, not just a logo at the top of the bill.

Smaller suppliers are more agile and offer a lower cost to serve

Big can be beautiful. When it comes to businesses, the perception tends to be that, the larger they are, the more sloth-like they become. But that couldn’t be further from the truth.

Water Plus, the biggest retailer in the UK water market by some way, has been designed to work in an agile way, be competitive, and provide customers with the right expertise. The scale of the business also places Water Plus among the lowest cost to serve in the market.

We are in it for the long term and have the backing to weather any storm. Also, we are able to invest more in digital platforms and systems. Other retailers have said they are the biggest, with all the benefits that this might bring; but there are at least a couple of questions you can pose to establish the facts. How many sites do they serve? What is their annual revenue? These are easy litmus tests.

The statements above are just a few of the myths, or pieces of misinformation, that are currently floating around the water market. But there are others, so be warned.

As a general rule, there are two things you should check with your supplier: the transparency with which it does business and the breadth of expertise there is within the company.

Depending on what you find, you may want to think about who you trust to guide you through the brave new world of water competition.