Pricing strategies in the SME market

Following the transparency measure introduced by the CMA in June 2017, suppliers servicing microbusinesses are required to make their rates easily available to customers. Whilst the majority of suppliers evaluated in our SME pricing reports have introduced online quotation tools to fulfil this requirement, the pricing strategies they reveal vary considerably by supplier, in both the gas and electricity market.

When comparing the cheapest one-year acquisition price provided through the suppliers’ online quote tool against the equivalent pre-commission TPI price, we found that electricity prices quoted online were universally higher. The largest difference in price was 13p/kWh, equivalent to a 99% increase. In contrast, three gas suppliers offered online prices below their zero-commission TPI equivalent prices, although five of the nine suppliers evaluated had online prices at least 32% above their pre-commission TPI rates.

While some differences in prices may be explained by suppliers publishing full-commission TPI prices through their online tool to ensure customers see consistent prices across different sales channels, three of the large suppliers also publish indicative TPI prices alongside their direct acquisition products. In electricity, one large supplier published an indicative TPI price 30% higher than its TPI pricebook rates, even with full commission applied. This disparity was even more evident in gas where the indicative online TPI prices were on average double TPI pricebook rates, even when adding on maximum allowed commission.

Given that one of the intended aims of the CMA remedies was to foster more competition between suppliers in the microbusiness sector, it does not yet seem to have had this effect. Suppliers appear to be competing more heavily for business through TPIs than through direct sales.

The latest editions of our SME pricing reports, published on 12 February, highlighted four industry-wide themes that suggest a highly competitive pricing environment in the TPI sales channel

  • Narrower range of electricity prices suggesting that suppliers are responding more quickly to changes by rivals
  • Realignment of SME gas pricing for small customers by one leading competitor
  • Discounts from some suppliers on multi-year deals suggesting that suppliers are looking to secure revenue and increase customer retention
  • More suppliers offering products up to one year before contract start dates

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