What does it take to challenge British Gas or Vodafone? Courier spoke to the founders of Giffgaff and Bulb – two upstarts having a go at rumbling the biggest of beasts in their respective fields – about how to create a modern utility company.
1 Mar 2017
Courier: Setting up an energy provider or a mobile network has to be just about as ambitious a business idea as it gets…
Gav Thompson: It is when you think of the resources and expertise of the incumbents, and how hard they make it to switch providers.
Amit Gudka: There is clearly an incentive for those who run the big providers to disengage consumers and make it as complicated as possible to switch so people continue to pay their overpriced direct debit without ever looking into it. The big risk for them is that customers wake up and look at other options.
GT: That said, I’ve always thought utilities and mobile phones were ripe for disruption.
GT: I have this principle that the lower the interest in a category, the more inertia there is. People can’t be arsed with this stuff, but they care a lot about the car they buy or their suit. That inertia drives a lot of bad behaviour from the incumbent companies because they’re able to get away with it.
AG: But news of bad behaviour in a sector somehow drives even more inertia. It almost has the opposite effect of encouraging people to switch.
GT: It’s true. I recently had a terrible experience with an energy company. After complaining, they called me three times to admit they’ve not been great and were giving me £8 because Ofgem told them to – £8! I’ve paid them £2,500 over the year. All I thought at the end of it was the whole industry is even more dodgy than I presumed. Like you say, I’ve now disengaged and just accepted they’re all a bunch of twats.
Given how much they’re all so disliked, and the competition among them, why doesn’t one gas company or mobile network offer something better?
GT: Well, of course, Giffgaff is an O2 company. When I pitched the idea to my boss at O2 (the CEO) I told him it was likely we would cannibalise O2’s customers. And to be fair to him, the reaction I expected was to point me to the door. But he backed it.
But why did O2 need to create a whole new company to do it?
GT: It’s perhaps hard to get your head around it when you are such a large organisation. Car companies and airlines have also done it by creating completely separate entities.
AG: Energy has been dominated by the Big Six. These patched-together companies used to be the regional energy suppliers, pre-privatisation. They’ve all got their legacy systems and dare not change anything. Scottish Power tried to update things, and it cost a fortune. There was a crash, it got tons of negative publicity and Scottish Power was fined. There’s little incentive to change things.
Gav, how hard was it to build a rival to O2 as a subsidiary of O2?
GT: In the early days of Giffgaff I didn’t want to tell anyone that I worked for O2. I felt guilty as I assumed everyone hated mobile networks and we were saying we hated networks. There was this dissonance between what I said and the fact I was paid by O2.
The reality was consumers didn’t give a shit. As far as they were concerned it was powered by the O2 network, and it worked.
I suppose from a consumer point of view, it’s price which is the all-important factor in choosing an energy or mobile provider.
GT: I was a big advocate of price when we launched, so we kicked off with 1p per minute and 1p per text. What became apparent very quickly was that customers wanted a better value service through things like bundles and data allowance rather than just a cheap one. I had that preconception with price, but very quickly people said they want value.
It’s important to recognise the difference in price and perceived value. Something that’s cheap and shit compared to something that’s good value.
What about all the price trickery that really irritates people?
AG: The bait-and-switching that goes on, luring customers with a headline price, is rife. People are wise to it and generally want peace of mind that when they switch, they’re getting a good deal.
As you both piggyback off larger providers for the source ‘product’, I assume neither of your companies get anywhere near the power stations, generators or mobile phone masts.
AG: Our job is to make sure we correctly bill our customers for their electricity and gas use. We have contracts with the National Grid and a number of hydroplant renewable generators and people who turn waste into electricity.
We have to buy enough renewable electricity to meet demand every half hour of the day, so there’s a lot of forecasting and trading.
Sometimes there’s an imbalance between the amount of electricity generated by our providers and the amount we supply to customers. When this imbalance occurs, we go to the wholesale market to buy electricity to make up the deficit, always from a renewable source.
GT: Wow, that’s so much more complicated than mobile! My brain aches just thinking of what you have to do. We were plugged into the network O2 spent years perfecting. There wasn’t a single network person in the Giffgaff team in my time, and there still isn’t one today.
It’s funny that as a disrupter we have to buy the commodity from the incumbent we’re challenging.
Also, I really do think consumers have a binary attitude to gas or electricity. It either works or doesn’t. It’s not much different with mobile, except all of us can see how many bars we’re getting on the corner of our phones and we know what a crap call sounds like.
If there’s nothing you can do on product, are there any other levers you have at your disposal to differentiate from the big guys?
AG: We’re all about renewables and making a positive impact. Instead of investing in a solar panel or a wind turbine which is frankly unrealistic for a normal person, we guarantee all the energy our customers use comes from renewable sources. We found that the industry was selling this but treated it like an ‘upsell’, a sort of Whole Foods premium tariff for your gas and electricity. It’s unnecessary and unfair.
GT: That’s also your brand isn’t it? I maintain Giffgaff was a brand idea. Not some clever marketing or advertising on top, but an all-encompassing thing around the idea of mutuality.
What do you mean by ‘mutuality’?
GT: I wrote that word down on the back of a napkin at a conference in San Francisco. The idea to treat customers like equitable partners, not people you throw things at and hope that they’ll pay. I know it sounds quite hippyish, but I really believe in it. Be straight, honest and respectful and they will pay for services happily. Don’t mug them off.
AG: You could see that in Giffgaff. It was pretty clear looking from the outside. We were quite inspired by Giffgaff and looked at how you went about things.
Is there more behind the identities of your companies that marks them out from everyone else?
AG: There’s a big advantage in coming in as a new entrant and being able to build an entire automated and modern technology platform without any of the heavy, and very expensive, legacy systems the big providers were built on.
GT: We had some tangible things too: we had no shops, no customer service, no marketing. We’d taken these three very big cost centres out of running a mobile phone network, and the three areas people most disliked about dealing with their networks. Our mutuality model was based on the customers doing the customer acquisition, service and promotion as part of the Giffgaff community.
AG: Clearly, big advertising is not an option for a startup. We looked a lot at what companies like Giffgaff did with the ‘member-get-member’ referral model. No-one in our space really used social media.
The ‘mutuality’ thing sounds great, but having that level of transparency and contact with customers must come with problems, especially when things go wrong.
GT: Absolutely, but that’s the deal with being disruptive and audacious. People love a Robin Hood, a Richard Branson, a Freddie Laker. It did mean we had to accept what happens when you put your Twitter feed on your homepage for everyone to see comments made about us. There were times the network fell over, when we had to put prices up and when we had to take away unlimited internet. You just have to roll with the punches.
AG: The fact you can’t hide at any point also keeps you honest.
GT: Absolutely! It’s so true. It really forces you to make the right decisions even when they can be painful in the short term.
Without the years of reputation and various corporate affairs resources to hand, how damaging can a bad incident be to a startup?
AG: Energy supply is very serious when you think of how critical it is and the risk of something like a gas leak. We’ve got no interest in being ‘audacious’ with that stuff!
What about the unlimited internet episode? Giffgaff got a lot of flak from that.
GT: It’s actually a very good example. We responded very honestly. We had 1% of our customers who were ripping the arse out of the network by using 85% of our data usage. We just presented that reality and said it isn’t fair.
Couldn’t you have just booted out that 1%?
GT: That was the response of the members: give them a warning and tell them to jog on if they keep doing it.
One of the biggest things I learned actually came when we had to put our prices up. We put it out to customers that our owners were charging us more for using the network and asked how we should put our prices up. We had an amazing response, people really valued being treated as peers. It’s the most interesting thing.
AG: We’ve found the same already by taking the dilemmas we face out to customers. Whether it’s a price increase, a policy on exit fee refunds, or the charity we want to use, it all builds deeper engagement.
GT: I would feel good about the world when I went home. There’s an enormous amount of goodwill from people as long as you’re honest and treat them with respect. It’s surprising businesses don’t leverage that.
AG: I agree. Companies seem to have a disproportionately weird obsession with the 0.1% that are trying to game the system and be fraudulent.
Are there some big structural changes coming to both energy and mobile soon?
AG: There’s no doubt. Smart meters in every home, people being accurately billed, the idea of ‘connected homes’, cheaper solar panels, automated vehicles… These are all likely to cause severe change in how the energy industry works.
It seems more open ended in mobile.
GT: My guess is that the consumer may not be paying for services directly. People don’t understand megabytes and gigabytes and there could well be a change of
the business model. I can imagine connectivity being part of the proposition with content from companies like Facebook, Netflix or Amazon.
This is an edited and condensed extract of a conversation that took place on 22 December 2016.
Gav Thompson, Giffgaff
Thompson set up Giffgaff in 2008 after pitching the idea of creating a mobile network with a radically different business model to his then employer O2. It would target students and young people through low prices and a sense of community. Thompson left Giffgaff in 2015, the year after the company hit over 1.4 million subscribers.
Amit Gudka, Bulb
In 2015, Gudka quit his job as a gas and electricity trader at Barclays to set up Bulb, an electricity and gas provider built on renewable energy, with friend Hayden Wood. While setting up Bulb, Gudka was already running a record label and club night, Man Make Music, on the side of his day job.
This story is taken from Courier Feb/Mar 2017.