March 2020

Back to basics


The heating oil industry isn’t the same as it was a generation ago. The heating oil industry is the same as it was a generation ago. This simple, yet confusing, dichotomy is at the heart of all changes that can be considered.

Technology continues to forge forward, bringing better, cheaper and smarter ways to communicate with customers, plan deliveries and manage expenses. However, as our industry is still a hands-on customer-centric one, we need to continue to differentiate in an era where differentiation has become quite difficult.

If you ask 10 dealers the top reasons for customer attrition (and customer growth, for that matter), somewhere in the top three will always be a mention of “price.”  Yes, customers like prompt service. They like budget plans, and having a tank monitor and an app is always a plus. However, if you really want to cut down on attrition, you need to be sure that the price you charge is not too high. You don’t have to be the low-price leader, but even the biggest and best-run companies have come to the stark realization that “heating oil is heating oil,” and that their customers will only pay so much for a “premium brand.”

Pricing programs

Although pricing programs have been around since the early 1990s, they remain a steadfast part of the value proposition for many dealers, and one that customers rely on each year for a measurement of certainty. At the beginning of January of this year, we had missile attacks by the U.S. on an Iranian leader, followed by Iran firing missiles in the general direction of U.S. military facilities in Iraq, with the world ebbing closer to a possible war in the heart of the world’s major oil-producing region. “World War III” was trending on Twitter and the U.S. Selective Service website crashed from too much traffic.

How high did oil prices spike? Don’t you mean how much did they fall? Yes, oil prices fell during that week of extreme tensions!

Did they fall because the temperature in New York hit 65°F in early January?  Did they fall because tensions with the Iranians (temporarily) eased? Did they fall because Organization of the Petroleum Exporting Countries (OPEC+) plans to stick to their quotas this time? Who knows, and does it really matter? The simple truth is that oil prices are as hard to predict as they ever have been, and considering that rising prices cause customers to shop around, addressing price increases is, has been, and always will be a part of a dealer’s life—if the dealer wants to keep customers from shopping around.

Now that we are in a new decade, we can look back at the past one and have 20/20 hindsight. In the first half of the previous decade, heating oil futures regularly traded above $3.00 per gallon (with retail prices often above $4.00 per gallon). At the beginning of the second half of the decade (early 2016), heating oil prices fell to under $1.00 per gallon, just to triple in the next 33 months. Seeing prices move by 25¢, 50¢ or 75¢ per gallon over the course of a year is something that we pretty much take in stride; however, with the ability to shop around being greater than ever, how do we keep our customers happy?

 

How customers shop

With all the sophistication that comes into play regarding offering pricing programs, and hedging the risk to assure the earning of a reasonable margin, there are pretty much only three ways that customers buy oil. Each has benefits and drawbacks, both on the margin side of the ledger and on the customer retention side.

  1. Customers can buy at a variable price—simply put as “rack-plus.” That approach benefits customers when prices fall and costs customers when prices rise. It also leads to a big jump in shopping around after prices rise, as customers seem to feel betrayed with each price increase. Margins should be fairly steady, and have an ability to increase in a market with falling prices.
  2. A second way to buy oil is on a fixed-price basis: Here is the price; that is what you will pay. Fixed prices are wonderful when prices increase, but seemingly (to the customer) quite expensive in a falling market, when everyone else seems to be paying less. Although the fixed price (if hedged properly) does allow for predictable profit margins for the dealer, it often “leaves a lot on the table” when prices fall.
  3. Price caps are the third standard option, and one that historically seems to bridge the benefits of the variable (lower pricing when oil prices fall), along with the benefits of a fixed-price (not rising when oil prices rise), without the offsetting risks. Since there is no free lunch, there is a clear cost to the price cap offering, and that is the premium for the price protection. A dealer can hedge the associated risks to offer a price cap a number of ways, and there are several companies—including Angus—that can talk you thorough the hedging process.

Regardless of your preferred method to hedge the risk of a price cap, knowing that regardless of where prices are heading next month, next year and for the rest of the new decade, you will be able to keep your price-related attrition under control, and might be the best way to keep your business thriving. The time to start planning for a price cap offering is generally in the spring.

Your best customers will be on a budget plan, with a service contract and a remote tank monitor. Don’t lose that most valuable asset (the customer) over something like a severe swing in prices when you can protect yourself and your customers by offering a cap. ICM

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