Written on: September 12, 2012 by John Vrabel
It’s no secret that brick and mortar retailers are feeling the impact of e-commerce over the internet. What is not so well known is how few heating oil and HVAC marketers are offering their customers the option of ordering fuel through their websites.
E-commerce is a broad term. It’s defined as “the buying and selling of products and services over electronic systems, including such technologies as electronic funds transfer, supply chain management, internet marketing, online transaction processing, electronic data interchange inventory management systems and automated data collection systems.”
That’s a lot to consider, but essentially, for your customers, they will be able to log on to your website, check your price, order gallons and pay by credit card, all through a fully automated process. Think Amazon.com as an example.
“Today, e-commerce sales are exploding,” said John Vrabel, Managing Partner at Energy Edge LLC and President at Smart Click Energy. His company provides a fuel marketer the “energy engine” software that essentially allows an online customer to buy product online. While heating oil gallonage, industry wide, is down, Vrabel points out that online fuel sales are growing. “Over the last five years, online retail sales have increased…even through the great recession.” People are buying more online. In fact, he said, 80% of Internet users buy online.
“In the ‘11-’12 heating season, heating oil sales were down 25 to 40 percent, while online fuel sales were up 12 to as much as 100 percent for some marketers.” The big benefit, though, is the fact that e-commerce can result in higher margins, without the necessity of raising prices. That’s due to the inherent savings in operating costs using e-commerce.
So even though heating degree days this past season declined between 15 and 17 percent, which translates to lower volumes, as much as 25 or 35 percent in some areas or even more added to the fact that there is a continual decline in customer numbers online volumes increased between 12 to as much as 100 per cent.
But not for everybody
That growth has to come from somewhere, since there is not a real growth in gallonage; this is obviously a shift from non-online sources to online sources. Companies offering online solutions to fuel purchases are experiencing the increases. And customer accounts are also increasing for those companies. Companies who don’t offer online solutions, said Vrabel, are losing sales.
A big worry for some companies is whether the full service customer will “abandon ship” and go online if they can get a better price. It is a reasonable question, but Vrabel says emphatically, “No, they will not.” The fear of losing full service customers is unwarranted, he explains because these customers buy for peace of mind and security, not for price. “They really want the experience; they want the security. They are paying that higher price for a reason. They don’t want to have to worry about it.”
He offers case studies to back up his assertion. When he was Chief Operating Officer at Able Energy, in New Jersey, he was instrumental in the launch of an e-commerce marketing setup. “We saw about 60 [full service ] customers out of about 12,000 move over to online. We saw many more ‘will-call’ customers move to online, but that’s O.K.; that makes sense.”
One of his current clients, Rice Energy, in Massachusetts, shared their experience. After establishing online buying, they found that 30 percent of their online customers were completely new to the company. That was a net gain. Another 13 percent were previous customers that they had lost, so in essence, they won back 13 percent of their customers. The largest number, 52 percent, were customers who had been doing a C.O.D. business with them by phone. When those phone customers shifted their C.O.D. to online, the company’s cost per customer dropped.
Still too few market online…
The stark reality, said Vrabel, is the fact that only between 9 and 12 percent of fuel dealers are actually doing e-commerce. Generally speaking, only about half of heating oil marketers actually have a website at all.
“The message here is, if you’re a fuel dealer, and unless you want to exit the business pretty quickly, if you want to sustain this business, e-commerce presents a unique opportunity to differentiate yourself from your competitors.”
Vrabel said there are two barriers that present formidable challenges to dealers. One is that they simply don’t understand the mechanism of e-commerce. Remember, an individual needs to be able to visit a website, find what he or she is looking for, pay by credit card, arrange delivery and log off without any human intervention by the vendor (that’s what saves the money). So setting up that process is complicated. The other barrier is even if they do understand it, the challenge of doing it themselves is daunting. His company, Energy Edge, essentially “packages e-commerce in a box.”
That’s where they stop: “We don’t get anything out of the marketing. Our interest is in helping them with consumer focus,” he added.
They don’t provide the website, although they can provide some templates for companies to adapt if they wish. But once a company has created its website, with its unique look, colors, logo and feel, then his company steps in and provides the e-commerce engine, customized to blend into the existing website. Consider it sort of a plug-in on steroids.
“All you really need is a domain, a URL, and we’ll point their version of the energy engine toward that.” Other parts of the website marketing, such as Search Engine Optimization (SEO), would be in the province of the web designers, although there is a basic SEO when the energy engine is connected to the existing website.
In the case of Rice Energy (riceenergy.com) for example, their traditional company home page now has a section, dead center, that talks about their online business, should a customer want to do business that way. “So, in their particular case, they already had an existing website, and their online site is now powered by the energy engine, with the look and feel of the site identical to what they had before.”
Once e-commerce is up and running, you want to make sure customers and potential customers visit your website. Once there, the convenience of ordering online should keep them there. So it is important to steer customers to your website as an online purchasing location.
“One of the things we find works well is small space newspaper ads,” said Vrabel. They build awareness and are part of developing an e-commerce business. Many local papers, he said, have a cluster of heating oil company ads on one of their pages. In that case, he said, “…you need to be there to develop the awareness,” because customers who are accustomed to looking for oil know they can go there. “And you need to be a part of that consideration.”
The Vital Six
In order for all to work, Vrabel suggests following his company’s marketing “Roadmap.” Six key actions are essential. Number One is SEO, or Search Engine Optimization. Dynamic SEO should be set up by a qualified firm, most likely the people that do one’s website. You want your company’s name to be at the top when a customer does an online search for, say, heating oil.
Two, a direct mail postcard should be sent to inactive customers or a prospect list. This should be done two to four times.
Three, start placing those small space newspaper ads, geared to your particular market.
Four, make full use of the Behavioral Marketing capability of the Energy Engine. He explained it this way: “I go to Amazon, shopping for something. I soon get an e-mail for that particular product or something similar. Your customer may request a price quote and just that. We recommend that the dealer, at that point, he capture the e-mail of the customer, and most of them do. This allows them to market to them via e-mail. At that point, they can add an online promotion. There are all types of residual marketing things built into the engine. All that residual marketing is done automatically, every day, so somebody doesn’t have to be there to put any of this into the system. We say, use that capability to its maximum potential.”
Five, Refer-A-Friend, another capability built into the engine, should be used regularly. This is where the referrer gets a $25 credit, for example, every time they refer someone who becomes a customer.
Six, e-newsletters. There’s nothing wrong with regular newsletters, but “…e-newsletters can be done more quickly and at less cost. This built loyalty very effectively, he said, in his past experience at Able. “The way we kept them loyal…was to talk to them periodically. You pick the frequency. Nice to do something once a month, as enewsletters are much easier to do. First thing we did was a Memorial Day sale. We gave the customers $10 or $15 if they placed an order before the end of the holiday weekend. Customers would tell us repeatedly over the years, “Thanks for giving us information. We can’t get that anywhere.”
How e-commerce helps
“One of the key things about e-commerce is you lower your operating costs. We’ve heard for years…that you can increase your margins by raising your prices. In this particular case, you can increase your margins without raising your price.
“Where that comes from is e-commerce can reduce order fulfillment costs by 20 percent.” This achieved through delivery efficiency, cash management and administrative savings.”
For example, delivery efficiency is increased because the average drop is larger, usually 200 gallons. You achieve this by offering the best price for that amount or more. Drops of less than 200 gallons would be priced as a higher per gallon price two cents more, for example. Fuel is delivered the same waythe automatics are, and due to the larger drops, you increase delivery density, gallons/driver, and gallons/truck.
Cash management is another area of savings. All deliveries are prepaid by credit card, so there is no bad debt, no bad checks, no keying of credit cards and no manual account credits. And no invoicing.
Administrative costs are also lowered. Ecommerce reduces customer care expense, provides a paperless process.
“We are seeing our e-commerce clients now averaging between 198 and 203 gallons per drop, as long as they follow some of our recommendations in terms of pricing.”
This also results in a greater number of customers who monitor their own tanks, placing an order when the tank gets to approximately one-quarter full. Since everything is paid online, the driver doesn’t have to make sure someone is there to get a check. And you increase your delivery density. We saw this in a big, big way. Prior to online ordering at Able, we were driving past some of our customers. Now you are stopping and making deliveries as you add more customers. So ultimately, you increase your gallons per driver and per truck, easing the most expensive part of your delivery.
The system can handle account credits automatically; if a customer says either “fill my tank” or orders 200 gallons and their card is charged for that amount, but at the actual delivery, they can only take 180 gallons, they will automatically be credited back the 20 gallons, although the 180 they did take would most likely be at the higher per gallon rate.
Online sales also gives the dealer the opportunity to do upsell. “One of the more popular upsells are additives. Or you can do an upsell to a service plan. You can add these things on before you check out. ‘People who bought that also like this….’”
The energy engine is designed to stand alone, and can actually be used as the company’s operating system, but it doesn’t include a financial package. Quickbooks, or another standard can be attached for monthly reports. Or, if you are a traditional company, you can also link the engine to several of the more popular heating oil software systems, although if you elect to do that, you’ll need a web service that serves as a “translator” between the two. “It will cost you money to do that, though,” said Vrabel, who advises waiting a while to see if it is actually necessary: “Don’t do it day one, or until you get the business built up, because doing the little amount you need to essentially print out a delivery ticket is not worth the expense.”
So, can you reasonably expect to increase your customer base? Energy Edge predicts customers would grow more loyal over the years, increasing the gallonage sold.
As an example, Vrabel provided a case study. In this example, there were 40,000 heating oil households in the delivery area. Using e-commerce, in the first year, a dealer should be able to capture 0.8% of those households, or about 320 of them, with an average of 450 gallons per household. In year 2, the e-commerce market share should approach 2%). That’s 760 households, with 600 gallons per household average. By year 3, penetration should be about 3%, or 1200 households, averaging 750 gallons each.
Translating that into total gallons and gross margin dollars, in the first year, with that 0.8% market penetration, total gallons for these new customers would reach 144,000, with a gross margin of nearly $60,000. By year 2, gallonage reaches 456,000 at $187,000, rounded off, and by year three, 900,000 gallons at $369,000. So in three years, gallonage for that company increased by 1,500,000, giving the company a gross margin of $615,000.
But, of course, there are expenses to consider: If it costs $0.15 per gallon to deliver, that’s $225,000 over those three years. Marketing is another 10% of the gross margin, or $61,500,
and credit card fees eat up another 2%, or $42,792. Subtract all that from the gross margin and you get a net profit of $285,708.
These are significant variables, of course. Delivery costs, marketing and even credit card fees vary, so it pays to plug in your own numbers, but the concept is sound. He said gallonage per household is expected to grow over the years as customers become more loyal.
There is more to the program, but the bottom line is that there are only so many gallons of fuel being sold. If the buyers are online, it makes sense to be there for them.