Put a Cap on It

Written on: July 24, 2013 by Phillip J. Baratz

There are a number of telltale signs of the summer. There are traffic jams to and from the beaches every weekend, there are long and relaxing weekends (for some)—and there are sightings in the wilderness that make oil dealers quake in fear.
The wildlife that seems to live dormant for most of the year, before waking up sometime between July and September, is known as the “What have you done for me lately?” customer, a/k/a “the Shopper.” The Shopper has grown in both size and relevance over this past decade, and now represents an uncomfortable percentage of even the most established and well-reputed dealers’ customer base.
Without the totally unnecessary reiteration of the negative consequences of the downwards spiral of margins, profits and services that are caused by the Shopper—i.e. that dealers ONLY compete over price, as opposed to over service, value and all of those other good old American values—we wanted to consider how to get fewer of your customers to actually be those Shoppers lurking in the dark, waiting for the summer price offers (from your competitors, who apparently have not heard of the downward spiral).
In spending years—in some cases decades—with our clients, watching the ebbs and flows of their marketing and retention plans, it is still abundantly obvious that when all else is equal, price is the only differentiator. And when all dealers offer seemingly similar programs at the same time of the year, is it any wonder that the Shopper population has grown—not to mention retail heating oil prices that approached or eclipsed $4.00 per gallon this past winter? The same dealers that we have been working with have clearly demonstrated that the clearest path to NOT being viewed as “the same offer, at the same time,” is to offer programs that keep customers happiest—and when dealing with happiness, it mostly means not giving customers a price that can come back to haunt you.
When you sell to customers, there are really only three ways that you can price to them: Variable, Fixed and Capped.
• The Variable price is simply that. It is a price that will float up and down, with rack prices (plus profit). It is more often than not, “what the market will bear,” and is very often a price that is negotiated lower as or if customers complain. Variable prices are wonderful when oil prices are falling, and very hard to lead to happy customers in rising price environments.
• Fixed prices are as steady as they can be. Simply, if properly hedged, a customer will never pay more and will never pay less than the fixed price. In a rising market, customers will pay under what the variable priced customers are paying, and in a dropping market will pay more (and let you know that they are not happy paying more) than variably priced customers.
• Capped prices combine the benefits of variable prices, in that customers pay less in a declining market, along with the benefits of fixed prices in that customers’ prices do not increase (above the offered cap) in a market that rises. So, best of both worlds? Always a good idea? Yes and no. Yes, that it keeps prices competitive regardless of where prices go, but you must bear in mind that there is a “cost” in the form of a paid premium—not to dissimilar from an insurance premium—to have that pricing flexibility.
If you consider that, on average, half of the years have rising prices, you would have to believe that in those years, Variable customers will feel that they overpaid, while Fixed price customers would feel that they got a fair (or even a “good”) deal. In the alternate, when prices fall—again, about half of the time, on average—Variable customers are happy to be paying lower prices, while Fixed price customers are left wondering why their oil dealer “told them” (even if you didn’t) to fix their price. So, regardless of Variable or Fixed, you have only about a 50% chance of keeping your customers happy. Are those good odds for a business that wants to keep their customers until they sell their homes and move south to retire?
That is the value of the Cap. It DOES cost more—the premium. It IS harder to market, as it is more complicated. However, if you don’t give your customers the “price reason” to be unhappy with you, a price cap can be a very rewarding way to market to sell oil to your customers.
Premiums, as compared with the last few years, are manageable, and there are several ways to recoup the costs of the premium—directly or indirectly from your customers. You will need to price the offering properly—again, avoid the “It’s ONLY about price” game—and will need to be sure that you are tracking your costs correctly, so that you can charge the proper price during the heating season.
Tricks of the trade:
Though there is no magic pill to stop customers from looking around, or to help you keep every customer, we have found a few things that might be worth consideration—especially when planning a price program offer:
1 Consider open enrollment, or at least make offers to your customers on a staggered basis, so that you don’t have everyone renewing, or deciding whether or not to renew, at the same time.
2 Although it might take a little training with your CSRs and a little work with your BOS vendors, try to not have your pricing program, budget year, and service contracts all begin at the same time. By separating these out, you can avoid the “END” of your agreement with a customer. Sure, the service contract might have expired, but the customer is still in the midst of his price and/or budget program. So….he might as well renew the service contract.
3 Seek advice—be it on hedging, marketing, analyzing profit margins, setting an annual budget or considering tank monitoring for delivery efficiencies. Though you might think that issues and challenges in today’s complex world are unique to you, most of them are not—and there are those out there who can help diagnose what your real problems are, and help to find the appropriate “fixes.”
Enjoy the summer season, “Beware the Shoppers of August!”