Retain, Don’t Replace

Written on: April 8, 2024 by Phillip J. Baratz

Keeping customers can be as simple as offering them the right pricing program

The saying “customers on a price program are the most loyal” has certainly survived the test of time.

Many of us grew up in this industry that revolved around “churning” customers; while some left each year, they were hopefully replaced by others the following year, and dealers were forced to absorb all the associated costs. The way that many companies accomplished real growth was through a different form of customer acquisition—acquiring other companies.

Although today’s homeowners average the same age as homeowners of a decade ago, their behavior is noticeably different. Homeowners today are tethered to their phones looking for good deals and the latest influencers to tell them what to do. Loyalty has been replaced by “likes.”

As operating costs have increased, the main way to offset those and to still make a reasonable profit has been to increase margins on fuel as well as equipment sales and service. We are fast approaching a collision of dealers who want/need to charge more with customers who want/need to pay less (and are often armed with online information allowing them to do so).  Replacement costs for lost customers continue to increase, rendering customer retention that much more important.

Operating a truly efficient business is no longer optimal; it is absolutely required in today’s competitive, information-overloaded marketplace. This means:

• Small deliveries need to go away.
• Trucks that sit idle for more than 200 days need to go away.
• The surprise of run-outs needs to go away.

• Significant overtime expense in peak months needs to go away.

The good news is that there are tools available to make all this happen right now—with an immediate return on investment (ROI)—not one premised on waiting for customers to hit their third year and have a stable Delivery-K. You need to operate more efficiently, and you need to investigate it now. In addition to the basics of operational efficiency, keeping customers can be as simple as offering them the right pricing program—one that inherently dissuades them from looking for another company while scrolling through social media.

Customers with price caps pay a lower price if retail prices spike, and prices drop if retail prices drop. Free lunch? Certainly not. The cost to provide that flexibility is generally shown in the form of a “premium.”

Given the volatility of ultra-low sulfur diesel (ULSD)  futures prices over the past few years—ranging from a pandemic low of 61¢ per gallon in 2020 to a high of $5.13 per gallon in 2022 (an 841% increase) —customers are seeking price protection more than ever.  In addition, dealers are seeking customers on price caps more than ever.

How to accomplish this can get a bit complicated. Obviously, you need customers to sign up for the cap, which can be done through existing or new marketing channels including snail mail, email, WhatsApp, bill stuffer, text, auto-dialer, websites, etc. For new enrollments, the message (we have helped many dealers create them) should be simple, straightforward and comforting. For renewals, the communication should include the cap price (the maximum a customer will pay) details.

Hedging can be intimidating, sometimes due to a lack of understanding, the perception that hedging is speculating, or by a preconceived notion/belief of what the markets will do. Does “it won’t go up, the economy is so weak,” or “it can’t drop, there is so much inflation” sound familiar?

Understanding hedging basics:

• Where do you get your physical supply?
• Does your supplier offer anything other than a rack price? Fixed price? Storage availability? Basis protection?
• How do you incorporate the “cap” feature into the mix (usually with an option of some sort)?
• How does a cold or warm winter impact supply, pricing and profits?

As mentioned, it is not necessarily easy or intuitive, but there are experts who can walk you through it.

An important note for those offering a pricing program and not protecting against the risk to the profit margin: If you are not hedging, you are speculating.

Track sales/hedges/risk while offering the cap
Your business operating system should allow you to track the “short” side of the price cap (the volumes you have made a promise on). Reporting on this can be done through a business intelligence offering (such as Angus Analytics’ BRITE software), or through an internal report generating system. In addition to tracking the customer (short) side, you need to track the hedged (long) side of the price cap. These positions need to be reviewed on a regular basis, and an overall hedge plan in place determined ahead of time (not based on your gut feeling on a particular day).

While “role playing” of future prices might not be a normal part of your process, it is good to know what will happen if prices make an extreme move higher or lower, or if the weather is vastly different from historical averages.

Points to remember:

• Cap customers stay longer than non-Cap customers.
• Cap customers are most likely to accept other offers: service contracts, budget plans, equipment sales and installation.
• Tracking hedging is requisite toward predictable profits and needs to be part of a management process.

• Managing and executing hedge transactions takes a certain amount of expertise and planning and can eventually be mostly on “auto-pilot.”

Don’t let the complications scare you away; we are here to help. ICM

*Please note that there are many details involved in delivery optimization and efficiency and your company will vary somewhat from the industry average. In addition, an increased cost savings is often achievable by shifting around the timing of certain deliveries using AI/ML (artificial intelligence/machine learning) focused on individual data points.