As businesses and industries mature, several different types of leaders and decision-makers emerge. Some take on the “if it ain’t broke, don’t fix it” attitude, while others live by the mantra that “good isn’t good enough.” All too often, we fall into the ill-conceived belief that if something has always been done a certain way, it should not be changed. This is not unique to the oil heat industry, but in our ever-changing landscape, it is something that might be more of an issue here than elsewhere.
When we look at the challenges facing the retail heating oil industry, a number of things come to mind:
The ugly cycle of losing customers due to price, and then replacing them with new customers only by offering a lower price (same customer count, less valuable company)
No matter where you look, the challenge is trying to create something to hang on to more of your customers. Usually, you make a delivery, you get paid, and then you hope that the customer will take—and pay for—the next delivery. In order to retain customers, you offer budget plans, service contracts, and pricing programs. These programs are excellent in that it takes the client-dealer relationship from something that is simply four or five transactions per year to one that has a commitment that generally lasts for the course of the year. That is good news.
For example, you might offer a budget that starts on July 1, along with a service contract that runs from July through June, and a price cap program for the winter, with an enrollment deadline of July 1. It sounds good, progressive and easy to manage (although June’s phone calls can be a little frustrating to you and your CSRs).
However, if you think about it, you are affording your customers one time a year to say that they are either “all in” or that they want to shop around right around the same time when all of your competitors are putting on their biggest sales pushes. In essence, you have created a yearly “end point” for the customer to decide if he or she is satisfied enough to stay with you or dissatisfied enough to go elsewhere.
What if, for example, your budget started in May, your price program enrollment was in
September, and your service contract renewal was in January?
Think about it. At any point in the year, when a customer might want to look elsewhere—for good reason or not—the customer may well be in the middle of two agreements with you. Budgets are easily sold to those who want the stable, ratable payments. Starting them in the late spring/early summer works best for your cash flow. If you then renew your price-protection program in the late summer or early fall, your customers are already a few months into their budget payments (let alone the service contract that goes through the first half of the winter), so why not renew with a cap or a fixed price? When it comes to a service contract renewal in the dead of the winter, you need to ask yourself how many customers simply pay winter bills because it’s the winter (most), and how many would willingly give up having a service contract in the middle of the winter (a MUCH smaller number than those who would give it up in the summer).
Though the specifics of this approach would require planning, marketing, training (CSRs and customers) and working on your back office system, isn’t it worth it if it creates a barrier to exit for even a small group of customers? If you need help with any of that thinking or planning, feel free to contact us, and we can point you in the right direction.
There are many things that you might want to do differently. You might want to sell propane, electricity or natural gas. You may want to expand your HVAC services. You may wish to go i plumbing. The list of things that you may want to do with your existing customer base is virtually endless, but most of your time is spent trying to keep your customer base from dwindling even further. Although something as basic as changing “renewal dates” might seem boring, if it keeps more of your customers feeling like their relationship with you is an ongoing one, how different might that feel?
With all due deference to Billy Joel, we are not in a New York State of mind, this month. Despite growing up and spending the formidable years of my life in the Big Apple, there is a current issue for heating oil dealers that applies most specifically to those outside the Empire State. Perhaps a little history would help:
In an effort to distribute a “cleaner” fuel, many industry, environmental, regulatory and legislative groups have been engaged in an effort that officially launched about a year ago. Last summer, in July, 2012, New York enacted rules requiring heating oil dealers to deliver a “new spec” of heating oil with 15 ppm sulfur (as opposed to the “standard” 2000 ppm that is commonly delivered—and the same 2000 ppm spec that the Merc futures contract was based upon).
For NY dealers, this meant that the product that they were buying for delivery to their customers was now a premium product, as compared with the standard reference point for supply pricing and for hedging, the Merc (2000 ppm) futures contract. A good way to think of it would be to imagine that the Merc futures contract were for “regular unleaded” gasoline (which it is), and that you were suddenly required to deliver premium gasoline, despite the fact that you could only hedge with the regular gasoline futures contract.
During the summer, and into the winter, NY dealers faced not only the knowledge that their product had jumped in value, relative to the Merc contract, but also the uncertainty of not knowing by how much. There were times where the premium paid was almost 30 cents per gallon higher than “normal”, and times that the premium was “only” about a nickel. Lacking a known “diff” from a supplier, many NY dealers were operating with supply costs, and associated hedging, at the whims of the marketplace.
While this was going on in New York, the rest of the heating oil space was enjoying (perhaps the wrong word) business as usual—if you ignore the effects of “Superstorm” Sandy, which are hard to ignore—with “diffs” within range of where we had historically seen them. “Old spec” (2000 ppm) was being delivered, and it matched up against the spec on the Merc. Then, effective with the May futures contract on the Merc becoming the “spot” or “front month” futures contract, the “diff world” did an about-face. The Merc contract—since renamed “NY Harbor ULSD” from “Heating Oil Futures”—changed the spec to what we will call “new spec,” with a 15 ppm (as mandated currently in NY, and only in NY) sulfur content. Accordingly, all dealers outside of NY are now buying a product that is a “lower quality” (via the higher sulfur content) than the spec of the Merc contract.
To review: outside of NY is buying “old spec”, and Merc contract is now “new spec.”
Interestingly, because the Merc contract is for a more valuable product, the “diffs” have shrunken—or at least appear to have done so. Not really a bait and switch, but if the cost to transport from New York Harbor to, say, New Haven, is the same as it has always been, AND you are buying a product (old spec) that is inherently a lower costing product than the Merc contract (new spec), then the “diff” versus the Merc will be lower.
Now that you might be thoroughly confused, what is the point? There are two main “diff issues” that we work with our clients on. The first is simply moving them in the direction of “differential certainty.” In other words—regardless of old spec or new spec—the small and medium sized dealers generally do not have any assuredness of what their costs will be when they lift at the rack, relative to the Merc (or other Index) contract. In sharp contrast, most of the largest dealers do have “fixed diffs.” Before the wheels start spinning in your mind about the incredible value of being a rack shopper, please consider the following:
Most small dealers buy almost all of their supply from one or two suppliers, despite wanting to be “shoppers.”
Getting the “low rack” on a day where the “diffs” have gone way up is just the best of a bad situation.
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!”
Coming off a season that—unfortunately—had consistently high prices and Super Storm Sandy, but also —fortunately—had “normal” weather, it’s time to take a quick breath before planning for next year.
Okay, that was long enough!
This summer will likely be filled with the standard summer issues:
There will be the never-ending customer retention challenges, while battling natural gas utilities, and the much nastier purveyors of low-ball offers (I have spent enough time on that soap box recently, so I will just let it go—for now…) from your heating oil compadres. Suffice to say that avoiding the economic realities of “gross attrition versus net attrition” is not the secret sauce to repeatable profitability. You must always be marketing yourself, especially to existing customers. If you counted on the earned margins only from new customers, well…you would not be reading this article, since you would be out of business.
You are going to have to make decisions about when, how and at what price to offer your pricing programs. One thing that we have seen changing a bit over the last few years is that too many capped programs (historically, the absolute best program for customer retention) have morphed into fixed-price programs as prices have stayed steadily high. While the logic may well be that prices COULDN’T be lowered, we can’t help but wonder whether some caps are not being hedged properly, and therefore, are truly FIXED from Day One, or—more likely—the value of the cap is not being properly conveyed. If you are not communicating with your customers to tell them that they were protected against rising costs (which they were), but were also in a position to take advantage of lower prices, in the event of a fall in prices, then why should they choose the cap again? Bear in mind that most do “re-up” for the cap, but simply assuming that customers understand the benefits of what you do—be it a cap, or a budget plan, or a service contract—is another recipe for having customers shop around. That is something that most marketers (aside from the aforementioned “nasty purveyors”) do not want.
How many parts per million?
Last summer, oil dealers in New York had to face a new challenge. The state-mandated change to the 15 ppm ULSD that went into effect in New York on July 1st, 2012 was anticipated, and (mostly) prepared for. Although the NYMEX/CME contract that was intended to be used to hedge oil purchases and sales was for a different specification of heating oil (2000 ppm), the consensus was that there would be a new futures contract to replace the “old” contract, and the basis risk*. That “new” contract turned out to be a revision of the “old” contract, and the exchange changed the specifications to match those of the supply that is mandated in New York State, effective with the May 2013 futures contract. So, during this past winter, heating oil dealers had to deal with the extra (and expensive) nuance of the uncertainty of the price spread between their supply (ULSD) and the pricing on the NYMEX. Aside from a period of a number of weeks in November and December, when New York lifted the ULSD requirement, the price spread between the two products was just something that New York dealers had to deal with. The good news was/is that starting in May, the physical and the exchange/futures products for New York dealers are again one in the same.
Nice as that may be, and as shocking as it might be to some New Yorkers (or ex-New Yorkers—and I include myself in that category), New York is NOT the only place in the world that uses heating oil, and not the only place that has concerns over “basis diffs.” Since the new contract came into effect in May, those OUTSIDE of New York (thousands of dealers) have been scratching their heads, wondering what kind of “diffs” their suppliers would be offering them for this coming winter. The suppliers, unfortunately, through very early May, have been scratching their heads, as well. The uncertainty as to what the “relative cost” will be has been frustrating. While it is clear to most that the “basis”—as previously understood—will be lower in New England than in years before (of course, until New England states**, one by one, adopt the ULSD specification of cleaner fuel to try to inhibit even more natural gas conversions!), the question is by how much. In essence, you are buying the same product as you have for a number of years, but the universal reference point of the NYMEX (Merc, CME, however you wish to refer to it) has changed their definition of the product to a more expensive one. Almost like a magic trick, it APPEARS as if costs have dropped. They have not!
Budgeting for profit.
This all leads us to the budgeting process, and the “What the heck am I supposed to do?” process. You need to start pushing suppliers to offer fixed-diffs for supply—not only for long-term contracting, but for day to day rack liftings. Some will, and some won’t. Some will prefer to link your costs to a non-Merc index, such as Platt’s or Argus (no, they didn’t steal our name, and change just one letter!). While not as easily matched up to hedges, you may find that the “tethering” to something that does not appear as random as your supplier’s rack postings is actually a comforting thing. When you consider that in addition to the actual price fluctuations of oil, itself, the discount of “old spec” versus “new spec” ranged by more than 25 cents per gallon since the start of the year, bringing a little more logic to the table might be a good idea.
For “actionable” (love that word!) steps, the “whisper on the street” is that the diff between the two products (NOT counting the cost of transporting it to your local rack, or the normal supplier mark-up/profit) should be in the 5 to 8 cent per gallon range. We saw that range a lot during the winter—but then, again, we saw the spread burst all the way to over 20 cents as the first contracts of “new spec” were delivered in early May. Assuming that you will keep a 20 or even a 10-cent discount may drive you to make an offer to your customers (and to assume profit margins) that will never bear a resemblance to reality. On the other hand, simply ignoring the spread and pricing your non-NY oil as if all prices were still set versus the NYMEX might lead you to being more expensive than you should be (or that the market will bear). Given a choice between the two, I would prefer the latter, as it should give you some needed elbow room; but don’t push it too far would be our suggestion.
Many dealers are looking at marketing regulated energy products—natural gas and electricity—either as a commissioned agent, or as a full-fledged marketer (ESCO). Others are wondering why they aren’t selling propane that costs only one-third of heating oil’s price (hint: you need to spend a lot of money on steel). Some are still wondering how they can even figure out where they stand financially, as they await their quarterly or annual “surprise” from their accountants. These items are no longer the mysteries they used to be. Ask the experts for help. We, and others, are available to help. We have a good idea of what might be keeping you awake at night. Better than that, we might be able to help you find some answers.
*Basis may have a number of components in it. It can be as simple as the cost difference between two locations (i.e. NY Harbor and a rack posting in Hartford). That basis, or “diff”, comprises the transportation costs, credit risk, and supplier profit. In addition, there can be a basis differential between two products, such as two different grades of gasoline, or—case in point—two different grades of distillate heating fuels.
**At this point, there is more talk than action, as to the timetable of the inevitable move by all states to ULSD for home heat. There may be refinery issues. There may be pipeline issues. There may be moves to slowly transition (perhaps a stop-off at 500 ppm) to ULSD, but the future of the industry—perhaps politically, more than practically—is premised upon this “clean fuel.” Until there is more clarity in the states’ mandate plans, there will be state-by-state confusion.
‘One thing that we have seen changing a bit over the last few years is that too many capped programs (historically, the absolute best program for customer retention) have morphed into fixed-price programs as prices have stayed steadily high.’
Over the past few years, as we have spent more and more time with our clients on matters that were not exclusively related to offering fixed and capped price programs, we have learned about various challenges and opportunities that heating oil dealers face on a daily, seasonal and annual basis.
The issues can range from customer retention and working capital needs and analysis, to excessive service calls and delivery efficiencies (i.e. gallons delivered per hour— or whatever your particular metric is). Sometimes, the needs require expert financial analysis, such as in the setting and managing of an annual (realistic) budget. Other times, the issues are in pricing of programs or how aggressive to be in “give aways” to keep customers from going elsewhere. Then, there are times where simply looking at the results and effectiveness of your service staff might assist in strengthening the company.
In just about all cases, we kept coming back to the simple notion of (not my quote), “You can’t manage what you can’t measure.” Since that very obvious realization, we have spent a great deal of time, money and effort to build and expand offerings that allow our clients to simply know what is going on in their world.
If you are a regular reader of this column (yes, I am including my kids, so the number will be higher!), you know that we rarely participate in self-promotion. We feel that it is very important to offer competitive pricing programs, and we certainly feel that ours are as good, or better, than anyone else’s, BUT if enough dealers are offering proper programs, this column has served its purpose. The same is true with required and critically important reporting.
You NEED to have sales and service reporting. You need to know which customers are simply not worth having. You need to know how you are doing versus your budget (yes, even small dealers need written budgets!). You need to know whether you are hitting your margins—by customer class and by program type (fixed, capped, index-plus, variable). Without this information, you are truly hamstrung, and will end up finding that logical fixes that SHOULD have been done in February, didn’t come to light until months after there was time left to make changes.
If you have a platform that provides you with all of this data—though I am not familiar with any that are close to as affordable or comprehensive as what we are releasing—then gain comfort in the knowledge that you are amongst a small percentage of oil dealers who are taking advantage of what your BOS is telling you, comparing it with your accounting system’s outputs, and actually using the data that is there —once presented properly.
If that platform is not part of what you have available, or if you are not using that as a major component to manage your business with certainty, you really need to start looking around. We (self-promotion alert!) think we can help.
With the volatility of prices, the high cost of oil, and the economic uncertainty that reigns, there is no longer any real excuse to not having the data – easily provided, relevant and affordable – at your fingertips.
I recently reviewed an analyst’s scathing report on the financial affairs of a large, vertically integrated energy business, and started to wonder about the woes of this particular company, and how losses could stack up so quickly in such a widely known entity. In conversations with one of our clients, a sizable convenience store operator, it was pointed out to me that even large branded gasoline distributors—regularly the bane of existence for “independents”—often make large tactical mistakes. The mistakes our client were referring to were those where street prices are set to attract more business, while at the same time devastating the margins from the business that would be coming that way (mostly), regardless of price. In other words, if you can get business by being the same or a penny cheaper than the gas station across the street, what is gained—other than losses—by being four cents per gallon cheaper?
Inevitably, this conversation morphed into one about heating oil dealers, and their incessant worry over being more expensive than “the other guy”. Companies do phone surveys to other dealers, focus on the rumor mill from their sales reps, and seem to search out every excuse to NOT maximize margins. Most frustratingly, during the winter—the time of the year where, for homeowners, staying warm and avoiding surprises trumps the cost of oil—dealers don’t seem to focus enough on grabbing the margins when they are there. If the typical residential customer gets between four and five deliveries at the time of the year that customers are the most “sticky”, how much would it benefit your bottom line to get one or two deliveries (averaging 175 gallons “per drop”) if you could grab that extra dime per gallon, instead of discounting a dime out of fear that someone would call you on not being cheaper than “the other guy”?
How much would an additional $15 or $30 net per customer per year help you out? And all it would take would be to charge a fair margin in the middle of the winter. Yes, I do know that increasing margins are easier said than done, but from what we have seen from some of our clients this winter, it may not be nearly as hard as you might think. Playing things too closely may be akin to trying to run out the clock right after halftime of a football game. Conservative does have its time and place, but not when you are conserving yourself out of the profits that you both need and deserve.
As more and more customers move to pricing programs, you will also need to manage how many customers are on fixed-price programs, as those are the customers from whom you will not be able (without unnecessary and risky speculation) to increase margins. However, the capped customers, and the remaining variably priced customers will allow for the greatest likelihood of strategic increases in margins. Historically, the cap customers are the most likely to stay with you, and therefore are most likely to not mind—or not notice— strong retail margins in the middle of the winter.
None of this is meant to say, or imply, that you should rip your customers off or even to push prices to the point where you are treating them unfairly. However, the window for profitability in most heating oil companies is restricted to just a few months of the year. Generally speaking, the first quarter of the (calendar, not fiscal) year is where all of the profits are made, with the rest of the year being either at breakeven or at a loss.
Given that the window of true profitability is limited to just a few months, the other part of maximizing margins and selling to the most profitable and predictable (capped) customers must focus on the timing and realization of what else is going on in the business. Are you hitting your targets—volume, margins, customers additions, customers retention (staving off losses), service billing, payroll, etc.? The biggest variable in your business is definitely the gross margin on the delivered gallons, but NOT managing the other aspects—or not being able to know what is going on with the other aspects— can be just as scary. Imagine hitting your per gallon margin number, just to find out, sometimes two months later, that you were way over-budget on overtime costs, or way under-budget on service department billings. It would be too late to manage those variables, but also too late to push margins to try to close that gap.
Maximizing margins, and “gettin’ while the gettin’s good”, will go a long way towards strengthening profits. Focusing on capped/reliable customers will make the company even stronger. Getting to the point where you can plan, execute, assess and modify your actions will put you at ease!
That phrase, “Garbage in–Garbage out,” more commonly written as “GIGO”, always gets a laugh from first year computer students. Usually it refers to programming mistakes that yield answers that “can’t be right.” In actuality, the computers didn’t make a mistake, but the programmer did.
In our business world, however, the programmers are not the ones creating the “garbage.” That honor goes to the billing, service and customer care departments of heating oil dealers. As one of our divisions, Angus Performance Advisors (APA), prepares to roll out its new web-based product, it has spent hundreds of hours tweaking and testing not only the programming, but also the “beta test” data from an assortment of dealers. This testing has revealed a number of GIGO moments that all should lead towards better reporting—but only after the correct information is put into the system.
One dealer was having the BOS (Back Office System) report to us that they have about 10,000 active customers. It is a pretty impressive number of accounts for an operation that we understood to be much smaller than that. Actually, the owner reported that he had fewer than 4,000 customers! After some basic testing, we found that the company had indeed, as most companies do, added customers with regularity. We also found out that this company—per their BOS—had absolutely ZERO customers who left them. No one sold his house, no one converted to natural gas, no one left for a cheaper offer, and no one got upset over a customer service problem! How nice for that company, if that were the case; but, alas, the company really only has about 3,500 customers. The rest are long gone—but no one told their system. That is, until now.
The same missing data can make diagnosing problems difficult in areas other than customer count. If you don’t enter the reason for a service call—as opposed to “customer called for service,”—or reasons for customers who do leave (move-out, price, convert to nat gas, etc.), how can you attempt to fix the problem that is leading to losses and excessive service calls?
Although this column generally focuses more on the supply and hedging parts of an oil business, there is only so much that tweaking of supply and trades can do—short of just speculating—but we keep seeing more and more opportunities for dealers to shore up their bottom lines on the side of efficiencies. The efficiencies could be in larger average deliveries, or in fewer service calls that result in overtime pay. In addition, if you KNEW why certain servicemen had “call-backs” on their work, while others did not, that might give you something to look into.
Back-office accounting systems, sold and in use today, most often contain significant and useful functionality, development of which has been fueled by the demands of their clients and the market in which they serve. Unfortunately, most dealers employ only the features which provide the obvious and immediate results needed for their daily operations, such as posting transactions, invoicing, degree day and service accounting, periodic processes and general reporting.
Any penalty for a specific field’s lack-of-use, or inaccuracy of values put into it, are generally non-existent unless this complacency is reflected in the dealer’s inability to bill or service their customers. The fast and competitive nature of our environment today demands that we analyze our data in ways we never had to before, but perhaps always should have. The system(s) today must, more than ever, reflect the most up-to-date performance of all departments within your company, as well as the most accurate profile of your customers, to which all activity is posted. Coupled with good reporting tools, this discipline will provide critical, timely and accurate insight into the ongoing health of your company and to the benchmarks you have set and must respect in order to survive.
The times are tough now, and seem to keep getting tougher (yeah, it’s mostly from the Springsteen song, “Cover Me”). The elbow room that made this an enjoyable business has all but faded away. However disheartening that may be, perhaps it is time to find out how good you and your company can and should be! Over the next decade, it seems that the “have’s” and the “have not’s” will be separating themselves from one another. Since it is clear that if the only differentiator is price, we all lose, there must be focused attention on maximizing margins while still remaining competitive. In addition, there is a big need to create and maintain barriers of exit for your customers.
If you can do this better than your competitors—and the tools are out there—the fact that the world is rough, and just getting rougher (yeah, paraphrasing the same song), won’t be a bother to you, but an opportunity. Start to clean up your data, start to get the reporting that you need. Mostly, start to use that data and reporting to maximize the bottom line profits of the business that most of you have poured your hearts and souls into.
Often, whether working internally on developing marketing and hedging strategies, or externally in our ever-expanding work with our clients, we try to focus on what the goals of planning are. Generally, we find that while conceptual goal-setting is easy (i.e., wanting a 65 cent per gallon margin, a net profit of $1.2 million, or lowering the amount of service department overtime during January), the details, and the tracking of “how are you doing?” is where plans start to fall apart. Instead of driving down the road (operationally), and seeing where we end up, we prefer to start with where we want to be, and then envision the small steps (moving backwards) to our starting point. That way, we can not only map out every step of the way, but but also, more importantly, know when we are off the trail.
There is a fairly well-defined set of responsibilities that the owner of an oil company should have in order to plan for and achieve financial goals. It starts with a budgeting process: one that is realistic, that is as detailed as can be, and down to the “whens” of what should be happening. The notion is to develop a calendar, one that is shared with management and staff, that breaks down the individual tasks and responsibilities for those tasks. All of this needs to be set up, including the listing of what things need to be reported upon daily, weekly and monthly. Once things are planned—and bear in mind that the expectations MUST be realistic—the plan needs to be approached as something that is flexible, as rarely (if ever) has a full one-year plan ended up working out exactly per plan.
Once budgets are set and the calendar has been planned out, you will absolutely NEED to start the tracking and reporting process. Some things might be tracked daily, others weekly, and some will be dependent upon the season of the year. While gross margins and sales volumes, delivery efficiency and customer gains/losses might warrant a closer, more frequent look as the current month progresses, excess service call reviews might best be kept to a lengthier interval, as transactions accumulate and your staff is on alert for offenders, etc. Gaining awareness of an issue today that could impact your operation, negative or positive, tomorrow should always be the objective. This diligence presents numerous and timely opportunities for positive change, resulting in the always-desired arrival of better-than-expected numbers at month’s end.
By providing yourself with the knowledge that, for example, you are charging correct gross margins per gallon, but that your deliveries are off by 35% MTD (month-to-date), you will be armed with the information needed to determine how/if you need to raise your margins on accounts (not fixed-price accounts, as those margins are not able to be improved). Or, if you see that delivery tickets are being “pulled way ahead,” you might want to move a river somewhere else. We have found that the greatest challenge in the attempt to track and learn from data is that MTD data is rarely available; and when available, it is often not used to get things back on track.
Sometimes owners, subconsciously, either don’t feel the need to—or simply don’t want to—share plans with their department managers or supervisors. Those particular men and women are the exact ones who need to understand the nature and goals of not only the budgeting process, but the reporting and modifying processes as well. If there are clear expectations (budgets), results (reporting) and actions (corrections) that are discussed and planned, having everyone on the same page will be the best bet towards achieving those results.
All too many companies operate, financially, on a razor’s edge—seeking salvation by virtue of a cold winter. You have very important financial and operational decisions that need to be made, and making them in the same manner as you have made them in the past might well be WHY you are sitting on a razor’s edge. There is a lot of information that is both needed and available. Instead of being (understandably) overwhelmed by the number of things that you NEED to know, focus on the risks and the potential impact of not knowing, and therefore not being able to react. We are in the information age. You have access to the information; you just need to know how to use it.
Though the song, first released by Bobby Day in 1958 (and re-released numerous times through the years), was a little before my time, there is no doubt that it is a catchy tune. However, it is more than likely that if you grew up listening to that song on the radio, that “Tweet” is the only one that you know —not the Tweet that represents the easiest and fastest growing form of communicating in today’s electronic world. Many of us grew up listening to the radio, but customers—yours and ours—are growing up with mobile devices, internet access everywhere and almost full-time addiction to Social Media, such as Facebook, Twitter and LinkedIn.
For years we have been advocates—though certainly not experts—of customer communications. Our core expertise is in trading and the management and reporting of data, but without the ability to convey to our clients, and to help them communicate with their customers, our proficiencies would not be worth all that much. We have helped clients write “price cap letters” and even worked with some on marketing natural gas to their customers who have “gone to the dark side.” Where our ability to help our clients to become better marketers is limited, we happily refer to those within our industry who have that expertise.
The simple notion that “everyone is like us” is very centrist, and wholly inaccurate. No one wants to get their “mail” once a day. No one wants to just do as their parents did. Decision-making processes are no longer based upon who has the nicest newspaper ad, but on what customers read on online blogs. Whether truly “taking back the power” or simply an easier forum for discussion, consumers seek advice from other consumers, and the easiest source is via blogs, chat rooms, and the like.
We recently started to focus some internal (and external) resources on the use of social media. Though you might find it surprising, there are not that many things that can be written about oil trading that would interest a reader (let alone interest us!). However, we have found an absolutely FREE way to have “regular touches” with our clients, and prospects, and we would be foolish to think that those who want to attract customers and clients will not be doing the same.
If you think back about 15 or 20 years ago, when price programs came into vogue, there were two main motivators to offer price caps. The first motivator was an opportunity to market something “different” and to use the cap offering as a way to grow your business. The other (perhaps far larger) group of companies that offered price caps was the group that was trying to defend its territory (i.e. customer base). So, like most things in life, fear and greed were the great motivators.
You might not have a Social Media department— unless one of your kids is setting it up for you while home from school for the summer— and you might not think that you need one. However, be rest assured that your competition, likely the same ones who were the first to offer price caps, have firm plans to start Tweeting and posting to their Facebook page. Oil companies, actually all companies, are doing what they can to remain relevant. Waiting too long to embrace, or at least start to embrace, Social Media can be detrimental to their businesses.
As our clients transition from “older school” to “newer school,” we see the glaring need for social media, and we actually do have a good deal of clients to whom a Tweet is just part of an oldies song. However, when you are selling a retail product to homeowners, the group of people who are now buying homes have never heard of Bobby Day.
Try it. It’s easy, it’s free, and you might be surprised at how many more of your customers will buy price caps, and stay loyal to you!