Information Management
Customer Retention?
Just Put a Cap on It! Philip J. Baratz
This heating season will be the second one since
the world was turned upside down by the current
pandemic. Every person and business is
aware that while some things might return to how
they used to be, much has likely changed forever.
COVID-19 hit our industry with challenges never
contemplated, and in many cases, exposed problems
that have been lingering for years but were never
critical enough to deal with.
More consumers than ever before did everything from
home and craved simplicity in 2020.
Our customers made life-altering decisions about
where they would live, work and school their children,
and many realized that they simply wanted to worry
about fewer things. This desire for simplification has
even impacted the way they interact with their fuel
dealers. In 2021, surprises are out and predictability is
in. This attitude change could be great for fuel dealers
if they help their customers achieve it (and they can).
Pricing
In 2020, the price of ultra low sulfur diesel (ULSD)
had a low-to-high range of approximately $1.35 per
gallon. When you compare that with the three prior
years, where the annual range averaged $.62 per
gallon, you can understand the notion of not wanting
surprises. We are not out of the woods relative to
the economic impact of the pandemic, nor regarding
where oil prices are headed. Will we retest the low
prices we saw last spring? Will we have a buoyant
rally taking us to new highs—along with the equity
(and other) markets as some are predicting?
The simple answer is: no one knows. If you realize
(and accept) that experts, producers, governments,
suppliers and traders do not know where oil prices
are heading, then it makes it easier to accept that
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your “experienced opinion” is really nothing more
than an educated guess, but a guess nonetheless. If
you take the logic just one step further, homeowners
certainly have no idea where prices are heading, but
they do rely on what you tell them.
If you promote fixed prices because you are certain
prices will not fall, there is a good chance you can
have your customers sign up for your fixed-price program.
However, you are taking the risk that if prices
do fall, you will have a lot of unhappy (former) customers.
If you promote a market that will only have
small price fluctuations and offer no pricing program,
the risk of losing your customers increases exponentially
if prices rally (as of this writing, prices are a
full dollar per gallon higher than the lows we saw
last spring). However, if you promote a price cap, you
should be able to accomplish three important goals:
• Give customers the predictability they seek
• Achieve the full margins that you are
budgeting for
• Increase customer retention at a time that is a bit
nerve-wracking for all
There are many ways to offer a price cap. The first
piece of advice is to genuinely believe that you don’t
know where prices are heading, so you do not make
the mistake of offering a cap and simply speculating
(not hedging) that prices won’t move against you.
Suppliers offer fixed-price and fixed-diff wet barrels,
trading companies offer swaps, futures and options.
There are calls and there are puts. It can be very complex,
but it can also be very straightforward; there
isn’t a “best way” to hedge your exposure.
If you want to keep with the notion that 2021 is
the year of simplicity and predictability, you should
sit down with a professional who can help you assess
your situation, and help you plan for your pricing
program. You might have to invest a few hours to get
it right, but if the result is saving you hundreds of
hours of worrying about prices, and perhaps saving
even more time wondering about customer retention,
it is hard to argue that it would not be time and
money well spent. ICM
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. The
risk of loss in trading commodity interests can be substantial. You should
therefore carefully consider whether such trading is suitable for you in light
of your financial condition. In considering whether to trade or to authorize
someone else to trade for you, you should be aware that you could lose all
or substantially all of your investment and may be liable for amounts well
above your initial investment.
30 ICM/March/April 2021
Photo courtesy of Ivan Samkov