Ask most oil and propane customers what they think of paying for price protection (think insurance) and you will likely hear “I hate it.” What is it that they hate exactly? After all, these are the same consumers who buy insurance for everything from cars to vacations and never seem to be upset that it rarely results in “compensation.”
Insurance is really about peace of mind, not financial compensation. We all feel better sleeping at night knowing that if something goes wrong in some risky corner of our lives, then we are covered. Whether that ever happens is oddly inconsequential since none of us actually hopes for bad luck just so we can collect on our premium. Have you ever heard someone say, “It’s about time I got into a car accident…at least now I can justify the expense?”
So why is it that our customers are generally offended by paying for price insurance despite simultaneously demanding to pay less for oil or propane? After all, the net result has been a significant drop in program participation, which, in turn, removes this important value-add service from your arsenal. That, in turn, puts you squarely in a street price war with low margin competitors. Not good.
Perhaps the secret can be found by better understanding consumer behavior in a broader context. Buyers of anything have a nasty habit of oversimplifying and then distorting the facts. It’s the oldest negotiating trick in the book. If I can make you feel bad (or better yet, guilty) about how you arrived at your “exorbitant” price, then you will give it to me cheaper. In our world, it’s as easy as saying, “The COD guy down the road is 30 cents less than you and now you want me to pay another 30 cents to cap my price?!?” We all know that this is an utterly inaccurate depiction of reality, but your customers do it every day. And very often, you give in to their demands, however unreasonable, to keep the account. What exactly is happening here?
Like most of my coworkers, much to my mother’s chagrin, I went to college to study economics. Clichés aside, you learn in 101 class that powerful competition in a market can force the price of a given product down to the point where firms can no longer derive a profit. And who drives this dynamic? Correct, consumers. They ultimately decide what anything is worth given stable supply. Oil and propane consumers seem to have decided that they want cheaper energy; hence they are pushing down prices and by extension, your profits.
Is It Really All About Price?
There is another interesting facet to this situation. While doing research for an upcoming AREE presentation, I interviewed a randomly chosen sample of heating oil consumers. I asked them about price, and almost invariably they sited “lack of price stability” as being equal to or more important than the cost per gallon. The message is that they seem to be annoyed that prices spike in extreme fashion leaving them with unpredictable expenses.
When pressed further, these same folks admitted to at least considering a switch to natural gas. The answer again was not necessarily because it was “cheaper,” but because it was “more stable” in regards to price.
Hedging allows marketers to exert incredible power over both the ultimate cost and price stability of oil and propane. When properly applied, hedging can help you offer consumers more attractive prices while not eroding margin. This is not simply relevant to your program business, but also, more importantly, your rack to retail business.
Maintaining competitive advantage in a market where consumers are flexing their muscles can be extremely challenging. You have to find that balance between a compelling price and a quality customer experience. And you have to make enough money to run your business!
Like it or not, a new age of consumerism means that prices will come under more pressure before they come under less. Therefore, incremental gains in margin can literally mean the difference between your success and failure. Learning to integrate hedging, both short and long term varieties, into your strategic plans is likely to become a business requirement in the years to come.
It is ironic that price insurance (aka puts and calls), the very thing that annoys so many consumers, is the same tool that will ultimately help them get the lower prices they demand. Perhaps as an industry we need to do a better job pointing out this important and rather odd contradiction.