The home heating oil industry has a long and proud history, and Fuel Oil News has been there supporting it since 1935. It is an industry that has faced many challenges during that time. In its 77th year, Fuel Oil News is doing more than just holding
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18 MARCH 2014 | FUEL OIL NEWS | www.fueloilnews.com FUELS By PhiliP J. Baratz Do Your Competitors Offer Better Programs (What Do they Know that You Don't?) A s the challenging winter of 2013-14 starts to wind to a close, it is time to take stock of what is working and what is not working for your com- pany, so that you can plan to make the appro- priate changes (or at least know what changes should be made) going forward. We plan a series of articles to cover a number of impor- tant topics for fuel oil dealers over the next few months. Following this month's article, we will cover topics on financing your business given today's banking realities, business analytics/management reporting — what you NEED to know and how to get that information. We will also look into some of the opportunities related to prod- uct diversification — should you look to sell natural gas, electricity or propane? Today, we start with the customer price protection offerings. Although the number of companies that make offers and the number of customers who participate in those offers has varied over the last decade, a good num- ber of companies regularly offer their customers some sort of price protection. Some offer a very basic fixed- price pre-pay program, while others offer a price cap. Some programs require that you are a budget customer, while others require an up-front fee. The plan for all of these programs — or at least it SHOULD be the plan — is make an offer attractive enough to bring in some new customers, and to keep your current customers from looking elsewhere. Pricing programs are NOT about trading, they are not about speculating on prices and they are not about undercutting the competition. They are all about stability and predictability — both in customer count and in profitability. Making an offer can be as simple as writing a letter to your customers telling them what they will get if they par- ticipate (usually a fixed price or a capped price). All too often, companies focus all of their attention on the solici- tation for the program, without the requisite time being spent on determining WHAT the offer should be — tracking the offer or hedging the offer (protecting yourself against the promises that you are making to your customers). Simply saying that you think prices are going to go up (or down) and setting a price to the customer accordingly is a very risky move. You need to consider where the forward (futures) market is for the time period that your offer covers — of course on a weighted average basis. You need to have an understanding of what price you will pay your supplier — unless you are picking up supply in New York Harbor (the "basis"), and how much storage, if any, you have access to. You should think about whether or not you want to buy futures contracts or fixed-priced wetbarrels, if you need to manage the product differential risk (i.e. high sulfur versus ULSD futures), etc. and whether you want to limit the number of gallons that a customer can have in his or her program. The inputs, just in determining the price for your offer, are many and you need to work through them very carefully. Once an offer is made, chances are that your customers will start to sign up. That brings up the next challenge: tracking the sales and being sure that you have protected yourself. Do you have one price for a program, or multi- ple prices? Can your back-office system accommodate all of this information, and give you the reporting that you need so that you won't wake up one morning and discov- er that you have sold way more to your customers than you have bought. (By the way, those realizations ONLY Philip J. Baratz