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Fuel Oil News - June 2016

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www.fueloilnews.com | FUEL OIL NEWS | JUNE 2016 23 "We have been up front with our customers right from the very beginning, explaining to them that in order for us to provide upside and downside protection—to offer a true cap—we have to buy insurance. I don't like to get into whether we're buying put options on our wet barrels or we're buying call options—the customers don't want to hear that. The way we explain it to them is we have to pay for the insurance plan so that if the price of oil goes down, your price goes down, and there's an upfront fee to it. We charge our customers upfront the day they decide to sign up for the plan." There are some customers, typically a minority, who voice skepticism about the fee, Uglietto said. "Initially you'll have peo- ple who say, 'Sure, you're putting that money in your pocket,'" he said. "But the reality is when the price drops precipitously we can drop [our price] and our customers see it. So now, twenty years later, they all understand that when we say cap we mean cap. If we're retailing oil for a dollar they're paying a dollar. If we're retailing it for four dollars tomorrow, they're paying the cap, and they understand it." Because price caps have worked well for Cubby Oil and its customers, loyalty has accrued over the past two decades or so, Uglietto said. "We've got customers that sign up for it every year," he said. The customers comment that the price cap provides them with "peace of mind—knowing that if anything crazy happens in the world and the price goes through the roof, they've got protection." Alternatively, "If things are nice and quiet and it's a mild winter and we're producing more oil than we know what to do with and the price crashes, we've got the downside" covered, Uglietto said. "The fee is a very, very small price to pay for that protection," Uglietto said. Typically, customers end up paying 10 cents or 15 cents a gal- lon, however it is worked into the invoicing, Baratz said. It might be in the form of a monthly amount of a few dollars, or an annual fee, such as $99 or $175. "It doesn't have to match up exactly to the cost of the protec- tion," Baratz said. Marketing price cap plans effectively can ease the reception that fees get from customers. Angus offers consulting ser- vices that, among other things, includes the writing of price cap solicitation letters. "You want to let the customers know you're offering something that is of true benefit to them," Baratz said. One of the common mistakes in marketing, Baratz said, is to tell customers they can have something, like a cap price plan, and follow that with, "Wouldn't that be great?" Baratz said a lot of people receiving such a letter are likely to "sit back and say, 'Yes, but is it so bad not having it?'" The benefit needs to be specified in concrete terms that customers can relate to, Baratz said. Incorporating the fee into a budget program works well, said Rich Larkin, president of Hedge Solutions, Manchester, N.H. "That, to me, is where the cap is sold most successfully," Larkin said. "The average option premium"—or fee—"right now for an 800-gallon account is about $160," Larkin said. "It's very, very difficult to get the consumer to come in and write a check for that premium. They won't do it. They can't bring themselves to write the check. "Bundle it into the budget payment—that's how [to] get the option premium paid for by the consumers," Larkin said. "One my marketers a few years ago said to me, 'I like a cap price program because once I get my customer on that I can never send them bad news,'" said Gary Sippin, marketing director of Destwin Energy Systems, Monroe, Conn., a provider of an online system that supports hedging. "So from that day forward the customer can only get good news from the company. That was a nice way of putting it." Sippin also said that a cap price program tends to draw a better customer "because they tend to be more insurance- or protection-oriented than specifically price-sensitive. They want to be protected almost like an insurance policy from any even- tuality that might happen in the marketplace." l F O N Cubby Oil & Energy has offered a price cap program for 20 year, with great success. "We market it to them as a way for them to have some price certainty in a very volatile market." —Charlie Uglietto, owner and president of Cubby Oil & Energy regarding cap pricing

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