When a low-cost, or worse yet, below-cost big box competitor comes to town, how should you or your dealer price so as not to lose current volume? How about a grocer that initiates new fuel service? Marketers nationwide are struggling with this question, and there is no one right answer.
While many marketers have found they can maintain fuel volume posting prices two to eight cents higher than a new competitor, others have lost their entire volume even while price matching. This month, let’s examine what works with big box and grocer competitor pricing strategy. We’ll also share a simple technique for monitoring any new pricing strategy to make sure you maximize profits, not just keep volume.
When determining pricing strategy, the first thing to analyze is a particular site’s customer base in relationship to the new competitor’s customer base. Therefore, pricing must be done on a site-by-site basis.
The entire American public is gas price conscious (thanks to our 12 foot signs!), but it’s proven that only 20% care about “cheap.”
That 20% segment doesn’t care about convenience, time, or even cleanliness. They will drive miles and wait in long, time-consuming lines to buy cheap gas at ugly, dirty fuel sites. Therefore, the first action to take on a site-by-site basis is an assessment of why customers buy at that site and whether they are “cheap-only” driven customers. The more “cheap-only” customers, the more price must be matched to maintain volume. Does this customer description match your present customer base? If so, then you will likely be forced to match a big box competitor’s price to keep volume. That could get ugly, so you may want to rethink your target customer strategy.
Hopefully, though, you are already catering to a sector of the market that cares about something other than just cheap. If so, it’s not as difficult as you may think to keep those customers. The further away your customer is from only wanting cheap and the more they want other features and benefits from your site, the higher your price can be. An attractive destination site frequented by buyers who value timesavings, can price as much as eight cents higher than big box without eroding volume.
Most sites, however, are not that special, and neither are their customer bases. Therefore, a good rule of thumb is to start out at two cents. If your volume and inside sales are stable at two cents, then test inching the price up, keeping a careful eye on both volume and in-store sales and margins. The best technique to monitor this precious relationship is using a daily inside-sales-per-gallon ratio. Know the baseline result for this ratio before the new hypermarket entrant, so you’ll know the exact impact of your new competitor plus have valuable internal data for store comparisons within a chain.
Some marketers wished they knew this ratio sooner. For instance, a marketer reported that he decided to match his new hypermarket competitor. He was amazed at the tremendous jump in his fuel volume from the new low price, but equally amazed that his inside store sales took a dive. His fuel supplier loved him for the volume, but his bottom-line took a serious hit. He realized that all those people waiting in line for cheap gas didn’t buy anything inside, plus the traffic jam in the parking lot scared away his good store customers! If this marketer had been measuring inside sales per gallon daily, he would have caught the error of his ways sooner.
Now let’s shift focus from big box to grocery competitors. The grocery customer is different from the big box customer. Think about today’s grocery shopper, and “Mom” will come to mind. So again, the critical issue is whether your current site caters to Mom. Right now, the Mom market makes up another 20% of the population. Unless you have a compelling reason for Mom to make an extra stop at your location, she will fuel up at the grocery store.
Grocers have been the most aggressive to date in grand opening pricing. In Ohio, a war between two grocers had fuel down to 8.9 cents per gallon and fights breaking out in the gas line. If you take a hard look at your customer base, though, do you think they would wait in line a couple of hours for 8.9-cent fuel? Consider allowing the grocers and big boxes to fight over the 40% of the population that has the time to wait in line for fuel, while you concentrate on serving your best customers.
Next, develop a compelling answer for the customer question, “Why is your gas 3 cents higher than Wal-Mart?” The answer should be from a customer benefit perspective. For instance, “Mr. Customer, that 3 cents per gallon equals about 45 cents per fill-up. Isn’t it worth 45 cents to pay for your gas here in my warm (dry, safe, or whatever you have as an advantage) store with my good service?” Or . . . “Aren’t you glad you didn’t drive 10 miles to Wal-Mart and spend $1.00 on fuel just to save 45 cents?”
All store personnel should easily know and be able to articulate to the customer the benefit of fueling at their store as compared to the new low-cost competitor. That means you should script the answer. To compete, it’s not just pricing, it’s pricing plus strategy. Do your customer analysis on a site-by-site basis, cater to your own unique target market, have a compelling reason for that target customer to do business with you, use smart pricing strategy carefully monitored with per-gallon store sales, and have a scripted benefits answer to higher pricing. It works and you’ll enjoy profits while the others fight over “cheap” and “Mom.”