Effective product pricing

November 1, 2006 By    

In today’s volatile energy market, the successful propane marketer must know how to effectively price propane. It’s one of the most important skills for any owner/manager to hone.

 Randall R. Doyle
Randall R. Doyle

Price determines the margin that has a significant impact on the bottom line. The 2 million-gallon marketer who earns an additional 5 cents per gallon increases the bottom line by $100,000, at least 40 percent of the profitability for most marketers that size.

A competitive price is crucial in the competition for the new customer. It also affects the consumer’s perception of “good value,” which is one of the Propane Education & Research Council’s five strategic elements for tracking propane’s effectiveness in the consumer market.

At a propane conference this past summer, I asked the marketers to rank the toughest marketing challenges they face. Here’s what they said:

1) How to price in a volatile market

2) How to price in a market of wide-ranging retail prices

3) Eroding customer loyalty and credit worthiness

4) Competition from electricity and other fuels

5) Finding employees that deliver value and service

6) Price wars

It’s not surprising that the marketers said it’s tough being effective at product pricing in today’s market. To help find the right pricing practices for your business, follow the practices of today’s most savvy and astute propane marketers:

More than ever, astute marketers are vigilant each day about pricing. They understand that the pricing practices of the past do not work in today’s market. They understand that current information on propane supply costs and per-gallon bobtail operating costs must be known. Many, however, don’t know those costs.

Savvy marketers are constantly in touch with their competitors’ pricing strategies, having an effective response to their low-ball, first-fill price. In addition, they ready themselves to set tanks in the dead of winter when their competitors’ quality customers become outraged that they are paying a 50 cents or more premium per gallon. Finally, their winter price hits that sweet spot of taking advantage of the margin updraft created by the premium priced marketers while being able to gain new quality customers on price.

The astute retailer markets propane as a utility. Their product offering blends a monthly budget pay program and a supply price cap. This offering helps the marketer’s cash flow, focuses the customer on the monthly energy cost and not the price per gallon, and protects the consumer from the turbulent energy market. Everyone wins with this arrangement.

Effective propane marketers know how to sell value ahead of price when a prospective customer calls.

“Seventy percent of new customers want value and only 30 percent are looking for the lowest price,” says Kirk Wright of Pro Image Communications, which designs marketing programs for the propane marketer. “Those marketers that know how to sell value will win that new value-minded customer 50 percent of the time. It’s these value-minded customers that will stay with the company for at least eight years and are not likely to leave on price alone.”

Price is just one aspect of effective marketing. A marketing program should be about building long-term customer relations. This is done by creating the perception of good value through excellent service. Marketers who deliver value improve their customer retention.

“Customers that are provided quality service will stay longer and will be loyal. I consistently see this principle at work,” says Wright.

Market research also shows that companies across all industries that achieve the “superior quality” position will command, on average, an 8 percent higher price than businesses that are perceived to have lower quality. For the propane marketer, this is about 15 cents per gallon.

“I also see this with my clients. They provide excellent service and as a result are able to command a higher price because they’ve earned it,” says Wright.

As each marketer creates that position with the consumer, the entire industry wins in its battle against competing fuels, especially electricity.

How is the propane industry doing in its battle to create the perception of good value with the consumer energy market? Not well. PERC’s most recent consumer education research reports that propane’s good value favorability score of 50 lags electricity’s score of 73. One year ago, the difference was only five points.

A major cause for the decline is high crude oil prices, which is beyond the marketer’s control. Thus, it’s more important than ever that marketers do well with the things in their control – the practices that consistently deliver quality service, build trust and build strong customer relations.

Each time the consumer comes in contact with the propane company, the perception is affected; a positive experience builds the perception while a bad experience erodes it. Let’s look at the six points of contact between the customer and the propane marketer:

  • Bobtail driver
  • Serviceman
  • Phone
  • Walk in traffic
  • Community involvement
  • Written communication, including statements and invoices

At the same propane conference last summer, the propane marketers ranked the bobtail driver and phone the top two in importance. Given this, there are several points to consider.

Bobtail drivers should be managed as important ambassadors of your company and the industry. Drivers must know that their role is more than delivering propane. They should be trained in customer service, be courteous and appear neat and professional. Driver performance feedback and bonus/recognition should include an element of customer service.

Practice effective phone skills, which is a unique and essential discipline in today’s marketplace. The most common interaction with the customer is by phone. There are plenty of cost-effective training programs on CD and on the Internet that can be added to your employee training program. Select and develop your employees, especially the CSR, on their ability to communicate, solve customer issues and market by phone.

Monthly statements should be easy to read and should send a positive message to the customer. Confusing statements erode customer trust and confidence.

Build a strong face-to-face relationship with the people in your community. Our rural American values tell us that people want to do business with people they know and respect. This is what distinguishes propane from electricity with the energy consumer. Capitalize on it.

Randy Doyle, a CPA and MBA, is a propane industry consultant based in Houston. He can be reached at doylerr@aol.com

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