Tip of the Week: Watch Your Discounts—Do the Math!
/By John L. Enticknap and Ron R. Jackson
Aviation Business Strategies Group
There’s a syndrome that is unique to the FBO industry. We call it the false-positive fuel pricing syndrome where the posted price is not really the selling price.
Show us another industry that establishes a pricing structure for its main product, publishes it online, feeds it to informational websites, posts it on a board in the store, and then completely ignores it when making the sale. Although this practice appears to be contrary, divergent thinking, it’s standard operating procedure for most FBOs.
When discounts are freely given to fuel brokers, base customers and transient customers, who’s left? At the end of the day, heavy discounts have eaten into the margins that were built into the posted price.
Pricing studies indicate that discounting posted prices may gain more customers but in the long-run the business is less profitable. “Making it up on volume” is a phrase we’ve all heard but this seldom works, especially in a very niche market like the FBO industry where the number of daily transactions is counted in tens instead of hundreds or even thousands.
Threaded below is an example of what a business needs in terms of additional customers to breakeven when a discount is given.
Before the Price Discount with 1,000 customers:
- Price per unit: $200
- Cost per unit: $150
- No. of customers: 1,000
- Gross income: $200,000
- Direct Costs: $150,000
- Gross Profit: $50,000
After the Price Discount with an additional 250 customers:
- Price per unit: $190
- Cost per unit: $150
- No. of customers: 1,250
- Gross income: $237,500
- Direct Costs: $187,500
- Gross Profit: $50,000
That’s an extra 250 customers you’ll somehow need to woo with your new low prices, just to stay even!!!
In the FBO industry, we’ve encountered many FBOs who have lost price-sensitive customers but have become more profitable by selling higher margin fuel on fewer transactions.
If the math does not convince you to be very cautious with discounting, consider these facts concerning price buyers:
- They are the least loyal customers.
- They complain more than premium price buyers.
- They expect more than premium buyers.
- They take up more of your time and distract from the time you need to spend with premium price buyers.
FBO operators should keep these concepts in mind as part of the planning and management of the enterprise. Remember, a 5 percent discount will require the FBO to pump at least 20 percent more gallons just to maintain anticipated profit. The question is, where will you get these customers?
About the bloggers:
John Enticknap has more than 35 years of aviation fueling and FBO services industry experience. Ron Jackson is co-founder of Aviation Business Strategies Group and president of The Jackson Group, a PR agency specializing in FBO marketing and customer service training. Visit the biography page or absggroup.com for more background.
