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Entries in fuel prices (4)

Monday
Mar272017

FBO Operations Tip: Want a Stronger Bottom Line? Mind Your Fuel Margin

Consulting with various FBOs over the years, we have discussed a strategy for improving bottom line performance that several FBOs have utilized with positive results. In a nutshell: Mind your fuel margin, and don’t be afraid to raise your fuel price.

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Tuesday
Apr072015

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.

Monday
Jun202011

When Pricing Fuel, Use Numbers to Your Advantage

“You can't do today's job with yesterday's methods and be in business tomorrow.” – Anonymous

We know the pricing game all too well. Gas stations and auto dealerships have conditioned us to react to pricing of a product or service by offering a perception of a good deal.

In the FBO fuel pricing arena, we tend to play the same game.

In a previous blog post, FBO Fuel Pricing: Seeking a Silver Bullet, we discussed some pricing theory and came up with some ideas to find the silver bullet — which is the best price.

In the FBO business today, some customers call ahead for fuel prices, seek to use contract fuel suppliers and try to negotiate when they arrive on your ramp. We would like our customers to believe that our prices are well thought out and not just some arbitrary posted numbers.

Knowing how customers interpret numbers can help your FBO make stronger pricing decisions. What we would like to discuss here are some thoughts that go through people’s minds when they are looking to purchase. Consider these ideas drawn from “The Importance of Numbers,” written by Geoff Williams and published in Go magazine:

Make Your Prices Easy to Remember

If you make your prices easier to remember, comparison shoppers should think of your FBO more readily. Your potential to complete a sale increases.

The numbers 0 and 5 are remembered easily. For example, $4.70 for a gallon of fuel is easier to remember than $4.72, and $5.50 sticks better than $5.58.

Precise Numbers Feel Firm

Precise numbers seem less flexible to consumers than rounded numbers, according to a study by a social psychologist named Matt Wallaert. If you price your fuel at $6.00 per gallon, your price might seem flexible. If your price is $6.23, it appears to be non-negotiable.

Minds Play Tricks

Our minds play tricks, according to DePaul University professor and pricing expert Tim Smith. Auto gasoline priced at $3.699 is really $3.70 a gallon. In the Western world, our languages read left to right, so to some extent, we encode the lower numbers on the left first. In addition, we seek the best deal from a rational point of view, but we perceive emotionally that we have “saved” by not paying $3.70 a gallon.

We tend to have a mindset when it comes to prices. It is incumbent on us to break out of normal thought patterns and be original with our pricing proposals to pilots. If you know how people view numbers, you can predict their reaction to prices and, therefore, price more strategically. For example, above a certain threshold — say $5.00 per gallon — people will not react too differently to $5.25 or even $5.45 a gallon. They will not balk until you approach the next threshold, $6.00 per gallon. For maintenance services, on a higher price scale, $875 is better than $900, yet $825 will sell as well as $800.

Blogger John Enticknap presents at the 2011 Florida Aviation Trades Association (FATA) annual conference.Much can be said about numbers and their importance to your pricing theory as well as your target margin — both gross and net. By keeping in mind some of the psychological factors discussed above, you have a better chance of making the sale.

As our anonymous quote states, we must keep an open mind and study new business ideas and methods to be successful. Yes, we see many of the same business situations time and again in the FBO business, but that should not allow us to get complacent or not try new thinking.

Stay flexible, and stay informed.

Please let me know what you think, and share your ideas. Please email me at jenticknap@bellsouth.net.

FBO Success Seminar Registration

The next NATA FBO Success Seminar is scheduled for Nov. 8-10 in Atlanta. Register at nata.aero.

John Enticknap

John Enticknap founded Aviation Business Strategies Group in 2006 following a distinguished career in aviation fueling and FBO management, including as president of Mercury Air Centers. He is the author of 10 Steps to Building a Profitable FBO and developed NATA’s acclaimed FBO Success Seminar Series.

Thursday
May192011

The Cost of Aviation Fuel, Part 2

FBOs Might Need a Two-Pronged Pricing Strategy

"Everybody has accepted by now that change is unavoidable. But that still implies that change is like death and taxes — it should be postponed as long as possible and no change would be vastly preferable. But in a period of upheaval, such as the one we are living in, change is the norm." – Peter Drucker, Management Challenges for the 21st Century (1999)

Recently, I was reading an article posted to Eye on the Economy on msnbc.com. The article was titled “As oil prices drop, Fed should get credit.” After reading the article, I decided to write Part 2 to a previous blog post titled The Cost of Aviation Fuel.

In the first post, I talked about continued increases in the cost of aviation fuel and what FBOs can do to mitigate high retail prices. We looked at a number of the reasons for the increasing cost of fuel:

  • The Fed policy of a weak dollar — a weak dollar requires more dollars to buy a barrel of crude oil.
  • The continued unrest in the Middle East.
  • Uncertainty with the federal deficit.
  • Speculators betting on the increased price of fuel.
  • Lack of offshore drilling in the United States.

Since then, here is what is happening in the world markets:

  1. The dollar’s value is up 3 percent so far this month after sliding 15 percent against other currencies over the past year.
  2. Global growth seems to be slowing.
  3. The inflation threat from easy money policies may be easing.
  4. Oil stocks have remained high even with the unrest in the Middle East.
  5. Inflation fears in Europe have prompted European central banks to raise interest rates.
  6. China has required its banks to hold larger cash reserves to help curb inflation.

The Platts fuel index prices peaked two weeks ago. The Gulf Coast Pipeline mean was $3.3239 per gallon. Looks like the West Coast took the prize for the highest Platts prices at $3.4275.

So what happened in the last two weeks? Prices dropped more than 15 cents last week (May 10). This week, we have seen nearly an additional 8 cent drop (May 16). We now have a drop of 23 cents!  Perhaps your customers are wondering why you haven’t dropped your price.

I’ve seen posted retail prices of Jet A as high as $8.74 per gallon. Who is going to pay that for jet fuel?

And what’s going on with oil futures? The trend right now is good, but will it last? There are many factors in the national and world marketplace that can affect what is happening.

On a national basis, we have the debt ceiling vote coming within two weeks or so; the economy might continue to slow; demand might be down; the Middle East could get more unstable. All these issues can negatively affect the markets and drive up prices again.

It appears the oil commodities markets/speculators are backing off the high prices to be paid for futures.

Simply put, the forces that drove the market up are now down.

All this begs several questions:

  • Will the fuel prices continue to drop?
  • How do I react and price my fuel?
  • The customers want better prices now! How do I help them while trying to keep my business profitable?

What Can You Do?

First, do not change your price! You have all that high priced fuel in storage — the same goes for the terminals and pipelines. This high-priced inventory will take a few weeks to work itself through the system. So when you purchase you next load of fuel, you will then be able to purchase at the lower price. How fast you turn over your fuel will determine how and when you pass along price reductions to your customers.

In a previous blog post, we talked about FBO Fuel Pricing: Seeking a Silver Bullet, so we won’t plow that ground twice. Suffice it to say you must maintain your margin to sustain your profitability and understand pricing theory. But the high price of fuel is making the customers very price sensitive. Change is coming!

Dual Pricing Strategy

One possible scenario is to establish a dual pricing strategy by providing an a la carte service as well as a full-service offering.

Remember when gas stations offered two levels of service, self service and full service? You would pay extra if you wanted everything under the hood plus your wipers and tire pressure checked. Otherwise, you saved by doing it yourself.

An FBO could offer two levels of service as well. For instance, you could offer full service for one price, whether retail or contract fuel. Under this pricing scenario, you continue to offer all your usual amenities for one set full-service price.

Then you could offer a discounted or a la carte “basic” service price. If the operator wanted other services, he could pay for ice, coffee, papers, lounge, transportation, baggage handling, galley and lav servicing, etc.

Our advice is to stay in touch with your fuel suppliers and what is happening in the national and world marketplace. Change will continue to happen, and you must be aware of it and react in a reasonable businesslike manner to be successful. Think seriously about an a la carte or full-service pricing methodology.

FBO Success Seminar Registration

The next NATA FBO Success Seminar is scheduled for Nov. 8-10 in Atlanta. Register at nata.aero.

John Enticknap

John Enticknap founded Aviation Business Strategies Group in 2006 following a distinguished career in aviation fueling and FBO management, including as president of Mercury Air Centers. He is the author of 10 Steps to Building a Profitable FBO and developed NATA’s acclaimed FBO Success Seminar Series.