The Price is Right: Strategies to Price Fuel

You may recognize the name of the popular game show “The Price is Right” where lucky contestants had to guess the prices of items on the show, with the guess closest to the actual value – without going over – won and the contestant walked off with the prize. Sounds simple, right? But estimating and selecting the price to get it just right – not too high, not too low – proved to be fairly difficult.

This same delicate balance of determining price is what fuel and convenience retailers try to achieve each day. They aim to set the price in the ‘sweet spot’ to balance fuel volumes and margins while achieving a customer’s broader objective of meeting the proper brand image along with various other factors. So, while this price setting is based on multiple components, the main factor as of late has been one thing: consumer behavior.

Economic impacts

Economies around the world felt the impact of the COVID-19 pandemic as countries began to enter lockdown. With only essential businesses and activities allowed to continue, fuel consumption plummeted while consumers stayed home. As noted in the NACS and PDI Insights Cloud Consumer Behavior Monthly Reports, fuel consumption reached stagnation, leaving prices in a state of steady decline.

As trip patterns shifted and began to trend down year-over-year, oil prices dipped below zero for the first time in recorded history. The surplus in the oil industry, supplied by Russia and Saudi Arabia, flooded the market during a time when demand was at a historic, all-time low.

Let’s be clear: no price predictions could have prepared retailers for the drastic shift in consumer behavior. Times of disruption, whether they’re caused by a pandemic or inclement weather (hurricanes, fires, etc.), have always left convenience retailers with the need to revisit their strategies. That’s why it’s important to rely on adjusted strategies as well as your software to help you survive during the 2020 pandemic.

No software, now what?

Although fuel consumption has dropped, the price of fuel at the pump is still an important psychological factor that consumers use while choosing which site to visit. Now more than ever, fuel retailers should evaluate pricing strategies even with the lack of fuel consumption. It’s more necessary than ever to put time and thought into the prices at your pumps and in your forecourt to help draw consumers to your store.

Unfortunately, historical purchasing patterns aren’t applicable during times of disruption. So, what do you do when the software and tools you would normally use to model the coveted ‘sweet spot’ for your prices are no longer viable? Here’s what you can do: go back to evaluating pricing based on your knowledge of your market, consumer interests, brand reputation, and more.

We understand the importance of always setting the right price, but know that determining the right strategy can be hard. Here are some of the ways you can help your bottom line during a time of disruption.

Pricing strategies in an unprecedented time

It can seem intimidating to evaluate new pricing strategies, especially when disruption is taking place. But these pricing strategies are here to help you through this unprecedented time.

While there may be various pricing strategies to choose from, most can be boiled down to one of three choices: Competition-Based Pricing, Cost-Based Pricing, and Customer Value-Based Pricing.

  • Competition-Based Pricing – Retailers look at their competitors and decide to charge a premium price, an economy price, or a mid-range price for their products, compared to their competitors. This offer to the consumer is more than just price alone. It factors in the quality of location, operations, and facilities offered.
  • Cost-Based Pricing – Retailers put a percentage of profit on the cost of producing or acquiring the product. For example, if the cost of producing the product, including taxes, freight, credit card fees, etc. is $2, and the target margin is $0.10 per gallon, the selling price would be $2.10 per gallon.
  • Customer Value-Based Pricing – Retailers can set prices based on a customer’s perceived value of the brand. Similar to competition-based pricing, it takes into consideration the location, operations, and facilities offered by the retailer into setting a price. The difference is basing the price on the customer-driven value of the brand vs. competition in the market.

Ultimately, when setting your new prices, it comes down to your desired outcome that drives your pricing point. Whatever your goals may be, proven pricing strategies will help you get there. They have the power to make an enormous difference to the bottom line – drive customers to your c-store, or drive past you to the competition. You’ll begin to see the positive effects on your bottom line once ‘the price is right.’

While there may not be a magic formula to determine the best pricing strategy, there is a unique formula for your business. What works well in one market, for one customer, in one country, may not make sense for another.

You can thrive in today’s digital economy. Contact us today, to learn how we can help you transform your business.