Everyone is familiar with the proverb about looking after the pennies and the pounds taking care of themselves. And never is it more true than in the delicate manoeuvrings of retail fuel pricing.
But Andreas Jonason, director at global pricing consulant Simon-Kucher & Partners, speaker at our recent Top Indies Track Day, goes even further than that.
"Every half-penny is important," he stresses. "But price changes that revolve around the last decimal point can be a false move when it comes to improving margins. The theory says that the one with the lowest price clinches the deal. In forecourt pricing this has translated into retailers playing around with decimal points. A 0.5ppl reduction might not sound very much, but it is when margins are low as is often the case in the UK. But research we have conducted on the psychology of pricing and the practical impact of the ’last decimal’ price change, has shown that while some consumers pay attention to the last digit, less than 10% see this as a reason to switch forecourt brand.
"This small reduction could need a 20% uplift in volumes [to maintain profits], but the volume uplift will likely be unsatisfactory and the lower price can also trigger a damaging price war, further reducing margins."
Swedish-born Jonason has been working globally in the fuel pricing sector for eight years, and believes there is an almost endless amount of things that retailers can do with marketing and pricing strategies "and the opportunities that come up keep changing".
But before even going there, Jonason suggests maybe taking a step back and thinking about the perception of price in the fuel industry. "If you look at the customer in terms of cost, there are basically two types the customer who drives his own car and the customer who drives someone else’s car. The highest cost for a driver is not the fuel, it’s the depreciation in the value of the car. But you don’t see a lot of people doing demonstrations, or having ballots outside a car manufacturer over price. If you look at the business sector, it’s even more the case. The fuel is only the third cost you also have the salary of the driver which is significantly higher than the cost of the fuel.
"So the price of fuel is a very sensitive issue. But I don’t think independent retailers should feel ashamed for charging a price for their hard work."
Playing with the price really depends on the product you are selling, says Jonason. "Premium fuel such as Shell V-Power or BP Ultimate can be categorised as the ’luxury’ level of the fuel product range, and should therefore be treated as such when it comes to pricing. The main grades account for about 90% of the fuel sold on the forecourt, and are very closely linked to the price of oil, which means that their prices change daily.
The fuels attempt to suggest a ’bargain’ price tag by showing a lot of decimal points on the price Asda, for example, made a lot of noise around 99.9ppl etc. Many oil companies use the same logic for the premium product, changing the price in line with the price of the underlying cost of oil.
"But we would advise against this approach for a number of reasons. With other premium products or brands, price is the last thing the retailer wants to draw attention to. The focus should be on other features such as quality. A Rolex watch or a Porsche car is rarely discounted, or priced at £1999.99, suggesting a bargain price.
"The more often you move the price, the more it becomes an issue in the mind of the customer. And having different prices for the same product across the country works in the same way drivers shop around for a good deal for the premium grade."
As a general pricing strategy, Jonason says that if your prices are more expensive than the competition for an extended period of time in a certain area, or your company’s prices generally are more expensive across a network, then over time your volumes will decline. He says prices need to be varied at different times but you need to get to know more about who your customers are and why they come to your site when they do.
"Price poles being in the sight-lines of drivers at particular times provides an excellent opportunity for fuel retailers to improve margins by adjusting prices according to the time of day/week," advises Jonason. "After surveys and detailed analysis of client data on customer travel and fuel purchasing habits, we provided a leading European retail forecourt client of ours with some key pieces of information and used this to create a highly effective solution. Analysis showed that the majority of drivers made purchases at fairly predictable times of the day/week. The other key factor was to understand customer willingness to pay and value levels. Normally there are two traffic rush-hours. One in the morning, when people head in to the office, and one when people are heading home. The study showed that the decision to fuel often was taken in the morning, but as time was short heading to work the customer did not make the actual purchase until the afternoon. For this reason the amount of fuel sold was higher in the afternoon. But also the price sensitivity of the customers was lower at this time. The retailer used these observations to reduce the price in the morning, to influence the drivers to decide to make a purchase in the afternoon, only to put the price back up in the afternoon when the customer was making the actual purchase."
If you have a lot of professional drivers, suggests Jonason, they tend to be quite price ’insensitive’ when it comes to refuelling. But the boss isn’t. So you need to make it attractive both to the boss and the person driving into the petrol station. But how do you appeal to both segments without giving away too much to one or the other? Businesses use fuel cards because they don’t trust their drivers. They want proper controls. But the driver might be tempted in by a free cup of coffee which costs the retailer nothing and pick up other things." In fact the ’bundling’ of offers across the forecourt and shop is a growing trend. Jonason says a European fuel retailing client has successfully developed a voucher exchange scheme with a local supermarket chain where purchases on the forecourt can earn customers vouchers to spend in the supermarket and vice versa. "I see no reason why a similar thing couldn’t be done on a large or small scale in the UK. I’ve only seen supermarkets do it within their own organisations."
Jonason understands that independent retailers often feel under pressure from huge national chains, but he says they have an advantage in being able to adjust fuel prices at any time of the day or night they can pop into their own sites unlike staff responsible for a big corporation where the set-up is less flexible. "A retailer could put his prices up when the supermarket site is closed, for instance! Retailers shouldn’t be afraid of testing new pricing iideas."