ARLINGTON, Va. -- Fuel margins are already razor-thin, aggressive pricing strategies among competitors are narrowing margins further, and many operators are left waiting for local “price leaders” to push up rates to avoid losing traffic. In this environment, a group of leading convenience retailers is leveraging business experiments to optimize large-scale fuel pricing strategies—including determining when to “restore” fuel prices relative to competitors.
Getting pricing right goes back to an age-old question: How can operators maintain fuel margin and in-store transactions while setting fuel prices that drive the most traffic? For operators, understanding when to revive margins can be a multimillion-dollar question. Based on our work with some of the largest fuel retailers, here are five strategies to get fuel-price restoration right.
1. Agility. How quickly should you restore fuel prices relative to your competitors? Many fuel retailers are not the price leader in their regions, which means they’re following the station next door to determine when to increase prices. After the price leader restores rates, surrounding retailers typically follow—increasing their prices within hours.
However, many operators are in the habit of taking a particular position (e.g., price leader, early follower, late follower) without certainty that it’s the optimal choice. Is there value in being more reactive?
Retailers know well that fuel sales can fluctuate dramatically due to weather, competitor actions and other uncontrollable changes. As a result, a step decline in fuel transactions can result from any number of factors. Executives wrestling with this issue have found that a well-set-up business experiment is the only way to have confidence that a strategy is working. That is, try the strategy in some stores, compare them to similar stores (on variables such as sales, volume and number of competitors) and understand the difference.
2. Timing. At what time of day should you restore fuel prices? On days when prices are restored, the timing of price changes can make a big difference in profits. Restoring prices earlier in the day can mean big losses at peak hours, while changing prices later can leave significant money on the table. How can retailers determine the optimal time?
As with determining the right restoration position to take, conducting a rigorous business experiment, in which “test” stores try restoring prices at a new time and “control” stores set prices as usual, is the best way to generate a fact-based guide on what works best in each location.
3. Retail sales. Which price restoration strategy drives the best in-store behavior? Many operators are acutely aware of the tradeoff between fuel prices and retail sales: The higher the prices, the higher the risk of losing high-margin merchandise sales. Customers filling up their tanks regularly may not buy a candy bar if their fuel bill is $2 higher, while others will get a soda and hot dog anyway. What’s the right balance between the two margin drivers?
Understanding the exact effect of fuel pricing on retail sales is crucial in gaining a holistic picture of any price restoration strategy. Leaders will use the information to choose the highest-margin strategy, and to make investments that combat losses, such as sending targeted campaigns to encourage in-store purchases.
4. Localization. How should you vary strategies across the network? Given how price-sensitive consumers can be, it’s no surprise that the success of a restoration strategy is dependent on how many competitors are nearby, who they are, and what restoration position they take.
As with any fuel-pricing strategy, a nuanced approach to price restoration will win over a one-size-fits-all strategy every time. For executives, understanding what’s best for each location can be the difference between achieving profitability and destroying profits in half of the network.
5. Operations. How should you implement price-restoration strategies in the market? A localized restoration strategy is ideal, but it’s not always simple to execute. Will store managers have a clear signal when leaders change price? Will it be easy to update signs digitally, or is it a manual process? It’s become clear that executing the right strategy requires two elements: achieving organizational alignment, and providing each store with clear instructions on how to do it.
APT has found that the best way to achieve organizational alignment is to use a set of analytic outputs that are consistent and recognizable to both executives and store managers. When everyone is aligned, clear instructions for setting prices at each store will remove the ambiguity from decision making for those involved. Retailers who make fuel-price-restoration decisions without mastering these five components are sure to suffer massive losses. After nailing down these steps, executives can begin to further refine their fuel pricing strategies with low-risk, potentially high-reward business experiments.