CLEVELAND -- Warren Buffet once said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”
How do companies gain the pricing power that Buffet describes? It can be achieved in a relatively straightforward way: by meeting the consumer’s needs and wants. Suppliers that meet more of the consumer’s desires earn the right to determine the price that they charge. Those suppliers that consistently miss the mark often must charge a much lower price; their offering simply doesn’t enable them to drive margin through pricing.
To see this in action, let’s look outside our industry for a moment. What makes a car desirable to a consumer? There’s a range of criteria that is important (and frankly, expected) to different people, such as quality of build, safety features, fuel economy, road handling, depreciation during ownership, peer and industry reviews, brand reputation, styling and reliability. All these factors determine the value of the car and, therefore, the price a consumer is willing to pay.
In some markets, the type of fuel will be important; traditional or alternative fuels may play a big part in the decision-making process. For some brands—Bentley, Lamborghini or Porsche, for instance—exclusivity, speed, acceleration, prestige and extravagant aesthetics may play a role.
The result is that a Ferrari costs more than an Audi, which costs more than a Chevrolet. As more of the wants and needs of the car-buying public are met by Ferrari, the company has greater pricing power and can charge a premium for its offerings.
To be clear, I am not implying that one strategy is better than the other. You only have to look at the number of sports-car manufacturers that have gone bankrupt: Jensen and TVR are two British manufacturers that I fondly remember but are no longer with us. I am simply highlighting that there are differences in offerings that determine pricing power.
When I have used this analogy in the past, I’ve had comments along the lines of “Our product is a commodity and therefore price is everything.” That’s like saying a Ferrari and Kia are just cars. There’s as much difference in our industry as there is in car manufacturing. Just look at a Wawa, QuikTrip or Sheetz convenience store. These sites and their gasoline offers rank among the most effective fuel brands in the industry. Compare them with an unbranded dealer; they are as different as chalk and cheese.
So what enables a fuel retailer to “own” its pricing decisions? In the same way that car purchasers have a set of criteria that determines how well a car meets their needs and wants, the same is true for fuel purchasers. Your customers decide where to buy fuel based on seven elements that have been proven to contribute to overall fuel success. Six of these elements act as “volume magnets” to draw customers to the site: market, location, facilities, operations, merchandise and brand. The seventh element is price. While price might also draw people to a specific location, it is more often a decision point instead of a magnet. A retailer that excels in each of the volume magnets has earned the right to determine where to price.
What does best-practice fuel pricing look like, and how do you achieve it? Find out in my next column.
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