Joe Ciccarello, CPA
Gray, Gray & Gray, LLP
September 2011
As oilheat and propane dealers cope with rising prices for product and overhead, there is a constant struggle to set and maintain a margin that will allow them to cover costs and still make a profit. Perhaps it is time to take a page from other industries in addressing the way we charge our customers for the delivery of product and services.
Sharing the highway with your delivery trucks are the semi-trailers of the freight carrier industry. Few other industries are so directly affected by fuel costs. How do trucking companies cope when diesel fuel climbs nearly two-dollars per gallon in less than a year’s time? They pass along that increase to customers in the form of a fuel surcharge. It is an open and transparent pass through that has become an accepted — and expected — practice.
The airlines are another industry where pricing is tied closely to fuel costs. Their answer to “sky high” aviation fuel prices is a little more deceptive. They started charging higher fees for everything except fuel. Baggage, in flight meals, pillows, blankets, telephone booking — there is no end to the once-free items that are now fee-based. And the airlines are being castigated for this, rightfully so.
The general public can accept a fuel surcharge as part of doing business. They may not like it, but they accept it, provided the surcharge is open and above board. But slipping in a price increase on the side is not tolerated.
Now let’s look closer to home, at natural gas. Have you tried to read a gas bill lately? There are charges galore. Product charges, transportation and delivery charges, surcharges. The natural gas industry has done a wonderful job of camouflaging the real costs of its product. Can anybody really relate to a cubic foot of gas? And what is a therm? Similarly, they disguise their price hikes by spreading them out among different “touches” in the supply chain.
So how can the oillheat and propane industry learn from these lessons? I would like to propose an entirely new pricing model for retail oilheat and propane dealers.
I say dealers should charge customers the same wholesale prices they pay for oil or propane. A simple pass through, with no markup. Your best price gets passed along to the customer.
Immediately the retail price for oil will drop by an average of fifty-six cents per gallon for oil and $1.08 per gallon for propane (the average margins as reported in Gray, Gray & Gray’s latest survey).
And how would the dealer make money? A simple delivery fee. Either a flat rate per delivery, or a per gallon charge. After all, the dealer does not pump the crude or refine it into #2 oil. The dealer’s role is the “final mile” delivery of the product.
Let’s run some numbers. The average drop for oil last year was 159 gallons. With the current cost-plus-margin pricing structure, at a wholesale price of $3.20 per gallon and a margin of $0.56 per gallon, the customer would pay $597.84 for a typical delivery.
With the new pricing model, the customer would pay $508.80 for their oil, plus a delivery fee of $0.65 per gallon, for a total of $612.15. But the dealer’s margin would effectively be nine-cents per gallon higher. The delivery fee rate could be easily adjusted to account for higher fuel costs for delivery vehicles.
Or, if the dealer chooses to charge a flat fee of $75 per delivery, the total price of a 159 gallon drop to the customer would be $583.80. The dealer would have to be very cautious on setting a flat fee price that would accommodate both larger and smaller delivery amounts.
Where would this pricing model leave full service dealers? How would it affect equipment and system service? This pricing model should not directly affect a service department. The service department should already be set up as a separate profit center, perhaps even spun off as a separate-but-related entity. Service pricing would not necessarily be tied to product prices, although service discounts could easily be offered as incentives to oil customers. (Just be sure to maintain sufficient profit margins on service calls!)
This is not the only solution to the pricing dilemma. But thinking “out of the box” and a willingness to break from ingrained habits will be required if the retail energy industry is to remain viable and profitable in the future.
Joe Ciccarello is the Managing Partner at Gray, Gray & Gray Certified Public Accountants, a Boston accounting Firm (www.gggcpas.com). Gray, Gray & Gray has served the accounting, tax and business advisory needs of companies in the oilheat industry for over 65 years. Joe can be reached at (781) 407-0300, or via email at jciccarello@gggcpas.com.