Last year, warm weather reduced heating demand to the lowest level nationally in at least 25 years. More recently, heating degree days for the month of September were lower than average nationwide. The forecast for this winter is calling for colder weather than last winter, but still above normal temperatures.
The Old Farmer’s Almanac “An Early Winter 2016 Weather Prediction”
Winter temperatures will be much colder than last winter—but still above normal—in much of the eastern two-thirds of the nation…
U.S. Energy Information Administration’s “Winter Fuels Outlook” – October 2016
National Oceanic Atmospheric Administration forecasts U.S. heating degree days this winter to be 13% higher than last winter, but below the 10-year average
EIA’s propane expenditures are expected to be higher than last winter’s level but 18% lower than the average winter expenditures from 2010-11 through 2014-15
This winter’s forecast sounds a little better than last winter, but not great. So what are you going to do to make up that lost revenue? Here are some ideas for improving margins and reducing costs that might help.
Tiered Pricing
If you’re currently using a “one size fits all” pricing system, then you’re probably overcharging commercial accounts and undercharging residential accounts. Commercial accounts do more volume and expect a discount. If you’re not providing some form of discount, there’s a good chance a competitor will. Develop price tiers specifically for your commercial accounts. To start, consider a “Light Commercial” tier for office buildings or others with volume less than 5000 gallons/year and a standard commercial tier for accounts with volume exceeding 5000 gallons/year.
Residential account pricing should also be tiered. You should have at least one tier for customer owned tanks and one for leased tanks. Consider $0.10/gal more for leased tanks. For both commercial and residential accounts, another tier should be established for payment type; with credit card accounts being charged more to cover transaction costs.
To maximize profits and stay competitive, one-price systems are rarely recommended. Take a hard look at your customer base and establish the appropriate price tiers. Set tiers with the objective of increasing your overall average price by some amount. The increase may just be pennies, but if you’re doing a million gallons per year, then even a $0.05 average price increase can mean $50,000 more to the bottom line.
Route Management
When people hear cost cutting, they often think of employee layoffs, but there are other ways to reduce your operating expenses without affecting your headcount. As a propane marketer, one of the best ways to cut costs is to maximize delivery route efficiency. Your objective should be to never have a driver come back with gas in the barrel.
If you’re not already doing so, start using a Degree Days system. In brief, heating degree days are a measure of how much (in degrees), and for how long (in days), the outside air temperature was below a certain level. They are commonly used in calculating the energy consumption required to heat buildings. Plug local temperatures into your DD system and begin to get a clearer picture of your customers energy needs. Now here’s the real benefit – with that information you’ll be able get more of your customers on a keep-full basis enabling more pre-defined delivery routes and lower delivery costs.
Tank monitoring systems can be installed to provide accurate and timely fuel level updates. Real-time access to fuel tank levels will allow you to reduce the number of deliveries and greatly improve delivery efficiency. It may not be feasible to install monitors on all tanks so start first with any tank greater than 30 miles from the plant.
Last but not least, basic route management should be analyzed on an ongoing basis. Are drivers being directed to areas that a full load can be delivered? Are location leaders using the tools provided to direct delivery personnel in the most efficient manner? It sounds simple, but it’s often the basics of the business that we tend to overlook.
Measure of Success
Best business practices tell us that we cannot improve what we do not measure. The most important metric for delivery team efficiency is Gallons Delivered Per Mile Driven. If you aren’t tracking it yet, start collecting data now. Once you have a baseline, set a goal to improve by 5-10%. Communicate the goal to all drivers and location leaders and discuss results with them on a weekly or monthly basis. You might also consider an incentive plan tied with performance to the goal.
A good cold winter wouldn’t hurt, but the success of your business does not have to depend on Mother Nature. Take action now to improve the profitability and efficiency of your business and you’ll be in a better position to ride out any storm.
What discount would you suggest for a Commercial client that owns their own tank on the tiered program?
Good question. You can go a couple different ways with commercial account discounts. A set amount such as $0.05 or $0.10/gallon could be offered on customer owned tanks similar to what is recommended for residential tanks. The discount amount will vary by region based on the margin you’re seeing in your area. For those parts of the country where margins are less, discounts will be lower. Another approach for commercial accounts is to not offer a discount for customer owned tanks and focus your marketing efforts on the volume discount.