KSS: the fuel pricing expert on driving store traffic through competitive fuel and product pricing strategies

Breaking silos is key, says Bob Stein, president and CEO KSS.

Retailers who sell both fuel as well as grocery items in a convenience or grocery store tend to manage the pricing of each separately. In this silo-like approach, the retailer often tries to increase gross profit through higher pricing on both sides, ultimately resulting in lower volumes, revenue and market share.

However, by looking at the two silos together, the retailer can find opportunities to buy volume cheaply on one side, and use those extra customers to maintain volume and increase margins on the other side.

The first step in this process of tearing down silos is to develop a pricing policy, or strategy, that can be translated into a set of consistent pricing rules and then efficiently used to guide a fuels' pricing process. Once defined, these pricing rules can be challenged to locate opportunities for volume, revenue or margin growth to meet strategic goals.

Typically, retailers have informal pricing strategies that vary from highly objective, such as “we are the cheapest in town” or “we’ll always be within one penny/cent either side of brand Y,” to very subjective such as “we are the value-for-money retailer”.

Experience shows in many organisations the pricing strategy is confusing, conflicting or not clearly communicated and not helpful to those responsible for pricing. A sound pricing strategy should address three components:

- Market-share goals, often represented as volume targets
- Price positioning versus competition
- Product and/or service differentiation – the additional value of your brand over a competitor, represented as a price premium or discount

The next step is to evaluate these strategies in the context of your retail operations. The goal is to base your fuel pricing strategies on the maximum combined fuel and store gross profit, rather than fuel profit alone. For this to work, the extra fuel customers you gain through more competitive fuel pricing have to generate more in-store profit than you have lost through discounting fuel.

For grocery stores, the in-store spend per extra fuel customer is usually enough to make this proposition work. The challenge is to know the maximum sensible fuel discount that corresponds to the break even point. Beyond that point, gains in fuel customer numbers generate less in-store profit than is required to offset the loss of fuel profit.

For fuel sites with convenience stores, the in-store spend per customer is often not high enough to create a scenario where fuel price reductions alone are profitable, even when profit is measured on a combined fuel-plus-store basis. Convenience store operators, however, are typically already giving away a significant amount of in-store gross profit margin through regular promotional pricing of the main convenience store categories – cigarettes, milk, beer, soft drinks, etc.

Therefore, there is scope to increase overall fuel plus store profit by combining fuel price reductions, which drive more store traffic, with reduced in-store promotional pricing. The goal is to use the extra store customers delivered by the fuel-price discounting to maintain store volume at lower levels of in-store promotional pricing.

To implement such a strategy you must estimate the correlation between fuel volume and store traffic. Determine if your store has either a high/low fuel to store correlation and therefore high/low fuel price elasticity. To do this, consider purchasing a retail fuels' pricing technology. Pricing software can help you meet volume objectives at maximum achievable margins by improving operational efficiencies and advancing market intelligence. Select a comprehensive pricing solution that supports the key tasks related to retail fuels' pricing, such as capturing field-based intelligence at the site level, generating price proposals via comprehensive pricing rules or price optimisation, and providing consistent and timely implementation.

If your location has high fuel–to-store correlation and high fuel price elasticity, then the cost in gross fuel profit of a given increase in fuel customers is relatively cheap. In other words, a relatively high proportion of fuel customers go into the store and the increase in store traffic creates scope to reduce in-store promotional pricing. This allows you to increase main category prices and thereby increase store gross profit margin, while maintaining store revenue and volume.

Fuels' pricing and optimisation software can help you apply appropriate demand forecasting and optimisation to determine the required combination of fuel price reductions and reduced in-store promotional pricing. Your goal is to find the exact pricing where the profit given up on the fuel side is offset or exceeded by the profit gained in the store, while maintaining store revenue and volume.

For those sites with low fuel-to-store correlation and low fuel price elasticity you will apply the opposite strategy. In this case, you will increase fuel prices to gain profit, in the knowledge that the consequent reduction in fuel volume will be relatively low and the impact on store traffic will also be low. In some cases, the gain in fuel profit may be enough to fund further in-store promotional pricing to drive store volume.

Retailers face the challenge of increasing gross profit while maintaining market share, revenue and volume. In an ideal world, a price reduction would lead to both increased profit and increased volume. Because the real world is more complicated and fuel prices volatile, price reductions or promotions can grow volume, but at the cost of lower gross profit. Having a pricing strategy that looks at both fuel and store prices, as well as volume, enables retailers to find a balance that maintains volume and profits.

Bob Stein is President, KSS, the fuels pricing expert. KSS is a leading global provider of pricing software, analytics and consulting services to fuel retailers and wholesalers in the oil and gas, convenience store and retail industries.