September 20, 2017

The Definition of World-Class Pricing

Fuel Pricing

By Ian Thompson, Managing Director, Planning

Pricing is an art. It's a craft. It's a talent. And some companies perform better than others. But there is a standard, so your organization should always aim for world-class pricing. What, exactly, does that mean for fuel and convenience retailers?

World-Class Pricing: A Three-Part Equation

World-class fuel pricing is never as simple as "pricing that helps you achieve higher margins." The definition is much more nuanced, and involves the three "P's": Position, People and Process. Let's discuss each in turn.

Position

When asked about your fuel pricing strategy, you might respond by referencing your attempts to match a competitor. Despite this being a common response to the strategy question, competitor matching is actually a tactic. Similarly, "increasing margin" is actually an outcome, rather than a strategy.

Your position is actually your strategy. To understand that position, you must recognize where you stand in the market, and what, exactly, your brand is. Car brands are an apropos analogy: Mercedes has high pricing power — they are high-class vehicles with luxury appeal, and are safe, fast and effective, generally speaking. Lower pricing power is reserved for cars like Chevrolet. They are well-known and effective, but do not boast the same luxury appeal or speed, and therefore, must price according to their position. Audi, Volkswagen represent a middle-of-the-road position, wherein some pricing power exists, but not at the level of the Mercedes or BMW.

Think about your pricing strategy in terms of what you are and what you would like to be. Are you an Audi with an aspiration to be a Mercedes? Or a Kia with an aspiration to be an Audi? The other factors of your business — location, facilities, operations, etc. — determine your current position. World-class pricing recognizes this positioning and responds accordingly. Your position is your strategy; the ways you act on that are your site-level tactics. Demand modeling, optimization and rules-based pricing are all ways to act according to your position.

People

The second element of world-class fuel pricing is your people. Who should price? What skills should they have? Where should they be located? Where should your pricing expertise lie? In most cases, these answers are straightforward: They should be centralized, smart, analytical people at your head office providing expertise. How you measure the success of those people will determine the sort of behavior you are looking for. If you measure success based on volume, your people will always price low. If you measure by margin, your pricing people will always aim high. But if you measure on profitability, you will get more balance. Your pricing strategy should align with your tactics, and those tactics should align with the KPIs you require of your pricing team.

Process

The final P is process. What does your day to day pricing process look like? What time should the survey take place? How quickly should you react? What data do you need?

There are lots of interesting questions to answer in this area, and the answers will be determined by both your position and your people. Ideally, your pricing will be integrated and automated, and managed by exception, meaning the people you hire to manage pricing should only need to step into the process in exceptional cases. The process must, of course, align with your position and with your people, and that means it needs to contribute (in one way or another) to the KPIs you've selected. If you require a certain type of report, and the process does not allow for or facilitate that report's production, the process is not aligned, and you are not achieving world-class pricing.

Is Your Fuel Pricing World-Class?

Without a clear understanding of the differences between position and tactics, you cannot begin to optimize people and process. But if you do possess this understanding, it's likely you have already begun to move toward a world-class pricing strategy. Focus on defining your position first, then selecting the right team and the right KPIs to motivate that team in order to match your position, and finally, on managing by exception.

Need assistance with developing your world-class pricing strategy? Get in touch with Kalibrate today.

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