By Jude D'Sourza
In markets around the world where prices have been deregulated, market-driven pricing is a regular practice. Micro-market pricing is a primary tool that fuel retailers use to stay competitive, attract customers and maintain sales volume. In October 2014, diesel prices in India were deregulated. Some established fuel retailers don’t believe market-driven pricing will emerge. They are betting that the business landscape will stay the same, even though market conditions have changed. Kalibrate, with its global experience and expertise, sees four signs that show that change—including market-drivenpricing—is coming faster than they realize.
Fuel price deregulation in October 2014 set the stage for a new competitive race between India’s public sector oil companies, private fuel retailers anxious to regain and improve upon their market position and new companies entering the market.
Traditionally, prices at the pump were the result of agreement among the public sector oil companies. Private oil companies followed their lead. This created a stable pricing landscape with protected margins. Companies attracted customers on the basis of favored locations, positive brand image, and appealing facilities.
This was an attractive business landscape for the most established companies, and most have continued to operate as if pricing were still regulated. They use their market size to discourage other retailers from lowering their prices and thus guard their competitive position. It’s understandable that they would want to act as if nothing has changed. They own the greatest portion of the market today, which means they have the most to lose if they can’t effectively adapt to the new market realities.
Global lessons in deregulated markets
Where pricing is deregulated, fuel retail markets go through typical changes. Kalibrate has seen this happen in countries around the globe. The country may be different, but market dynamics follow predictable patterns. Retailers who understand this can take these lessons to heart and prepare for the change that is coming.
Retailers with foresight know that, sooner or later, something will happen to shake up the market. At that point, they will need to protect their position with every strategy and tactic available. And in a deregulated market, that includes micro-market pricing.
4 Signs that Dynamic Pricing is Coming
SIGN 1: The government gives companies the freedom to price. After deregulation, everyone waited to see what the government would do when international crude prices start moving upward. Would the government allow the oil companies to move their prices upward? Previously, oil companies would hold their consumer pricing and then take a government subsidy to make up for the difference. Now, the government has allowed the oil companies to move their prices upwards. This gives an indication that the government is very serious about deregulation. They have given the oil companies the freedom to price.
SIGN 2: Fuel retailers aggressively promote loyalty cards. Today, every oil company has launched, re-launched, or is aggressively promoting their fleet card. They reward customers with better prices or rebates for purchasing product at different outlets from the same brand. These card are increasingly tied in with banks for transaction management. It’s a way to reinforce their brand and build customer buying habits—which adds up to loyalty. That loyalty can be disrupted or reinforced by market-driven pricing at the pump.
SIGN 3: Oil companies are automating their outlets. In a regulated marketplace, oil companies could price from an Excel spreadsheet. There was no urgency to get that price to the pump. Now we see companies focusing more on automation, so they are able to push the price from headquarters right up to the pole sign and the pumps. Automation also means they are able to understand and manage inventories at each retail outlet.. Automation is a very important step to getting the visibility and speed you need toexecute market-driven pricing. 3G and now 4G connectivity is simplifying this in a big way, connecting headquarters with all their retail outlets in a uniform network that can take advantage of micro-market pricing practices.
SIGN 4: Global competitors come to India. Deregulated pricing makes India a newly attractive area for best-in-class retailers to expand their retail fuel networks. These companies, already expert in market-driven pricing, may be the catalyst to India’s marketplace that no current retailer will be able to ignore.
Prepare to be accountable for performance and profits
All the pieces are falling into place for market-driven pricing to become a reality for fuel retailers in India. When will it happen? Sooner than you think.
The speed of change has accelerated in the last two years, because we see that the government is very serious about deregulation. The end of subsidies to oil companies means that their profit and performance depend on their own strategies and operations. Shortfalls will not be covered at the end of the quarter with a government subsidy.
This is the first time that public sector oil companies in India have to be fully accountable for their networks’ performance and profit. They will need to use every tool available to maximize their potential—and that includes market-driven pricing.
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