The average price of regular gas has increased by more than a third to over $4, and the average price of diesel fuel has shot up even more, rising 67% to $4.69, the federal government reports. Were you prepared for these fuel increases? Are you prepared if the prices continue to climb?
In combating the higher expense, as a dealer you either have to pass on the price increases to your customers or absorb the expense. If you pass it on, consider the following:
Pass It On
A recent ProSales Fuel Survey generated 958 responses from dealers and distributors. It found that LBM people are all over the map in regard to delivery charges and fuel service charges.
Since Sept. 1, 2007, 65% of the respondents in the survey have raised delivery charges and 48% have raised fuel charges. About 10% have raised charges for pickup returned merchandise or raised the restocking fee, while only1% had lowered the delivery charge or fuel charge.
Of those that have not changed fees or those that have not imposed any fees, 55% are considering the possibility of changing or creating fees, 64% a fuel charge, 29% a charge to pick up returned merchandise, and 25% a restocking fee.
Some of the participants in the survey suggested consolidating deliveries, allowing sales people to work from home two days a month, delivering with the salespersons' vehicles, and realigning sales territories to avoid overlaps. In other words, there are ways to become more efficient.
In my opinion, if your market will allow you to charge a delivery fee or fuel service charge, then do so. For example, if you add $20 to each delivery, you have just added $20 to your bottom line for each delivery. This may offset the price of fuel.
If you do charge a fuel surcharge on each delivery, compare the amount that you are charging on monthly basis with that of your fuel costs and determine if you are making a profit on the fuel.
Consider increasing your fuel service charge while the price of fuel is climbing.
It is easier to ask for an increase when your customers see increases from other suppliers or when they see the $4-plus fuel at the stations.
Absorb the Fees
If a dealer just turns over and plays dead like a possum, he will lose out on bottom line dollars. So, when I write about "Absorbing the Fees" I mean passing those costs on to the customer in a transparent way. Here two ways to make this happen:
1) If you have tried to implement the fuel service charge and you have retreated, the likelihood of you implementing this again is slim. Consider moving your margins 2 points. See my column on Transparent Pricing. Get details.
2) If your salespeople are margin monotones--that is, they sell at the same margin by simply adding to your costs--consider adding a buffer to your cost. I refer to this as a buffering bonanza. (Pause) You have to think about this one, because it is not a subject that we talk about at conferences and this is a new introduction to this column. This is something that I have not written about before, but I have implemented and it works well.
For example, if you add 2 points to your costs on every item, and your sales people are consistently operating at a 28% margin, they will continue to operate at a 28% margin. The difference is that you have 2% in the game, plus the additional dollars on the margin.
If an LBM dealer has a 28% margin on $10 million in sales, he will have $2.8 million in gross profit dollars. If we move the costs up by 2% and move from $7.2 million to $7.344 million the new gross profit dollars at a 28% margin will be $2.856 million, or an increase of $56,000. If you add the $56,000 with the $144,000 in increased costs, you have just added $200,000 to the bottom line.
It seems too easy. Well, actually, it is a little tough to implement, but if you look at the impact on the bottom line, you will be motivated to pull the trigger on it now.
If fuel prices stabilize, you may also want to consider absorbing the costs and using this as a competitive weapon against your competitors that are charging customers for the increased costs.
You need to get the dollars back to offset the expense. I recommend that you implement a fuel service charge and if you already have a charge, consider increasing it now. If the market and competitors will not allow the increase, you have to increase dollars on the bottom line by either increasing selling prices or increasing costs. Yes: increasing costs is a radical idea that works.