Fuel Price Strategy Explained

by John Keller | Mar 9, 2010 | Fuel Price Management, Fuel Price Management Solutions, Fuel Price Optimization, Fuel Pricing Strategy, Fuel Pricing Technology, Retail Fuel Margins

There’s a great article explaining fuel pricing strategies to consumers on the website ENCToday.com. It’s common for consumers to have misconceptions about how their gas prices are set. Sometimes these misconceptions can include cartel-like price fixing arrangements between c-stores in a particular market. This article goes miles to debunk these misconceptions and accurately explains the truth about how fuel managers actually set their c-store fuel prices.

This article lists these factors as being included in fuel pricing strategies:

1. Total customer experience including cleanliness of the c-store building
2. Competition down the street
3. Maximizing volume
4. Traffic flow and the convenience of pulling into a particular c-store
5. Locking in lower fuel prices in the futures market
6. Demographics of a location and the price elasticity in that neighborhood
7. Selling fuel at a lower price and enticing customers to come into the c-store to buy a higher margin snack
8. Corporate retail fuel margin targets

Fuel price management solutions such as PriceAdvantage from Skyline Products allows the Fuel Manager to carefully watch each market, effectively monitor fuel pricing trends at each c-store, and set street prices at each store location. Fuel Managers can accelerate their speed to the street by pushing prices to the sign, POS and pump. In some markets, that can even mean pushing new prices several times a day.

The article is copied and pasted below.

Competition among factors driving gas prices

It was no coincidence that Dennis Seeney pulled off Interstate 85/40 Friday afternoon to fill up at the Sheetz gasoline station.

“I live in Asheville, but I travel the state so I know where the cheapest prices are,” Seeney said while filling his gasoline tank.

Seeney paid $2.599 for a gallon of unleaded fuel, as did motorists buying gasoline at a number of other stores at that exit and others nearby. A couple of stations at the exit sold gas for a penny cheaper, while another’s advertised price was 10-cents-a-gallon more expensive.

The interchange’s prices were less expensive than the average North Carolina price of $2.67 per gallon and the average national price of nearly $2.70 per gallon, according to the GasBuddy.com Web site.

Greg Parsons also filled up at the station. Again, it was not by accident. He and his family travel between his Windsor, Va., home and another home in Morganton about every six weeks. But it wasn’t cheap gasoline that drew the family to stop at the station.

“It’s a clean building,” Parsons said. “We always stop at this station. It’s actually programmed into my GPS.”

The difference in prices along that stretch of the interstate highway near Haw River and Mebane are part of a complex system of determining prices.

“Some of it is competition,” said Tom Crosby, vice president of AAA Carolinas. “If one station down the street has it at $2.60, I might want to do it at $2.55 to generate more volume.”

Some has to do with neighborhoods and the amount of traffic going by, Crosby said, noting that often prices are higher off of an interstate highway.

“They can’t shop for the price of gas, so they’re going to pull off whenever they need it,” Crosby said. Michael Walden, an economics professor at N.C. State University, said that supply and demand factors also account for geographic differences in gasoline prices. “Everything in economics comes down to supply and demand,” Walden said.

On the supply side, suppliers could have faced different prices, he said. “If the supplier had, for example, locked in a lower price in the futures market and prices indeed went up, he could pass those lower prices on to his distributors,” Walden said.

But price differences from station to station are more likely a result of demand-side variables, he said. Factors pushing prices up could include stations that are in high-income areas where people are not as sensitive to changes in price, stations located on lots where motorists can get in and out more easily or stations connected to a convenience store, where motorists may want to make other purchases after filling up.

“All those can be reasons for geographical differences in price,” Walden said.

A number of other factors could figure into the price at the pump. A store owner could just break even on gasoline, hoping that a number of motorists would come inside and purchase a snack, Crosby said.

Another store owner might keep prices a nickel or so higher than nearby stations as long as sales remain constant, Crosby said. “If I’m not losing any sales, there’s absolutely zero incentive to drop it,” he said.

Stations owned by the oil companies generally have prices a little higher than stations that buy their gas on the spot market, Crosby said.

“They buy it at a lesser price,” Crosby said of the stations buying gasoline on the spot market. “But you can’t always count on getting it,” he said, referring to times in the past when various conditions produced shortages of gasoline.

Then there is the delivery cost factor. A station closer to the gasoline terminal would have a lower delivery cost than one further away, Crosby said.

A number of other factors go into making up the price of a gallon of gasoline, including the price of crude oil, refining expenses and federal and state taxes.

Crosby noted that gasoline stations are constantly monitoring other stations’ changing prices. “You don’t want to be five or 10 cents out of line with the one that is caddy-cornered across the street from you,” Crosby said.