Four years ago when National Petroleum News reported on software solutions for optimizing fuel prices, vendors observed that many petroleum marketers remained wary of trusting a computer and worried that automation would diminish their control.
As vendor Bob Stein, president and CEO of KSS Fuels in Florham Park, N. J., related in 2007, he then spent much of his time explaining to fuel retailers how “you don't lose control over your pricing. The system is flexible so that you set up your own pricing rules, as well as your own margin and volume targets. It’s a tool that takes your rules and then automates them, which saves you a lot time by alleviating manual tasks.”
Despite retailers’ general unfamiliarity with price optimization software, sales and marketing vice president Greg Stadjuhar of Skyline Products in Colorado Springs, Colo., noted that “even now [in 2007], the market is increasing dictating that savvy petroleum marketers must develop the ability to instantly react to competitive market changes and confirm with absolute certainty that their responses occurred.”
That trend prompted one vendor in 2007 to tell National Petroleum News his prediction that “within five years it will be unheard of for petroleum retailers to just stick a finger in the air and do their prices,” even though “a lot of people in the petroleum business figure they've got experience and intuition with pricing which nothing else can duplicate.”
Now four years later, in 2011, has that prediction come true? Stadjuhar reports, “Fuel marketers today want to automate. The question four years ago was, ‘Can I trust a computer to do my pricing?’ Now the question is, ‘Should I do this with a solution I develop internally or should I get an off-the-shelf solution?’ Four years ago, people worried about maintaining control. Today, we’ve got data to prove the performance and results of automated pricing solutions.”
Similarly, Stein relates, “Our solutions and people’s attitudes have evolved over the past four years. We don’t even use the phrase ‘price optimization’ anymore. Now we’re talking about a ‘total pricing solution.’ KSS Fuels isn’t just a ‘software company’ but, much more than four years ago, we go in as a consultant to talk about your total pricing strategy.”
Stein offers three reasons for marketers’ changing attitude toward automated pricing. First, he believes, “Since price volatility is now the norm, marketers realize that manual systems can no longer keep up with the amount of data involved and the speeds at which you must execute your strategy. When you’re managing prices for 50 sites, or maybe 500 sites, you need to focus on exceptions—for example, to be alerted when a local pricing survey from one of your locations hasn’t yet come in, or when a site is slow in posting a price change.”
Second, because KSS Fuels now has years of data in its system, Stein says the company can help marketers through consulting, diagnostic, and analytic services to devise increasingly effective strategies. “Because things that once took hours to execute now take minutes,” he adds, “you’ve got more time to be proactive rather than reactive.”
Finally, Stein notes that another prediction voiced in the National Petroleum News report from 2007 has been realized. “If you don’t want to buy and operate the software yourself,” he points out, “you can choose a fuel pricing solution that’s hosted by the vendor.” The current buzzwords are “SaaS” (software as a service) and “cloud computing,” an option that can make fuel pricing automation feasible for smaller fuel marketers.
In 2007, not long after the National Petroleum News report appeared, KSS was split into two companies—KSS Fuels and KSS Retail—that operate under separate ownership. Lyle Walker, vice president of marketing for Cincinnati-based KSS Retail, formerly worked with fuel pricing solutions and has continued to watch developments in that segment.
“Ten years ago,” Walker says, “fuel marketers wanted proof that it works and worried about maintaining control. Now those questions are no longer asked very much.” Instead, he notes, “Fuel pricing solutions have definitely gone past the early adoption phase. They’ve now become a cost of doing business—like scanning, for example. So if you’re not using a fuel pricing solution, you’re fighting the guy who does.”
Walker’s current role, however, is with KSS Retail and focuses on store pricing. And there, he reports, “Fuel marketers who operate convenience stores are still in the early adoption phase. Automated pricing is very common in grocery stores, while c-stores have lagged behind. Very few petroleum retailers also have price optimization software for their c-stores. The segment just isn’t a trendsetter. Even in the 2000s, many c-stores didn’t have scanning.”
Back on the fuel side, however, Stadjuhar confirms, “The petroleum industry is moving dramatically toward price optimization. Now with the cutting-edge marketers having adopted the capability, the rest of the industry must do so as well.”
That automated pricing solutions are now feasible for even smaller fuel marketers is suggested by the experience of Cheers Food and Fuel, a chain of 11 locally-owned c-stores in western Kentucky, southern Illinois, and southeastern Missouri. Founded in 2002, by last year the company had built up annual revenues of nearly $70 million, but felt it needed a better fuel pricing strategy than simply following its competitors.
To execute a strategy based on data that would optimize net margins without sacrificing volume, Cheers in 2010 selected KSS Fuels’ PriceNet, PriceNet Mobile, and PriceNet Web solutions on a subscription basis. The three components provided fully integrated fuel price management as PriceNet Mobile permitted individual site managers to input competitors’ pricing via mobile devices and receive back new pricing proposals and exception-based performance alerts in real time, while PriceNet Web facilitated the exchange of data so that the head office could review and authorize site-level price adjustments more quickly.
Cheers CEO Nathan Long confirms that prior to automation he “would collect prices from each of our stores on a notepad throughout the day and then enter data into an Excel spreadsheet when I had computer access.” The process allowed him time to check prices only once a day, whereas “now I’m able to input prices directly into [a mobile device], checking running rates as I go.”
Not only can Long check prices several times per day, but the process is more efficient and inspires greater confidence. “We’re definitely in tune with competitor pricing more so than before and we’ve decided to price above competitors at times depending on the store’s running rate and current margin,” he adds.
A mid-sized chain that has recently automated its fuel pricing is CEFCO C-Stores of Temple, Tex. In September 2010 the company completed a five-month rollout of Skyline’s PriceAdvantage product to each of its 124 stores across Texas, Alabama, and Mississippi. The solution allows the central office in Temple to automatically push prices to sites that use either the VeriFone or Gilbarco point-of-sale systems.
“I have everything I need on one screen and can change prices at all 124 stores in less than an hour,” reports CEFO fuel coordinator manager Mark Lapierre. Previously, he needed five hours to manually do the same work—and as he later discovered, prices could hit the streets too late to be effective, or might even be off by as much as 10 cents at individual sites.
By contrast, PriceAdvantage gave Lapierre access to real-time competitive pricing surveys, current fuel prices at every store, and “what if” pricing scenarios based on pre-set pricing rules. Once the right price is determined, changes are automatically pushed to each site and a confirmation received. If field personnel are late in submitting price surveys or delay an authorized price change, they receive BlackBerry email notifications. In time, CEFCO plans to install electronic price signs which, he adds, “will save us even more time and money” by instantly pushing new prices out to the street.
Because Skyline has partnered with the Oil Price Information Service (OPIS), the PriceAdvantage software automatically imports the daily OPIS Radius Report so that “we can see when a competitor moves, even if our own store isn’t watching,” says Lapierre. With plans to add more features to the system, he continues, “We’ll be even more nimble when we schedule future price changes based on time of day and drive times. That’s when we can implement even more aggressive strategies.”
As of 2011, one of the nation’s larger c-store chains was on target to fully automate 200 of its locations. Two years ago Sheetz Inc. of Altoona, Pa., piloted PriceAdvantage at ten stores.
The ability to manage and reset electronic price signs remotely from headquarters or from within the store, together with the ability to remotely manage prices on the signs, afforded each store manager up to 50 more hours per year to spend instead with customers. Remote pricing also cut service maintenance calls that, if projected across the chain’s 360 stores, would otherwise cost Sheetz $140,000 per year.
“Our overriding team goal is to ensure that store managers can maximize their time with our customers,” reports Mark Wilson, director of store support. “This is a key corporate initiative and competitive advantage for Sheetz.” With locations in Pennsylvania, Virginia, West Virginia, Maryland, Ohio and North Carolina, the company is looking to integrate technologies so Sheetz headquarters can—using only a desktop computer, laptop, or handheld device—remotely update fuel pricing across each store’s electronic price sign, pumps, and point-of-sale system. Potential chain-wide savings are estimated at $460,000 per year.
“We have customers who range in size from 10 sites to 3,000,” affirms Stein of KSS Fuels, “and they report their investments were returned within six months.” Likewise, Skyline’s Stadjuhar says his clients include fuel marketers both large and small who “depending on how you measure payback, have gotten a return on their investments in six to 18 months.”
The number of major players in fuel pricing automation has recently changed with the June 2011 merger of KSS Fuels and Tulsa-based Market Planning Solutions Inc. (MPSI). An open letter issued by Stein states, “In fuels pricing, the combination delivers a true end-to-end capability” that extends from wholesale and terminal pricing to retail and dealer channels.
While automated fuel pricing for fuel retailers—such as Cheers, CEFCO, and Sheetz—have garnered the most publicity, Stein tells National Petroleum News that his company also offers solutions for clients who supply wholesale customers, fleet owners, and dealer networks and who want to ensure optimal fuel pricing.
At Skyline, Stadjuhar likewise affirms, “We can work with anyone who sells fuel” and not just fuel retailers who directly operate their own sites. “We’ve worked, for example, with fuel marketers who own properties and lease sites to dealers,” he says, “and we’re currently working with a marketer who does unattended fleet fueling. While our software isn’t custom-made for each client, neither is it just ‘off-the-shelf.’ It’s customizable for each client’s needs and pricing strategies.”
Another area in which advances can be expected is what Stein calls the “fuel-store link” or the correlation of fuel price changes to sales volume inside the store. “If you can raise your fuel price a bit without hurting store volume, that’s certainly a helpful piece of information in determining your fuel pricing strategy,” he points out.
Stadjuhar agrees that as data accumulate it “becomes more possible to analyze how the fuel side affects the store side.” Though Skyline’s solution does not set pricing for in-store items, he says partnerships with point-of-sale (POS) system providers Verifone, Radiant Systems, and Gilbarco provide “integration of all the fuel-related components, from the sign to the pump to the POS device, so you can generate the data you need to make decisions.”
Lyle Walker of KSS Retail, however, explains why it would be difficult to automate both fuel and store pricing through a single software solution—and consequently, why fuel marketers who operate c-stores need separate solutions for each. “I don’t know any vendor who is fully integrating food and fuel pricing,” he relates. “The biggest differences are that in-store pricing isn’t as volatile as fuel pricing and that in-store items have their own discount promotions.”
The price for a loaf of bread, gallon of milk, candy bar, or coffee does not change every single day. By the same token, while a store might offer a 50-percent discount on fountain drinks for a week, no similar discount on gasoline would be feasible. “Then, too,” adds Walker, “on the food side you’ve got thousands of SKUs [stock keeping units, or separate items], while on the fuel side you’ve only got three SKUs” or grades of gasoline.
For that reason, Walker avers, “C-store merchandising is much more about the product mix than is fuel sales. “Your store has far more products than your fuel islands. There are fewer price changes. And there are more cross-effects between all the different items in your c-store product mix.”
To set optimum prices for store items, Walker says the grocery industry has largely gone the way of automated solutions. By contrast, he reports, “Most c-stores just decide their margins at random, based on what they’ve ‘always’ done.” Yet he sees no reason why c-store operators cannot reap the same benefits enjoyed by such KSS Retail clients as the Kroger and Bi-Lo supermarket chains.
Last year, 7-Eleven selected the PriceStrat and Heartbeat solutions from KSS Retail for price modeling, forecasting, and optimization. The chain’s goal is to manage its regular and promotional pricing by modeling “what-if” scenarios that drive more timely and effective pricing decisions. “Our solutions give you the tools to see how consumers react to pricing, what they’re buying, and which products have the most impact,” Walker explains.
“But if you operate c-stores with gasoline, at least from the pricing angle, food and fuel are different businesses,” Walker continues. “You’ll need different people in your organization to manage the pricing of each. The price optimization solution for your c-store looks at each category, rather than individual items, to help you manage your mix of margins.”
Walker advises fuel marketers who operate c-store and are interested in a pricing solution for the latter to “start by asking yourself some questions: Do you have the data? Do you have the people to run the tools? Do you understand the need for, and have, a defined strategy? ‘Price optimization’ isn’t a strategy. Is your goal to drive more traffic—or more transactions, or more volume, or more profit, or more sustainable growth?”
In the future, Stein of KSS Fuels predicts that the sales volume data—a key to optimizing fuel prices—will be put to other uses. “The ability to forecast your volume can tie into inventory management,” he says. At Skyline Products, Stadjuhar expands on that point by observing, “While fuel deliveries cost a lot of money, it’s the unexpected delivery that really costs you. But as you monitor your volume, you can see if your volume is unusually so that you’re in danger of running out.”
Inventory management is typically conceived in terms of saving money by replenishing fuel tanks when product can be acquired at advantageous market prices. Yet in addition to what retailers pay for fuel, Stadjuhar suggests the prices at which they sell fuel can also be a factor in inventory management. “Maybe you’ve got an advantageously-priced delivery coming up,” he says. “Then in anticipation of the delivery you could lower your fuel prices to drive more volume and make room for that delivery.”
Moreover, Stadjuhar believes that pricing strategies in the future must account not only for gathering data, deciding price changes, and executing those changes at individual locations. In addition, he says a fourth step will be added to process. “Along with executing strategies,” he explains, “will be communicating those strategies to your customers.”
What if, for example, a fuel marketer could not only push instant price changes out to the street via electronic price signs, but also push a message out to consumers via social media? “We just started working on that in spring 2011,” Stadjuhar relates. “So for example, you could use social media to tell your customers, ‘We’re going to raise gas prices in six hours. Why not come and get your gas now? And if you do, we’ll give you a free fountain drink.’”
Finally, Stadjuhar is prepared to make another prediction. “In the future,” he believes, “the current trend toward more consolidation among fuel marketers and more private branding will make price optimization even more important. As you acquire more sites and need to rationalize them, and as gasoline brand loyalty decreases and fuel becomes more of a commodity, you’ve got to optimize every penny.”