Cap budget programs foster stability and take focus off price
By Jarrod Robinson, Hedge Solutions
As of this writing, the forward curve for next heating season is trading at $1.90 per gallon. That’s more than a dollar lower than where it priced this time last year. You have likely contemplated what many have after such a precipitous drop in the numbers over a relatively short period of time: Are we at the bottom?
It’s a great question, but why speculate? Remember 2009? Those who attempt to pick the bottoms do so at their peril—and at significant risk to their company. A smarter, less risky means to take advantage of the lower price domain would be to make an offer to your customers now. This way you’re both leveraging the lower price conditions and locking up your customers through next heating season. Additionally, you are likely getting ahead of your competition.
At current price levels you can lower you customers’ monthly payments while simultaneously showing them a significant savings over last year on their annual heating costs. We prefer the budget cap over fixed price budgets and pre-buys for obvious reasons. How many consumers were happy about having a locked-in rate that was a dollar per gallon higher than their neighbor? With the budget cap you take the emphasis off the price per gallon, and instead focus on the annual cost savings.
Customer Disinterest Is a Myth
Many dealers pause at first glance when considering an early offer over concerns that the last thing your customers want to do after coming out of a prolonged winter heating season is to make a decision on the next heating season. Previous experience has debunked this theory. In 2009 consumers jumped all over these offers once they viewed the windfall they were going to realize. When the budget customer is presented with a lower monthly payment, he or she will seize the opportunity. It’s not a difficult decision when presented to them properly.
Customers who budgeted through the summer and are unaccustomed to enrolling in the spring may be easier to convert than you think. In fact, they have a natural incentive to sign up earlier. In place of paying higher budget payments they’ll receive immediate price relief. This is what we call a no-brainer. And when faced with the choice of waiting to see where competitors “might be” later down the road while continuing to make the remaining higher monthly installments, they are highly likely to go with the “bird in hand.”
This new regimen of lower prices also has us revisiting the age-old annual debate of fixed vs. cap pricing. Many of you offer both but tend to weight your pitch to one over the other. I’m always happy to weigh in here while understanding the temptations of fixed pre-buy programs. The problem with these offers is that your customer has all the leverage. It’s a one dimensional offer focused solely on the price. With the pre-buy offer the effect is intensified since they are writing a check one time. You are walking into that dreaded space that so many retailers such as car dealers and appliance salesman live in: “Let’s make a deal.” To make matters worse down the road, if the “deal” they made doesn’t work out you’re left “dealing” with their buyer’s remorse all winter. Which most of you know does not come without significant risk, as you spend the season watching for cheaters and those that bail out altogether!
Caps Bolster the Relationship
The cap program is a win-win for you and your customer, and the focus is rarely on the price. It’s all about the monthly budget payment, and this simple truth lowers their barrier to entry significantly. Yes, you do have to deal with the option premium, or fee (a term I highly recommend you avoid). There are multiple means to dealing with this. Unfortunately, too many to cover in this short article. One glaring statistic that does stand out is that the budget accounts stay with you longer, use more oil, and are not focused on the price itself. Worth noting, they are the highest valued account in the customer list when it comes to monetizing your business. Something one should consider seriously.
So while preparing for this coming year’s launch, don’t speculate. If the numbers make sense for you and your customers you may want to consider moving up that launch date. If you can show them significant savings over last year’s costs now, why wait to see if they can save a nickel down the road? Consider offering a cap and/or weighting your to favor the budget cap. They’ll always receive your best price, and they won’t be calling during the middle of January re-negotiate.