Five strategies to maintain margins in chaotic commodity markets.
Volatile commodity markets are an occupational hazard for propane and heating oil dealers, a point driven home by the turmoil in the Middle East. When wholesale prices swing dramatically within a single season, or even week to week, protecting gross margins takes more than competitive pricing. It requires systematic discipline across your entire pricing structure.
The dealers who thrive through market chaos share a common trait: they have built margin protection into their operational framework. They understand that sustainable profitability does not come from chasing every competitor’s price or quietly absorbing every cost increase. It stems from clear pricing policies, legitimate cost recovery, and regular audits to detect margin erosion. Here are five strategies that work.
1. Pricing Discipline: Your First Line of Defense
Pricing discipline starts with a fundamental principle: your price should reflect your costs plus a reasonable margin, not simply what the competitor down the road is charging. Yet reactive pricing is remarkably common. Dealers cut margins the moment they hear about a competitor’s promotion or lose a single account to a lower price.
The foundation is understanding your true cost structure. Track not just your wholesale commodity cost but your full delivery cost per gallon, including driver wages and benefits, truck maintenance and depreciation, insurance, fleet fuel, and overhead allocation. Many dealers discover they have been underpricing for years once they run these numbers accurately.
Once you know your costs, establish a minimum acceptable margin for each customer segment. Will-call customers who order only during price dips should have higher margins than loyal automatic-delivery customers. Customers in remote areas or requiring special handling need pricing that reflects those realities. These are not arbitrary distinctions; they reflect genuine differences in cost to serve.
Create a formal approval process for pricing exceptions. When a sales rep wants to offer a special price to win or retain an account, they require documentation showing expected volume, delivery efficiency, and payment terms. This one step prevents margin erosion from becoming the default. Companies that implement this control consistently see meaningful profitability improvements.
2. Fee Structures That Protect Profitability
Transparent fee structures serve two purposes: they recover costs that would otherwise erode margins, and they encourage customer behaviors that improve operational efficiency. Many dealers leave significant money on the table by failing to implement or enforce reasonable fees.
A modest per-delivery charge helps offset fixed costs for each truck roll, particularly for customers who request frequent small deliveries or off-route service. Late payment fees of 1.5 percent to 2 percent per month on overdue balances recover the real cost of carrying receivables and signal that your terms are meaningful, not suggestions. The problem is that too many companies set late fees and then never charge them, undermining the entire credit policy.
After-hours and emergency delivery fees reflect the premium cost of off-schedule service: overtime wages, dispatching costs, route inefficiencies. A surcharge for genuine emergencies is both reasonable and expected. Equipment rental fees for customer-sited tanks ensure you are recovering the investment, maintenance, and compliance costs associated with that hardware sitting on someone else’s property.
The key to making fees work is consistency and transparency. Publish your fee schedule, include it in customer agreements, and train your staff to explain fees professionally. Customer complaints about fees almost always stem from surprise or perceived unfairness, not from the fees themselves.
3. Minimum Drop Requirements: Small Deliveries, Big Impact
Small deliveries are profit killers. When you deliver 75 gallons to a customer whose tank holds 275 gallons, you have incurred nearly the same delivery cost as a 160-gallon drop while capturing only a fraction of the margin dollars. This is the most common margin leakage pattern in the industry.
Establishing minimum drop requirements is one of the most effective margin protection strategies available. Best practice is 100 to 150 gallons for propane and 125 to 175 gallons for heating oil. These minimums ensure that the margin dollars per delivery justify the delivery cost.
Here is the math: divide your cost per delivery by your per-gallon margin. If your delivery cost is $85 and your margin is $0.85 per gallon, you need 100 gallons just to break even on the delivery itself, before overhead or desired profit. Every gallon below the minimum destroys value.
Phase in minimums carefully. Start with new customers, then extend to existing accounts with adequate notice and clear communication about why minimums matter. Customer pushback is almost always less severe than anticipated. Exceptions should be rare and documented. If a customer has a small tank that physically cannot accept your minimum, handle that account through higher per-gallon pricing or honestly evaluate whether it is worth serving.
4. Hazmat and Safety Cost Recovery
Propane and heating oil delivery entails significant safety and regulatory compliance costs that many dealers fail to fully recover. That is a mistake.
Consider what is on the clock: hazmat certification training every 3 years, plus annual refreshers; DOT compliance requirements, including vehicle inspections and driver qualification files; and drug and alcohol testing programs that run several hundred dollars per driver annually. Insurance premiums for hazmat operations far exceed those for typical commercial vehicles. Add in ongoing safety equipment, emergency response materials, and spill-containment supplies, and you have a recurring cost line item.
Rather than treating safety costs as pure overhead, build recovery into your base pricing or fee structure through a small per-gallon safety surcharge. Customers increasingly value companies with strong safety records, and most understand that professional safety programs cost money. When you frame these costs properly, they become a reason to do business with you, not a reason to object to your pricing.
5. Margin Leakage Audits: Finding Hidden Profit
Even with strong policies in place, margins leak. Every company has some when you look closely enough. Regular audits identify where profits are escaping before the damage compounds.
Start with pricing exception analysis. Pull reports showing all deliveries made below your standard margin threshold. Categorize exceptions by reason and by sales representative. If certain customers or certain salespeople account for a disproportionate share of low-margin business, you have identified a coaching or enforcement opportunity.
Audit your accounts receivable aging regularly. If you are carrying $500,000 in receivables with an average age of 60 days and a 6 percent cost of capital, you are spending $5,000 per month in financing costs alone. Identify chronic slow payers and consider requiring prepayment or cash on delivery. Some customers are simply not worth keeping at any margin.
Review delivery efficiency metrics. Compare actual gallons delivered per stop against targets. If you are averaging 150 gallons per delivery when route planning assumes 200, you are running 33 percent more stops than expected and destroying margin through excess delivery costs. Then, examine will-call customer profitability: despite typically higher per-gallon margins, will-call accounts are often less profitable than automatic delivery customers because they order only at market lows, require more customer service contact, and create route inefficiencies.
Finally, review the fee application and collection. If your system charges a late fee but your staff routinely waives it, you are not actually recovering the cost. The gap between policy and practice is exactly where the margin disappears.
Building a Sustainable Margin Strategy
Sustainable margins require more than implementing individual policies. They require an integrated approach that spans pricing discipline, cost recovery, operational efficiency, and regular monitoring. Margin protection must become part of your company culture, not just a finance department initiative.
Create a margin dashboard that tracks average margin per gallon by customer class, margin per delivery, delivery efficiency, accounts receivable aging, and exception frequency. Review it monthly with your management team. What gets measured gets managed.
Invest in technology that supports margin protection. Modern delivery management and pricing software can enforce minimum drops, flag below-margin pricing, optimize routes, and track costs in real time. The ROI is often less than a year, even with margin improvement alone. Train your entire team on the basics: when drivers understand why minimum drops matter and sales know how to sell value rather than just price, margin protection becomes cultural.
The dealers who maintain strong margins through volatile markets are those who treat margin protection as a continuous process, not a one-time project. In turbulent commodity markets, that discipline is what separates the profitable companies from those that struggle.
Marty Kirshner leads the Energy Practice Group at Gray, Gray & Gray, LLP, a business consulting and accounting firm that serves the heating oil and propane industry nationwide. He can be reached at (781) 407-0300 or mkirshner@gggllp.com.
