A New Take On An Old Game: Fuel PricingJanuary 25th, 2011 | Posted by in Uncategorized
Washington D.C. – Auto fuel has always been the economic poster-child of price transparency, efficient markets, and easy menu-changing. But any gas station owner will tell you that there’s still some money to be made at the pump. Yet given the razor thin margins on fuel, the game has, of course, moved away from the pump and into the store.
This shift has profoundly changed the make-up of where the gas game is played – very few pure refueling stations exist anymore and new entrants are looking to use zero-margin fuel as a traffic driver: grocer Stop & Shop recently announced that it will be ramping up their fuel service offering, opening their first location in Quincy, MA.
Price Competition at the Pump
Why such intense focus on a loss-leading product? Three things:
- In a recent survey by Citi, US consumers indicated that finding more competitively priced (aka, cheaper) gasoline topped their lists of ways to cut back on expenditures
- 42% of consumers had smartphones as of the beginning of 2010. Recent price decreases and Verizon’s iPhone announcement promise to continue growth in the smartphone space.
- There are dozens of GPS-driven mobile apps on smartphones that put real-time gas pricing information in the hands of drivers (and most of them are free).
By any measure, price transparency is at an all-time high, especially for automotive fuels, and it’s only going to accelerate. Of course, this only makes pricing more important, since (through the irony of mathematics) as margins thin, the power of a tenth of a penny magnifies. But consumers probably won’t notice a tenth of a penny, right? Would they notice two tenths? How about three?
Test & LearnTM
“How many gallons will I lose next month if I move a half penny higher? How much would I pick up if I moved lower?” Turning to elasticity models based on historic cross-sectional data is quickly becoming an obsolete answer to this paramount strategic question for convenience chain operators. As it becomes crucial to accurately know the answer for today and not yesterday, the winning gas stations are the ones routinely conducting in-market pricing tests and adjusting strategies in real-time. These companies are the ones who know which stations serve app-wielding price shoppers and which can mine more margin at higher prices.
APT is the world leader in helping organizations harness the power of Test & LearnTM to gain an edge at the pumps. Click here to learn more about how APT works with leading convenience retailers to build and continually refine their pricing strategies.