GSB-09: Best Pricing Strategy for Gas Station Business | 6P’s of Marketing Mix Part 4 |

Podcast: Play in new window | Download | Embed

Subscribe: Email | RSS

In this episode I discuss both sides of pricing, the price you pay to buy your merchandise and fuel and then the price you sell that same merchandise and fuel for also known as your selling price. I outline how to have a creative and effective pricing strategy that makes a retail business stand out in this crowded and competitive market.

After listening to this podcast, you will learn how to creatively price each category:

• Cigarettes
• Tobacco
• Drinks
• Soda
• Alcoholic beverages
• Auto Accessories & Oil
• Fuel

I also talk about how to negotiate with vendors and buy at the lowest possible price so you can sell with a competitive price and still make a great profit margin.

[spp-transcript]

Hello there, Welcome and thank you for joining me in yet another episode of the gas station business 101 podcasts. Today’s episode is a tricky and a risky one. Wondering why I am using the word Risky? Stay tuned and you will find out. If you remember we are still continuing the 6P’s of marketing mix series. Today’s; episode is the 5th element of the mix and it is all about Pricing. One mini-correction, I believe I misspoke in episode 6 where I think I said we would wrap up this 6 P’s of marketing in 3-4 episodes, but looks like it will be 5 episodes before we are done.

Anyway moving on, now let me explain why this episode is tricky and risky first. Pricing is the most important factor of your business. A carefully thought out pricing strategy can make you very successful but a pricing strategy that places you above your market can literality put you out of business and on the other hand pricing below the market can wipe your bottom line profit completely clean and before you know it, you are out of business and in debt. That was the risky part, now the tricky part is if you stay with the market, then you are standing out in the crowd instead you are standing in the crowd. In order to make yourself more visible and unique and to stand tall among other competitors, you have to be really very creative when it comes to your pricing strategy and that is where the tricky part comes is. My goal is to teach you how to implement a carefully thought out pricing strategy that can make you stand out and make you successsful.

In this episode I want to discuss both sides of pricing, the price you pay to buy your merchandise and fuel and then the price you sell that same merchandise and fuel for also known as your selling price.

Merchandise Pricing:

First we want to discuss your buying price or the price you pay you buy your inventory, because if you don’t buy at the lowest possible price then you won’t be able to sell them at a competitive price, nor you will be able to keep your margin. So it is very vital that you negotiate hard and get the lowest possible price.

If you recall the last episode where I spoke about grocery companies that supply you with 60% of your in-store merchandise, this is where your negotiation should start. Picking the right company to buy from can make a huge difference in your bottom line. Even a 10 cents difference in a carton of cigarette price makes a big impact on your bottom line profit. Here is how. Say you buy 200 cartons cigarettes a week and at 15 cents higher cost you will be paying $30 a week which translate into $126 a month and $1560 a year! (when calculating week, month and year, it is a good idea to calculate everything based on 52 weeks for the year and 4.2 weeks in a month) So as you can see just a dime and a nickel in price difference can make a huge impact in this case.

Remember if you have a Sam’s Club or Costco type wholesalers in your area, go to them see their wholesale cigarette prices first as they are known to be the cheaper compare to most other grocery companies. Then sit down with at least 2-3 grocery companies and compare their prices and see who offers you the best prices. Let them tell you their lowest price in writing first then offer them a dime less than what they offered and tell them if they can make that happen they will have a deal from you. Keep in mind cigarette is the most competitive commodity when it comes to pricing so don’t expect much, they may come down another 3-4 cents if that, now if you see they are still the lowest compare to the local Sam’s Club and other grocery companies then you should go with them. Provided they are offering you competitive prices on other grocery items as well. If you remember the last episode, where I spoke about how to pick the right grocery company? Best is to get each of those companies price book and put them side by side and then compare apple to apple and orange to orange. Meaning pick out few items from the candy section and match those prices, and then similarly do the same for cookies, cakes, automotive accessories, oil and drinks and so on and so forth.

Keep in mind you will not find any company who has cheaper prices on every item, as long as they are lower in most items then you should be good. One more thing to look for, sometimes these companies offer cheaper cigarettes prices to get your business while they charge higher prices on every other item from tobacco to drinks, so it is important to check all other categories and make sure they are competitive in other prices too.

Since we are talking about cigarettes and tobacco, next you need to meet with the tobacco manufacturer sales reps and this is very important that you build a good and solid relationship with them as they are the one who offers you some type of contract where they compensate you for promoting their cigarettes and tobacco products.

Since the recent merger between Lorillard and RJ Reynolds, you most likely have to deal with just two companies and not three anymore. Depending on your store’s location one of these companies will have more of a dominant presence compare to the other. Do your market research and know where you should be when it comes to pricing your cigarettes and tobacco, know your competitors prices so you can stay in line with them. Also talk to your sales reps from Phillip Morris and RJ Reynolds and see what the biggest contract you can get from each of them as in this case bigger or higher level contracts when it comes to cigarettes companies translate into bigger and deeper discount meaning they pay you more $/pack cash discount. So negotiate for higher discount and not lower.

Soon I will have an episode about vendor contract negotiation as there are many vendors who offer you some of the very complex contracts where you pretty much need an attorney to understand them.

Next you have to sit down with your local coca cola and Pepsi sales people. See what program they have to offer you. Lately both of these companies started to push out contracts where they take certain percentage of your cooler space in exchange they offer you a cheaper contract pricing but the downside is often times they try to enforce the selling price too. Example is Coke recently offered case of 12 oz can coke which ahs 4 -6packs for around $8 or $2 each 6 packs, but in order for you buy them at that price you would have to agree to sell them at $2.25 each 6 pack or $9 a case. In my 20 plus years experience I have always seen around 33-35 % profit margin in the Soda/drinks category /department, but when you run specials such as this that 35% margin and go down to 28-30% which can be a big dollar number.

For example say your store sells around $400 soda and drinks a day, which is %$12,000 a month and if your profit margin is 35% then your monthly profit dollar is $4200 a month. Now let’s take a look at the profit margin when it is down to say 30% because you ran too many low margin promotions. The same sale would bring you $3600, which is a difference of $600 each month and in a year time it can be again $7200.

But don’t think I am against all promotions. Instead I love promotions as that is how you grow your business, but there is fine line of running a limited time offering and running a year around low-priced promotion where people expect you to sell that product at that low prices. A true promotion should always be for a limited time and not always on the same or similar items, your goal is not to have your customers expecting $2.25 for six-pack all year around. When something great is given to us more often than usual, we become used to it, and our brain is trained to expect it instead of appreciate it. You want your customers to appreciate a promotion but not expect it each time they visit your store.

Remember your store is a convenience store and not a discount grocery store, when a customer walk into a gas station or C-store they know they may pay little higher for a pack of cigarettes or a candy bar compare to if they walked into their local grocery store or the discount warehouse.

They pay for that convenience of walking only 5 steps from their car to buy the item, they pay for that fast in and out convenience not to mention they pay for that convenience of shopping at your store at 2 in the morning when most other big retail chains are closed.

Now let’s recap, meet with the sales people of both Coke and Pepsi and negotiate for the best suitable contract for you, remember not to sign the first day you meet, take note when you meet them review them and then get them back again to negotiate.

Now few companies you can’t negotiate with, for example Frito lays and most other chips companies won’t negotiate prices as they have set prices, no worry you pay the same price what Wal-Mart pays for those chips. The only difference is some of these companies do offer you a percentage of totals sales back to you as a rebate if you are part of any large chain stores, or you belong to a buying group. Next non negotiable category is Beer and wine. in most states if not all, beer is distributed by only handful of companies. For example, Budweiser or Miller beer is produced and sold by one company in one areas or city, and since no other company is producing or selling the same beer there is no price competition nor there are any price negotiation. I will cover this topic in a future episode.

Next you need to meet and negotiate with some of the smaller vendors such as the ice company if your store sells ice, then the company that sells you coffee, cakes and other snack items, most of these smaller companies will negotiate with you so make sure to talk to some of the competitors as well and pick the best and cheapest one as long as the products they are selling are the same or same quality.

Now that you are buying your merchandise at a cheapest possible price let’s talk about the other half of this equation, the selling price and how much you should sell them for.

Again first let me address cigarettes and tobacco, if you are in a contract with both of the tobacco companies then you have some guidelines that you have to maintain, but more importantly your cigarette and tobacco prices are determined by how much your competitors are selling them for. Poeple are more price conscious when it comes to their cigarettes especially since they buy the same thing or same cigarettes every day, they know and remember that price well so try not to price yourself out of the market here, try to stay within the market range, a difference of 5 to 10 cents is okay but not 50 cents. Just remember this is the category you have to very compmetitive at.

Next Soda and drinks, again 99% gas stations in any area sales their 20 oz coke or pepsin at a set price, so you can’t play the pricing game here, only price game here is for milk or other soft drinks that are not Coke or Pepsi. You can also run various other promotions on the bigger packages like 12 pack cans or 2-liter bottle sodas.

Chips and similar products usually always have a price printed on them, so no room to play there either. Move on to some other smaller items like a bag of ice, snack cakes, coffee and fountain drinks. This is where you need to be creative and make yourself visible among other retailers. Run great promotions year around but on different items, like in winter run a special on coffee or cappuccino and in the summer months run special on fountains.

7-11 does a wonderful job when it comes to summer fountain drink promotion, they always promote a 64oz huge mug for a very low price and the deal is every time you bring that big mug back to the store for a refill you only pay a few cents. They created a huge fan base who carries those mugs and visit 7-11 every day even if they have to go out of their ways to get to one of those stores. That is what brand loyalty is. You don’t have to copy their exact model, but you can create some creative promotion that goes better for your local neighborhood’s needs. In next episode I will be discussing everything about promotion and marketing for your gas station business, which I am looking forward to already. So make sure to tune in and listen to it next week.

On beer and wine category, as I said you most likely won’t be able to negotiate any prices but you can always entertain some deals most of these two companies offer, for example, Bud and Miller both often offer 50 case or 100 case deal, where if you buy 50 or 100 cases of the same package, they may offer $1-$2.50 off each case. These two companies always have some type of promotions going on but not all of them great promotions for every store.

When it comes to selling prices, this is where you have to be again very creative. Again check your local area competitors and then decide where you need to be. But remember if you are already offering the cheapest fuel or cigarette prices, then no reason for you to offer the cheapest beer as also, instead use one of the items in your store as the loss leader to bring people in and keep the rest of your merchandise as regular prices.

If you have a grocery company to supply you with all your grocery, tobacco, cigarettes, drinks and candy items, then pricing can be easier for you. Usually when you sign up with your grocery company they always ask you what type of profit margin you want to keep in each category, and it can reduce your work as the grocery company will process each grocery items before shipping them to you, and all those grocery items will be pre-priced at your desired profit margin. Similarly, they will suggest prices on the invoice for your candy, drinks and all other items, it is then up to you to decide if you want to follow their suggested retail prices or not. Remember you can always adjust the suggested retail price by contacting your grocery company.

This is how I tell my grocery company to price my merchandise at:

• Grocery at 35%
• Candy at 40%
• Automotive Accessories & oil at 50%
• Drinks at 37%
• Tobacco at 25%
• Deli food at 50%
• Cigarette at 17%

Even though I do not price cigarette according to their suggested retail for the reasons, I told you about before.

Fuel Pricing:

Now let’s talk about buying and selling fuel which is your biggest category really. When it comes to buying your fuel, I am sure 95% of you out there are already locked into a fuel supply agreement or contract. If you are, then you can’t pick and choose your suppliers like you can for your grocery items. But don’t feel bad, most all fuel suppliers have standard contracts, where they sell you fuel at a penny or two over the rack price. Let me explain what Rack price is first…Rack price is the published wholesale fuel price is for a specific day and area, as it can vary by brands, your location and it varies day to day. Fuel is a commodity and like any other commodity fuel gets traded daily and prices do go and down by supply and demand. So let’s say the rack price today for Chevron in your area is $2, if you buy gasoline today, your supplier will charge you $2 each gallon, along with all the local, federal and state taxes and lastly based on your contract with them, they will add anywhere from 0 to 4 pennies to each gallon as their profit. Now how many pennies they will add will depend on what you negotiated with them when you signed that fuel contract. It is always a good idea to know your contract well this way you know how much more you may be paying compare to your competitors. I will get into more details about fuel contracts when we cover vendor contracts at a later episode.

Now if you don’t have a fuel contract or you are building a new station or buying a station that comes with no fuel contact, you are in the driver’s seat and you should negotiate a good solid contract that benefits you in the long run. Remember a typical fuel contact usually runs for ten years or more. So negotiate hard as you have to abide by that contract for a long time to come. As I said I will cover contract negotiation at a later episode but if any of you are in a situation where you are about to negotiate a fuel contract, email me if you think I can be of help to you.

Now let’s talk about pricing your fuel. Remember pricing your fuel is most likely THE most important pricing strategy you will ever make for your business so be careful and do not take this lightly.

Pricing your fuel is not like pricing your grocery, cigarettes or soda, there is not set margin or set pricing for fuel, just as the buying price varies with the market, selling prices do too. It is best to do a price survey daily of at least 3-4 of your nearest competitors, this way you can see where you should price yours.

But before you price your fuel, first you need to figure out who is the leader in your area, rank each station including yourself this way you know who to follow and who will follow you. If you have a national brand or a very dominating station near you then put them at rank 1 then see who should be number 2 and so on and so forth, if you decide you are the dominating brand o=in your neighborhood then you are in a very good place as you can dictate the market. But if it is someone else then be careful and price accordingly, some of the dominating brands have a tendency to be the lowest, if you have one of those then make sure to stay a penny or two above them as the last thing you want is to start a price war between you and them where at the end you will be the one losing everything since they tend to have deeper pockets.

Moving on to email part of the show but before I do, I want to thank two kind people that gave me two 5 star reviews on iTunes, and they truly made my day so thanks to Sontu and Wilson.

The book I want to mention today is call Think and Grow Rich: The Landmark Bestseller by Napoleon Hill, it is one of the greatest self-motivational book with over 2500 Amazon reviews. Reviews don’t come easy, trust me I know, On the first edition of my book even though I sold close to a thousand copies of the book in 2.5 years, but I still only had 13 reviews. So yes they are hard to come by, and this book has over 2500 of them. So enjoy it.

Next episode I will discuss the final part of this 6P’s of marketing series, and the last topic will be about Promotion, I am excited already. Hopefully, I can wrap things up in one episode.
Thanks once again for staying with me and giving me your valuable time. Keep sending me your questions and comments and I will try to answer them as much as I possibly can.

 

Take care and I will talk to you soon.