In any home services industry, a company’s financial health depends on maintaining healthy contribution margins. Without a thoughtful propane pricing strategy (in the propane industry specifically, of course), these margins naturally shrink over time as overhead costs increase and customer price sensitivity creates downward pressure on pricing decisions. As a business owner, you should either set prices yourself or establish clear guidelines for how your team determines them.
Let’s face it — sometimes you lose money on certain projects or barely cover your overhead costs with some customers. While this isn’t completely avoidable, remember that these challenging situations only benefit your business when you transform customer satisfaction into future contribution margins.
3 Key Approaches to Pricing
When making pricing decisions, consider using all three of these methods together to create a strategically optimal approach:
- First, start with cost plus pricing by calculating your marginal costs and adding a markup that covers overhead plus your desired profit margin. This establishes your baseline.
- Next, look at competitive comparison positioning. Consider how you want your offerings to stand relative to your competitors. Would you prefer to charge slightly less than the average competitor, match their pricing or position yourself as a premium option at a higher price point?
- Finally, explore value-based pricing by asking: What is your unique service worth to your customers? Sometimes the only way to truly know is to test higher prices than you’ve charged previously and observe customer response.
Understanding Your Contribution Margins
Contribution margin serves as the foundation for any break-even analysis. It’s defined as the revenue from selling a particular product, minus all variable costs associated with producing and delivering that product. Your revenue comes from what you charge customers. Your contribution margins equal that revenue minus all variable costs. You might calculate these margins daily, monthly or per delivery. Interestingly, contribution margins can vary not just by product but even for the same product depending on which of your customers you are serving.
The Complexity of Variable Costs
Some variable costs are straightforward to calculate — like the per-gallon cost of heating oil from your supplier. Others require more detailed accounting, such as routing expenses and printing and billing costs for each delivery.
With a well-organized accounting system, you can track aggregate costs for internal operations, truck drivers, fuel, vehicle leasing and maintenance. But calculating customer-specific variable costs becomes more nuanced. Some customers:
- Are located farther away from your terminal
- Have complicated delivery requirements demanding more driver time
- Purchase service plans subsidized by your oil delivery department
- Have larger or smaller tanks requiring different delivery amounts
- Demand more attention, increasing your operational time costs
When you lack specific data on individual customers, it’s time-consuming but worthwhile to create a cost factor for each one to inform your pricing decisions. While operational software is increasingly providing this data automatically, creating a temporary workaround can prove cost-effective if your current system doesn’t accommodate this level of detail.
The Psychology of Price Elasticity
Understanding price elasticity — how likely customers are to reject price increases — adds complexity to your pricing strategy. The more a customer values your services, the less elastic (price-sensitive) they tend to be.
When customers frequently complain about pricing, they’re signaling higher elasticity. Similarly, service failures like allowing a customer to run out of fuel or failing to resolve issues on the first visit typically increase price sensitivity.
Conversely, earning five-star reviews or efficiently replacing a leaking boiler tends to build loyalty and decrease elasticity. Tracking these customer experiences provides valuable context for your pricing decisions.
Avoiding the Discount Trap
Team members who regularly interact with unhappy customers often advocate for lower pricing. After all, customer complaints frequently include requests for discounts or price concessions.
As a business owner, resist this natural bias. Instead of (or in addition to) offering discounts to dissatisfied customers, identify what service improvements would prevent complaints in the first place. Remember that resolving an individual customer problem represents only about 10% of the work when a customer is unhappy. The remaining 90% involves improving systems and processes to prevent future customer dissatisfaction.
Strategic Approaches to Improving Margins
Sometimes increasing contribution margins doesn’t require raising prices. Instead of raising prices, you may work to reduce operating costs to increase contribution margins. Other times, the increases in consistency or value of your services you have worked so hard to achieve can justify higher pricing without significant customer dissatisfaction. Whatever changes you contemplate making, it is wise to recognize that any shift involves risks, including the risk that changes will increase costs without the ability to raise prices, or the risk that raising prices will cause customer losses.
Delegating Pricing Authority
The critical nature of the analysis needed to make good decisions, the need for a comprehensive view of a company’s financial and operational situation, and the need for a consistent focus on finances are the three main reasons pricing decisions are most appropriate for senior leadership.
However, if your business has grown too large for you to handle all pricing decisions personally, consider delegating in stages. Begin by making cost reduction (without sacrificing quality) an organization-wide objective. Next, consider delegating price increases while retaining authority over margin reductions. If you must delegate all day-to-day pricing decisions, then implement a dashboard or regular reporting system to monitor how effectively your team maintains or grows margins over time.
By thoughtfully managing your pricing strategy and contribution margins, you’ll create a stronger financial foundation for your heating oil or propane business while continuing to provide valuable service to your community.
