Futures $ OptiOns Renting or Buying? By Philip J. Baratz, CTA Angus Energy pbaratz@angusenergy.com /company/angus-energy /AngusEnergy @AngusEnergy This logic, a/k/a chasing your tail, is why attrition numbers are so high, acquisition costs keep increasing and customers keep shopping. If the customers stay for shorter periods of time—especially recently acquired customers— what should be done? The first thing that would be suggested would be to get to know your customer. Are higher credit score customers better than those with lower credit scores? Don’t answer that so quickly. Will tank monitors make customers feel comfortable enough that when the “next great offer” comes along, they will be willing to not listen to it? Does “better service” really matter? The more you get to know your customers, their motivations and their behavior, the better you will be at assessing how much money you should be willing to spend to acquire new ones. It has been proven, time and time again, that customers who are on price cap programs are more likely It has been proven that customers on price cap programs are more likely to remain with their dealers. As the statistics continue to show, the percentage of residences occupied by renters, versus those occupied by owners, continues to grow to its highest levels since World War II. In 2005, the rate of homeownership was over 69%; it has now fallen to 63%. Although there are two million more homes now than just a year ago, ownership decreased by about 400,000, while rentals increased by almost two million (WSJ, July 28, 2015). The logic behind that trend is fairly easy to understand: an increasing number of Millennials leaving their parents’ homes, a suspect economy, painful memories of the imploded real estate bubble and housing stock that “just seems too expensive”. The logic of renting gives the renter a good deal of flexibility, with the obvious downside of no true ownership, equity or interest write-offs. As we hit the time of year, the Fall, where oil heat shoppers are aplenty, and the new customer deals seem illogical, we just need to wonder how many oil dealers are “renting” customers, when they think they are “buying” them. If you are spending hard-earned marketing dollars to acquire new customers, it might pay to have a better idea as to the real value of that acquired customer, and how to maximize that value. Typically, customers choose a (new) dealer due to a specific price offer at a time when the customer is “willing to listen”. Very often, customers are not the evil shoppers that they are made out to be, but rather are approached with an offer that seems much better than how they perceive their current dealers’ offer, and their interest is piqued. We all know how this story ends, and that is with the customers choosing the offer with the most freebies—lowest price, free service contract, etc. So, imagine that you are a dealer who has just made this “lowest offer”, and have been lucky enough to acquire a (hopefully) credit-worthy new customer. This point is where there is often a logical disconnect in the mind of the new dealer. The disconnect goes like this: 1. The customer is paying a full margin to another dealer 2. I will entice him/her to buy from me with a low-ball offer 3. The customers will stay with me when I raise my prices to full margin and won’t look elsewhere. to remain with their dealers than those who are not on programs. However, even with that information, many companies are inconsistent with their program offers. Some wait “until the time is right” (the answer is that the lowest price of the year happens exactly once per year—the other 364 days have higher prices). Others switch between offering a cap, then offering a fixed-price and then (sometimes) offering nothing. Considering that the price of oil always has a 50/50 chance of going up (or down), it seems to be an unsafe bet to tell your customers that this won’t be the year that prices will go up. If you can offer pricing programs to cut down on customer attrition (nothing will eliminate shopping outright), track customer behavior via the data that you already have in your back-office systems and learn to value customers based upon their value to you, then you can transition from being an overpaying renter to a savvy buyer. ICM 30 ICM/Sept/Oct 2015
ICM September-October 2015
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