As landscaping companies across the United States seek ways to be more competitive and win more business, managing volatile fuel price risk may be the answer they need.
Implementing a Fuel Price Protection Plan
As landscaping companies across the United States seek ways to be more competitive and win more business, managing volatile fuel price risk may be the answer they need. Implementing a fuel price protection plan that caps the price they pay for fuel and reduces the risk of fluctuating fuel prices on their bottom line can ensure budget predictability and potentially improve their competitive edge.
For most landscaping companies, fuel is one of their biggest costs. In recent months, gas and diesel prices have been volatile, they’ve seen prices move 70 to 80 percent, exposing them to financial risk. In a tight competitive market, they often cannot pass on high costs to customers and are forced to absorb costs directly, squeezing their margins and hurting their business’ bottom line and competitiveness.
Earlier this year, a national survey from Pricelock, the online leader of fuel price protection and budget predictability, found that 65 percent of U.S. business fleets are forced to absorb higher fuel costs directly, while only 16 percent are able to pass on rising fuel costs by increasing prices to their customers.
Naveen Agarwal, CEO of Pricelock“Putting a cap on volatile fuel prices can ensure the health and growth of your business,” said Naveen Agarwal, CEO of Pricelock. “If you know that fuel costs are fixed, not only do you reduce risk to your bottom line, you can make more accurate and aggressive bids on jobs, increasing your competitive ability.”
Just 100 gallons a month can be protected
Historically, according to Agarwal, a company had to be large enough to use minimum of 42,000 gallons of fuel a month in order to hedge their fuel usage, like Southwest Airlines. With Pricelock’s innovative technology, it can serve all fuel volumes and sizes of fleets.
“Volume no longer matters,” said Agarwal, whose company has fuel price protection plans for as little as 100 gallons a month.
Protection and profits
Pricelock works with landscaping, gardening and nursery businesses across the country to help them create fuel price protection plans that are simple and easy to implement online. By completing three simple steps, companies can purchase a plan that protects their business from fuel volatility. They simply need to determine three things:
The volume of gas or diesel they need each month
The price protection point they want for that fuel
The length of time they want the plan to operate
Once a business purchases a plan, if the national average of fuel prices goes above their selected protection price, they’ll receive a monthly payout. During the first quarter of 2011, 93 percent of Pricelock’s customers received a payout, according to Agarwal. If the national average is below the protected price, companies do not receive a payout but they are free to take advantage of cheaper prices at the pump.
Five Tips for Fuel Savings
Pricelock offers these simple tips for fuel savings:
#1: Do your homework Begin by analyzing your historical fuel consumption to understand your exposure to fuel price volatility. Look at the last 12 months, determine how much fuel your business consumed each month, number of gallons, average price spent and overall fuel cost.
After you’ve estimated your fuel spend for the year, you can see how your fuel costs varied month to month. For the months when fuel costs were higher, were you unable to make budget? Were you forced to drive less which impacted the level of service you provided?
Calculate the impact of various fuel price increases–for example, how much more would you have to spend if prices increased 25¢? At what point would price increases be detrimental to your business?
#2: Set your main business objective Once you have a better understanding of your business’s fuel price sensitivity, you can better determine your main business objective. Do you want to use fuel price protection for budget predictability to benefit from lower, predictable fuel costs or for business protection against unforeseen large increases in fuel prices?
If your main business objective is budget predictability, you can control your overall fuel costs by choosing a protection price below market price. If you decide you can sustain small fuel price increases but want protection when it matters most, set your protection price at the highest fuel price your business could withstand without harming your ability to do business.
Keep in mind that the lower your protection price, the more likely you will get a payout but you will have to pay more for the plan upfront. While a lower protection price may seem more desirable, it comes with a higher upfront cost so you’ll need to decide the right cost benefit for your business. A more affordable plan can still safeguard your business and provide protection when you need it most.
#3: Understand seasonal trends in your business Some businesses use more fuel during different parts of the year and fuel prices tend to be seasonal, with prices highest in the summer. If your business consumes a large volume of fuel in the summer months, you may want to have extra protection June through August.
Remember that the longer the term of your protection, the costlier your protection plan. If you want to keep your costs down, consider implementing a short-term plan for your busiest months or multiple plans where the first plan is year-long with added gallons for your busiest months.
#4: Keep it simple and easy to understand When evaluating different fuel price protection programs, keep it simple and look for a program that is easy to understand.
#5: Monitor your protection plan performance Once your plan is implemented, make sure the program provides access to ongoing performance reports. This way you can monitor your plan and ensure it meets your business objectives.