Squeezed by high gas prices? 4 options to consider
Rising gasoline prices affect all consumers and businesses, of course. But small businesses get hit harder than most other businesses, particularly because they don't have access to some of the tactics employed by larger corporations.
"If you look at a large company like a Southwest Airlines, you'll see that they are able to go out and buy financial contracts to lock in their fuel prices, and they do that on an ongoing basis," notes Peter L. Rodriguez, associate professor at the University of Virginia's Darden Graduate School of Business Administration in Charlottesville.
"The problem for small businesses is that it's just not feasible or affordable for them to buy an oil future or a derivative contract to protect against higher future prices," he says. "The smaller you are, the harder it is to protect yourself from changes in fuel costs."
But there are a few strategies that smaller businesses must consider to cope with higher energy costs. Because they are without the financial tools of the big boys, smaller businesses must either increase their revenues or reduce their expenses related to gas costs.
Here are four tactics to consider.
1. Build the higher costs into your product pricing. Gasoline is a significant expense for Michael Brennan's Deerfield, Illinois-based door-to-door pet grooming service. His business, Aussie Pet Mobile Northshore, uses two Ford F-150 trucks. Each truck pulls a 3,500-pound converted horse trailer to clients' homes and gets about eight miles a gallon.
Brennan raised his prices, which average about $65 per pet, by 10% after gas prices had increased by more than 30 cents a gallon. "You have to be sensitive in the way that you do it," he says. "We incorporate the price of fuel into the pet cleaning fee, so when we increased prices, we let people know that we're paying more at the pump just like they are. If customers know the increase is because of something out of your control, they tend to understand."
2. Break out the costs as a separate charge for customers. If you're in a business where customers tend to compare prices among competitors offering similar products, it can make more sense to create a separate line item than to fold your higher gas costs into your product price. That's what Atlanta-based Wing Zone Franchise Corp. did with its 75-plus takeout and delivery franchises.
"Roughly 60% to 70% of our business is delivery, and part of our mantra was always, 'free delivery,'" says Stan Friedman, executive vice president of Wing Zone. "But we've had to tell our franchisees that with higher gas prices, they had to initiate a delivery charge."
Most of the franchisees instituted a delivery charge of $1, with some charging a little more. But the charge hasn't affected business.
"In most cases, consumers are very forgiving — it's impossible for a conscious consumer to not be aware of what's happening with gas prices," Friedman says. "I think what people do is look at that extra dollar and realize that it would probably cost them more than that to drive out and get the food and bring it home, so it's still a good value proposition for them. If you keep giving customers an experience that is above their expectations, they are not going to be resistant to paying that charge."
Wing Zone could have simply increased all its prices slightly to absorb the higher costs, but chose not to. "We gave careful consideration to just increasing prices, but cost of goods is something that everyone in the food business is acutely aware of," he says. "By directly associating that delivery charge with its relevancy to the price of gas, consumers have had no trouble connecting those dots and realizing that we're not increasing our food prices."
3. Improve your own energy efficiency. Most businesses can benefit by periodically reviewing their delivery routes and other practices. Are you or your vehicles using fuel as efficiently as possible?
Brennan says his pet-grooming business "looks at ways of optimizing the routing to decrease our windshield time." Put another way, the company tries to cluster appointments for customers in adjoining neighborhoods to cut down on travel time.
Contact-management software such as Outlook 2003 with Business Contact Manager and online scheduling programs such as Microsoft Appointment Manager can help you better organize your business's appointments and deliveries.
For many businesses, using online meeting software such as Microsoft Office Live Meeting can save in time and the costs of driving between towns for meetings.
4. Determine that absorbing the pain in the short term may be the best option. It may indeed be an unsatisfying option, but in the most competitive environments, small businesses may decide it's best to absorb higher energy prices in the short term. As the University of Virginia's Rodriguez points out, the long-term cost of losing and having to replace customers may exceed the short-term cost of absorbing price fluctuations.
"Especially if you are a new business or just establishing or growing your business, you may have to suck it up in the short-run and take it [price increases] on the chin," he says.
This option, of course, is contingent to a large degree on the spike in energy costs being a short-term occurrence. If it isn't — and time will tell — you must revisit the other options.