Marina Dock Age, July/August 2000

How to Price Fuel for Profit
by Dennis Kissman

With the price of fuel on our minds this summer, it’s a good time to analyze a break-even point on fuel sales. Profit-per-gallon usually refers to the difference between the sales price and the cost per gallon. In retailing circles this is referred to as mark-up—a concept that has put many retailers out of business, because they refer to mark-up as percentages rather than actual dollars.

In certain circumstances the concept of mark-up has merit, particularly when analyzing the profit on fuel sales. But this only applies to marina operators who take the time to see what their fuel costs with each delivery. Most marinas buy fuel based on market prices set by the distributor, who sets his prices based on what it costs him from the refinery. These prices fluctuate daily, and if you do not stay on top of them, you will not remain competitive.

How can you use mark-up to remain competitive and profitable? If you sell an average of 20,000 gallons of fuel per month at $0.30 per gallon over your cost, your gross profit is $6,000. After adding appropriate operating costs, the profit in actual dollars is acceptable. You have maintained this sales volume at $1.70 per gallon, the same price as your nearest competitor.

You just got a delivery and your cost went up $0.10 per gallon. You notice that your competitor is still selling his fuel for $1.70 per gallon. Now you are faced with a decision, do I raise my price to $1.80 to keep my $0.30 mark-up, or hold my price at $1.70 and make only $0.20?

You have three choices. First, if you raise the price, you could lose market share. Second, you can do nothing and hold your market share, but it will cost you $2,000 in gross profit. Third, you could lower your price below the competition to gain market share to offset the lower mark-up.

SCENARIO 1

Past experience has shown that as long as your pricing is the same as your competition, your market share remains the same. Using this thought process, you know that it will cost you $2,000 in gross profit. Not a pleasant thought, but a real possibility.

SCENARIO 2

If you raise your price by $0.10 per gallon and can still sell more than 13,334 ($4,000/$0.30) gallons, you are better off than keeping your price the same as the competition. There is also an added advantage. If your competitor is typical, he will raise his prices to match yours, getting you back to your existing market share and $6,000 gross profit. Continue »