Additional Fees: Friend or Foe

Advertisement

Some companies charge additional fees for various items such as deliveries of fuel or tank rentals. Other companies don’t charge any fees and they think fees should be included in the price of the fuel or service. I would like to state that I don’t have a strong feeling either way.  Business owners need to do what they feel is right for their business. It’s difficult to track how fees affect a particular business regarding customer perception and growth, however the financial results can be much easier to track.

From work we have done for companies who charge fees, I can see the financial impact. I recently performed a business valuation for a company, and I questioned the uptick in operating income (EBITDA) the last year.  When we did the research, we found out that it was related to the implementation of a $6.00 delivery fee.  I questioned the owner and he said that he consulted with his marketing company, trained his staff, notified his customers in advance, and began charging the fee.  He has 5,500 customers and they average 2.5 deliveries.  That’s 13,750 deliveries times $6 equals $82,500 to the bottom line, every year.  When he implemented the program, he had ten complaints, of which he was able to resolve eight and he lost two customers.  The value of his business has increased over $500,000.  No one wants to lose a customer, however two losses and a pickup of half a million dollars in value seems like a good business decision.

The area where I see the most impact is in fees for propane tanks. At my previous home, I only used propane for a cooktop.  I don’t think I used 20 gallons a year.  I did not know how my propane company could make money selling 20 gallons a year–that is until I received my first bill. There was a $75 annual tank rental fee and the margin on my fuel was $6.00 over cost.  That’s still only $195 a year gross profit and they put in a $600 tank with another $200 in labor to install it. Then I noticed two delivery fee charges, one for around $6.00 and one around $11.00. I called the office and they explained it as the cost to bring the propane to their facility and the cost to bring the propane to my house. I did not disclose that I had done work with many propane companies, I just wanted to see how they answered the question.

So that’s still only $212 a year profit before delivery costs. Delivery was once a year so if I deduct $70 for the delivery cost and a proportion of SG&A expense, my propane supplier was making around $142 per year on their $800 investment, or 17% return on investment.  Not a great return, but certainly not a loss.

I have learned that some companies do not charge tank rental fees, nor do they charge delivery fees.  The feeling is that these “hidden fees” are misleading to customers, and they do not want to run their businesses with hidden fees. I certainly would have preferred that as a customer had I known that might be available to me. So, in the same scenario, the profit on my account would have been the 20 gallons at a $6.00 margin or $120 less the $70 cost or $50 net. That equates to a 6% return on investment.  Hardly worth taking on a customer for that return, although I was thinking of adding a log set, generator, water heater and possibly a pool heater. I ended up moving.

Advertisement

With the cost of steel at record levels, I encourage companies to explore fees for customers. It’s also a way to keep your price per gallon lower. Many customers know the cost per gallon, but do they know the cost of the fees?  If you decide to implement a program, I recommend using a professional marketing company to roll out the program.  The money you will spend having an experienced professional work with you is a small investment.—Steven Abbate

Steven Abbate is managing director of Cetane Associates (www.cetane.net), whose services include managing mergers and acquisitions for fuel oil and propane companies.

Advertisement

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button