Operations

Business Owners Grappling with Soaring Gas Prices

Posted on May 7, 2008 by LCT Staff - Also by this author - About the author

WASHINGTON, D.C. — Anyone who has stared in shock at their gas-station credit-card receipt knows oil prices are headed up. Any threat to refinery output, no matter where in the world, is enough to make prices shoot even higher. This week, attacks by rebels in Nigeria and fears of a refinery strike in Scotland – not to mention increased demand from China pre-Olympics – sent oil to a record price of almost $120 a barrel.

The price surge may be great news for companies such Exxon Mobil and Chevron, which both report their first-quarter results next week. But it's been terrible for companies that use vast amounts of fuel. Airlines, in particular, have seen their expenses soar as their stock prices plunge. This week, Delta Air Lines and Northwest Airlines, which are preparing for a merger, announced a combined $10.5 billion in losses, blaming record-high fuel costs.

Small businesses may measure their losses in thousands rather than billions, but the toll can be just as dreadful. Right now, business owners across the country are wondering how to pass the cost along to customers without driving away those customers.

"It's a big issue for us," says Richard Kane, CEO of International Limousine Service in Washington, D.C., and president of the National Limousine Association. He's been on the front lines of high gas prices: His company runs 120 vehicles and goes through 1,000 gallons of gas each day. Although many small-business owners are reluctant to raise prices for fear of sending customers to a competitor, Kane warns that this is not a temporary crisis that can be ridden out. "We as an industry have to pass the cost along to the customer," he says. With regular unleaded gasoline up 26% from a year ago and diesel prices up 40%, there is simply no way to keep eating those costs.

The key, says Kane, is to be upfront and clear about how and why prices are being raised. Rather than jacking up rates across the board, he suggests adding a fuel cost surcharge. "It shows that all we're trying to do is recoup the difference in pricing," he says. Companies need to calculate what percentage fuel makes up of total costs, then structure the surcharge accordingly. Creating a separate charge makes clear that the money is being used to cover this specific expense, rather than high fuel prices making a convenient cover for an owner to make more profit.

"You have to have an open conversation with your clients, and a clear agreement," says Kane. "People in general have been very understanding. They get it, because they're paying the same high prices when they fill up their cars." For his business, Kane ties the fuel surcharge to the Department of Energy's weekly report of gas prices across the country, which is announced every Monday. Because the surcharge is tied to a specific, objective price report, Kane can also assure customers that the rate will go down should gas prices ease.

The limousine business, like almost every small business, is on some level a people business: Clients hire a car, they chat with the driver, and if they have a good experience they'll stay loyal. Customers might not be thrilled to see a new surcharge on their invoices, but if it's explained clearly and openly, they'll understand.

No business can absorb double-digit price increases for one of their supplies. Painful as it might be to tell customers you're adding a surcharge, it would be even more painful not to.

Source: TheStreet.com

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