If the price of orange juice went up 50 percent, you might switch to apple. If the price of beef went up 50 percent, you’d probably eat more chicken. Too bad there’s no viable alternative … yet … for the gasoline or diesel fuel needed to keep your trucks on the road.
As you are no-doubt painfully aware, diesel fuel broke the $4 a gallon mark this spring, up more than a dollar from the previous year, according to the U.S. Energy Information Administration. Recourse for small businesses is limited to: conserving as much as possible, absorbing the increase by realizing lower profits or passing along the cost to the customer.
Tag … You’re It
When it comes to fuel costs, Americans are playing a big game of tag ... or, more accurately, hot potato. If suppliers pass their fuel costs on to you, you can either pass them on to customers or be stuck with the hot potato. Maybe you’ve been juggling the potato for a while … and it’s getting hotter and hotter … but you just don’t know how to pass it on. Here’s how to do it as nicely as possible, so you’ll be able to stay in the game without driving customers away.
Make It Temporary
It may not turn out to be temporary, since fuel prices don’t seem to show any sign of decreasing significantly, but introduce a fuel surcharge to customers as a temporary emergency measure. Base it on the current price of fuel. This makes it easier for customers to swallow, but creates more work for you, since the charge will have to be recalculated regularly.
Some businesses have opted for flat-fee surcharges, but unlike surcharges based on fluctuating fuel prices, even if the prices go down, the surcharge remains and the connection to actual fuel costs is unclear in the mind of the customer.
Determine Base Rate
To begin implementing a surcharge, start by figuring out the fuel price-point at which you want the charge to kick in. This is your base rate. Your base rate should be the rate you were paying for fuel at the time you set your current service prices. If you set your current prices in January 2007, the price of fuel that month should be your base rate. I am assuming that when you set current rates, you set them high enough to make a profit. The goal is to recoup some or all of those profits that spiking fuel prices are eating up.
What you will do is this: Take the price of fuel in your area the week you preformed the services you are billing for and subtract your base rate. You can get these figures from the Energy Information Administration, which is part of the U.S. Department of Energy. Average retail price information is collected by the EIA, updated every Monday and can be found here: http://tonto.eia.doe.gov/oog/info/wohdp/diesel_detail_report_ combined.asp.
Two Formulas
According to a recent contributor to the PRO Online Discussion Forum, a good formula for fuel surcharge calculation is to charge a 0.5 percent surcharge for each five cents fuel climbs above your base rate. Take the current fuel price and subtract your base rate from it. Divide the difference by $0.05 and multiply that amount by 0.005. This will provide the percentage to multiply your service rate by in order to determine a fuel surcharge.
For example: If your base rate is $3 per gallon, and the price of fuel is $3.75 per gallon, take the difference of 0.75 and divide by 0.05. Next, multiply by 0.005 and you’ll get 0.075 or 7.5 percent — the amount you will increase your normal rate to implement the fuel surcharge.
Here’s another formula based on miles driven, not service rate. Gather these numbers: the total miles driven for the particular job being billed, say, 100 miles. Your truck’s average miles per gallon, say, 10 mpg. The average price of fuel for the day and the region where you pick up the load (check the EIA or OOIDA Web site), say $3.50 per gallon.
Now do the math:
a) Figure your increased fuel costs per gallon used: Take the average price of fuel for the day and region traveled in and subtract the benchmark fuel price: $3.10 - $1.10 = $2 — the increased cost of fuel per gallon.
b) Figure the number of gallons you used: a 100-mile trip divided by 10 miles per gallon = 10 gallons used.
c) Multiply the total fuel surcharge: 10 gallons used, multiplied by the $2 fuel surcharge per gallon equals your increased fuel costs and the total fuel surcharge you should charge for the trip: $20.
Dear Customer
While small business owners do not need to get government approval or file an application with Department of Transportation to implement a fuel surcharge, it’s good business etiquette to inform customers rather than slip the surcharge onto their next bill and hope they won’t notice.
Send them a polite letter, e-mail or fax explaining the situation. Here is a sample notice:
Dear (Customer Name),
As you are no doubt aware, fuel prices are at all-time high levels. (Portable Restroom Company Name) has resisted raising prices as long as possible, but due to the critical nature of the current situation, we can no longer continue to absorb the increased cost.
Therefore, effective (insert date here), we will be implementing a temporary fuel surcharge. The fuel surcharge will remain separate from our usual charges and be shown as a separate entry on your bill. The surcharge will be based on the price of fuel in our area at the time service was provided.
We appreciate your understanding of the dilemma we face as fuel costs increase. We hope that by sharing this burden we can maintain the high quality service you have come to expect from our company.
Respectfully,
Your Name
Your Company
Come Join Us Online
And don’t just write to your customers. If you’ve had an experience — good or bad — introducing a fuel surcharge to customers or have questions or comments about surcharges, get in touch with other portable restroom operators. The PRO Online Discussion Forum can be found at www.promonthly.com.
