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The High Cost of Competing on Price in the Propane Industry
Why service, safety & long-term profitability matter more than winning customers on price alone
By Amanda Bohm
The propane industry was built on more than providing fuel. Companies earned customer loyalty by delivering when needed, responding quickly when problems arose and standing behind their service. These days, companies are reverting to an old strategy of competing solely on price.
While large national companies may have the resources to support marginal pricing, many independent propane companies do not. Trying to match those prices often results in sacrificing customer service, equipment upgrades and long-term stability.
How a Price Shopping Market Hurts Service
While lower pricing may benefit consumers now, many companies within the industry are concerned about what will happen to service quality in the long run. As Propane Insider noted in a recent article, “Supply is ample, spot prices are soft and competitors are quick to undercut to protect gallons. On paper, this looks like a win for customers. Operationally, it creates a trap. Price-only competition trains customers to shop every renewal, weakens margin discipline and shifts risk onto delivery, safety and staffing teams that still have to perform at winter standards.”
When price becomes the primary selling point, customer relationships often become transactional rather than built on service and support. It becomes difficult to retain loyalty when customers are making decisions based on price per gallon alone. A customer who switches providers for a lower price today may leave just as quickly when the next lower offer comes along. When that is the case, companies may try to continuously undercut the competitor’s pricing in an attempt to keep the account.
This cycle creates an unrealistic expectation from the customer while hurting all propane providers involved. Those customers who switch providers for a lower price may find that the service is not comparable to that of an independent company whose pricing was a little higher. They will have to decide if the higher quality of service and better response lost was worth more than saving a few cents per gallon.
However, if all companies compete based on low prices, the industry loses, and the customers will lose out on the values of an independent business.
The reality is that equipment, employees, training, insurance, storage and emergency services all cost money. At some point, shrinking margins make it harder to reinvest in the people and equipment needed to provide the level of service customers expect from smaller family-owned businesses.
Why Pricing Is More Than a Race to the Bottom
When companies expand their service areas, it is important to understand that every propane market operates differently. Coming into a new area and automatically setting a race-to-the bottom price strategy to gain customers is detrimental to the industry. As Randy Doyle stated in LP Gas magazine in 2022, “Each geographic propane market is different. Florida, Maine and Illinois, as examples, have different customer demands for propane and service. Competition within and outside the propane industry are different. The consolidating company must market and operate with the flexibility to compete in these different markets rather than fitting them into a one-size-fits-all operating model.”
Propane companies that learn the market and understand their customers will build stronger customer relationships through dependable service than companies focused mainly on lowering prices. When companies base their price per gallon and other prices on the actual cost of providing safe and reliable services, they are in a better position to reinvest in their business.
Price Strategically for Investments & Market Shifts
Running a propane company requires significant investments. Maintaining delivery trucks and storage facilities, carrying the required insurance coverage, meeting compliance requirements, training employees and providing emergency services all come at a cost. Companies operating on extremely thin margins may eventually struggle to reinvest in the very things customers depend on most. Significantly lowering price per gallon to gain a customer from a competitor hurts both customers and the propane market itself.
The risks become even greater when aggressive pricing is paired with long-term, fixed-rate agreements. Propane markets can change quickly because weather, transportation costs and supply disruptions can all impact wholesale pricing. What looks like a profitable strategy today can become a challenge when market conditions shift. Companies that lock in low rates for years at a time may eventually find themselves selling propane at prices that no longer make economic sense.
Historically, the strongest propane companies were not always the cheapest. They were the companies that customers counted on to keep their tanks full, to answer the phone, and provide reliable and timely service.
As competition becomes increasingly focused on price, it is important not to lose sight of the value propane companies provide beyond the gallon itself. Safety, reliability and quality service are all factors in providing the exceptional service customers expect. Price will always matter to customers; however, success ultimately depends on balancing pricing with dependable service that customers will remain loyal to. We have to ask ourselves at what point does chasing gallon volume become more expensive than losing the account? How much profit has the propane industry sacrificed when competing for the lowest price? Is it worth sacrificing profit just to gain gallon volume?
The biggest threat to the propane industry may not be electrification, regulation or rising costs; it may be the industry’s willingness to compete away its own profitability.
Image courtesy of Sunrise Propane
