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From June of 2007 to June of 2008 we saw Diesel fuel costs climb from $2.70 per gallon to over $4.70 per gallon. After staying painfully high for almost three months, the cost of Diesel fuel finally started to decline in mid-August and fell below the $3.10 mark last week. For distributors what this means is: "Get ready for another round of fighting over Fuel Surcharges and Fuel Related Price Changes." So in this issue we look at what techniques to defend your Fuel Surcharge.

As we discussed in Issue 159 the most recognized resource for Diesel fuel prices is the Energy Information Administration. Shown below is the current information for On-highway Diesel Prices.  See below for an explanation of the colors we have added.

Two years ago a company decided on a reasonable cost of fuel, and based business costs around that number.  In the image above we're indicating $2.60 (a quite reasonable number two years ago.)  As prices rose and fell they lost some profit (red) you gained some profit (dark green) and in the past it averaged out.  Since March of 2007 however the price never fell back to "normal" levels.  and in November of 2007 the company implemented a Fuel Surcharge (blue vertical), it took time to implement but after four months all the customers were onboard (purple vertical) and the company stopped losing profit to the excessive fuel costs (gray). 

Now that prices have fallen to the level they were at should the company drop the fuel surcharge?  Of course not, the company is still far above the "normal" operating cost, and has not recovered any of the opportunity for profit lost (red) since March 2007.

With Diesel prices expected to swing back to an average of $3.91 per gallon now is no time to lower your defenses and give up on your fuel surcharge. But how can you defend a fuel-surcharge when Diesel costs are down?

Here are three techniques you might consider when defending your Fuel Surcharge:

Pre-emptive Strike: Before your customers start asking for the full fuel surcharge to be removed notify them that due to the recent fall in diesel prices the Fuel Surcharge has been reduced. Assure them that you are monitoring the situation closely to protect their interests. Many of the larger travel companies that implemented fuel surcharges are already doing this, including Carnival Cruises, and several airline companies.

Break out the Fuel Surcharge from your Item Pricing: If you are still "burying" the fuel costs in the price of your products consider breaking out a portion of the price to be billed separately as a Fuel Surcharge. This can be an especially good move if you were caught unprepared when fuel spiked several months ago and had to dramatically raise prices. You now have the opportunity to drop each product price by a small amount and introduce a new Fuel Surcharge structure. By introducing the system now as part of a price reduction you should have fewer objections, and you will benefit by having the system accepted and in place if fuel prices swing back up as predicted.

Link a tiered Surcharge to a third party figure: Many companies instituted an emergency flat rate fuel surcharge or delivery surcharge as a means to stay profitable during the recent fuel spike. If your company was one of these expect your emergency fuel surcharge to come under attack now that prices have fallen below critical levels. Consider implementing a tiered structure linked to the weekly rates shown above.