What Is the Logic Behind this Pricing Strategy?

May 16, 2007 9:21 AM

What is the strategy behind gas station pricing? Frequently I'll see two gas stations across the street from one another. Basic sales logic would tell you that the two stations need to be price competitive with one another to earn business, since both are equally accessible to customers. Yet often I'll notice that one station's per gallon price is a good $.10 higher than the across the street competitor. Is there a strategy to this than I'm missing? Or just illogical greed?
posted by The Gooch to work & money (30 comments total)

Gas station owners don't set their prices.
posted by dendrite at 9:32 AM on May 16, 2007

Blue-sky guess here, but on many streets it's a pain to turn around or otherwise get to the other side of the street. Maybe the higher price is on the more-traveled or more-accessible side?

Also, depending on the wholesale price of the gas, it may make sense to charge a higher price and have fewer customers. If Cheapside Gas sells a thousand gallons and makes a dime per gallon, while Dearside Gas sells five hundred gallons but makes twenty cents per gallon, then they're competitive to each other, even if the price would indicate otherwise.
posted by L. Fitzgerald Sjoberg at 9:35 AM on May 16, 2007

L. Fitzgerald Sjoberg beat me to it on the traffic patterns front.
posted by cashman at 9:37 AM on May 16, 2007

Blue-sky guess here, but on many streets it's a pain to turn around or otherwise get to the other side of the street. Maybe the higher price is on the more-traveled or more-accessible side?

Apparently (not joking), this is actually the reason there are so many Starbucks.
posted by drezdn at 9:41 AM on May 16, 2007

Margins for gas stations. "After factoring in expenses, most retailers make, at best, a few cents per gallon in pretax profit." Not very good, and they get worse as prices rise, because more people use credit cards and that takes a chunk out.

There are people who will always shop at one gas station, because they have that credit card, or a brand preference, or because it's more convenient, and sometimes it makes sense to "gouge" them.
posted by smackfu at 9:45 AM on May 16, 2007

"Or just illogical greed? "

Its pretty logical for gas stations. Some gas stations sell on brand like BP. Others sell on price like Marathon. Think Coke vs RC Cola. A lot of people feel they get quality gas from the bigger name brands, so they pay a little more. Others just want the cheapest price so they'll find a Marathon or a Citgo or whoever. Usually the cheaper places have less desireable locations like a little farther from the expressway exit.

Its illogical to think that people purely function on price. Most people function on habit and brand.

Lastly, have you investigated the real prices at these gas stations? The new trend is to mislead people into thinking gas is 10 cents or so cheaper, but when they pull up to the pump, that's only if you pay for a 4-7 dollar car wash.
posted by damn dirty ape at 9:50 AM on May 16, 2007

Each time a gas station gets a refill from the tanker truck they may pay a different price. The station then adjusts the price accordingly. If one station happens to need a fillup first when the price is changing then there will be a price differential.
posted by JJ86 at 9:59 AM on May 16, 2007 [1 favorite]

Each time a gas station gets a refill from the tanker truck they may pay a different price. The station then adjusts the price accordingly. If one station happens to need a fillup first when the price is changing then there will be a price differential.

That's exceedingly difficult to believe.
posted by Kwantsar at 10:01 AM on May 16, 2007

As dendrite said: gas stations don't set prices. They are set by the big companies by region. The station owner/manager doesn't have a voice in price setting. The big corp needs more bucks so they scalp us. Nothing to stop them.

Maybe they will become like Verizon. Verizon tries to charge $2 a month even if you do not use the phone. I guess the gas companies will charge extra if our tank is empty. heheh
posted by JayRwv at 10:03 AM on May 16, 2007

I don't know if this is the case everywhere, but in Portland, the gas stations that are 10 cents cheaper are usually places where you have to go inside to pay, regardless of your form of payment.

That's a total dealbreaker for a lot of people, especially those of us who are unwilling to a) leave an infant in the car or b) unstrap that infant, take him inside, wait in line for assholes to pay for their pounders of Schlitz with a credit card, continue waiting for the tank to fill in order to get the total, pay, and strap the kid back into the carseat.

10 cents a gallon extra to avoid the hassle is totally worth it.
posted by peep at 10:06 AM on May 16, 2007 [1 favorite]

Here's the explanation. While traffic patterns do play a role, branded stations sign contracts to buy gasoline exclusively from that station (an Exxon station must by from Exxon). Because they are locked into this contract (they usually sign long-term deals with "jumpers", jumpers are the middlemen between the refinery and the station, and there are a small quantity of jumpers for each refinery regionally), branded gas stations are kind of held by the balls to whatever their particular brand is charging for (and depending on the deal they have with the jumper).

Independent gas stations (i.e, local kwik mart) can buy gasoline from whomever they want, and that's why they often have the best prices. Independent gas stations that got smart pooled together to negotiate better deals (RaceTrac). 7-11 is also doing this now, since they stopped getting gas from Chavez.

In any case, gas stations only make a couple cents, as noted. Their just trying to get you into their store, where they make huge margins.

There was a recent article in California where some gas station owner was upset and though Shell was charging too high, so he decided to stick it to Shell and raise prices a whole dollar above what he paid.
posted by unexpected at 10:09 AM on May 16, 2007

An article about gas station pricing.
posted by camcgee at 10:09 AM on May 16, 2007

On lack of preview: the linked article explains the situation that unexpected described at the end of his response.
posted by camcgee at 10:10 AM on May 16, 2007

Most (if not all) chain retailers don't set their own prices. They are controlled by the sales office, which can be 1000s of kilometers away (in Canada, that means Toronto, Calgary or Montreal). The only places that control their own prices, from what I understand from talking to oil company marketers, are independents. Independents may charge based on the price of the last tanker load, but that's certainly not true of the larger chains.

Prices can and do change multiple times a day depending on traffic and demand. Prices often rise during morning rush hour, fall back at about 10 am, bump up at lunch, fall back in midafternoon, then rise again fro the evening rush hour. My brother's workplace has "coffee-break rushes" to gas up on bad days. During a price war, however all bets are off.
posted by bonehead at 10:11 AM on May 16, 2007

At least in Canada there can be real differences in the fill up "experience". I'll gladly pay $0.03 a litre more at the Shell station if the cheaper choice is a PetroCanada. The PC pumps are very, very slow. Other times certain stations will have cleaner or better bathrooms.

Also in the winter I pretty well use Mohawk and Husky exclusively for my carbed truck because they add ethanol to their gas which acts as a gas line antifreeze.
posted by Mitheral at 10:17 AM on May 16, 2007

There were two stations duking it out in Seattle that always cracked me up. One offered a 5 cent per gallon discount for cash. So their sign said "WE DISCOUNT FOR CASH."

And the other guy turned it around, and his sign said "WE DO NOT CHARGE EXTRA FOR CREDIT."
posted by GaelFC at 10:34 AM on May 16, 2007

Another possible reason that this is okay is that a lot of people have gas cards and only buy that kind of gas. My mom has few brand loyalties other than Chevron gas, because she has a Chevron card. I've literally never seen her buy gas at any other station. Similarly, I've never seen my dad buy anywhere but Shell. When I was a little kid I thought Chevron was for girls and Shell was for boys and wondered what all the other things that looked like gas stations actually were.
posted by crinklebat at 11:20 AM on May 16, 2007 [3 favorites]

The new trend is to mislead people into thinking gas is 10 cents or so cheaper, but when they pull up to the pump, that's only if you pay for a 4-7 dollar car wash.

I'm pretty sure the price on the sign is required to be the actual price, without requiring you to purchase anything in addition.
posted by oaf at 11:57 AM on May 16, 2007

In the UK, the standard explanation is that the expensive places are usually more dependent on corporate account customers than passing trade.
posted by Idcoytco at 12:25 PM on May 16, 2007

I'm pretty sure the price on the sign is required to be the actual price, without requiring you to purchase anything in addition.

I'm pretty sure you've never been to Chicago.

Oh, it says "w/ carwash" in teeny tiny letters.
posted by damn dirty ape at 12:32 PM on May 16, 2007

I'm pretty sure you've never been to Chicago.

At least one of us is wrong. If both of us are wrong, Illinois needs some consumer protection laws.
posted by oaf at 12:34 PM on May 16, 2007

Independent chains - in St. Louis, there's "jump stop" and "CFM", among others - do set the prices individually. A friend of mine who worked at many different gas stations had to, as a manager of one, go out every morning and check the prices at certain other stations, and price his gas accordingly.
posted by notsnot at 12:40 PM on May 16, 2007

oaf:

He's not kidding about the "with car wash" thing.

Signs typically read something like:

Regular: $PRICE1
Silver: $PRICE2
Premium: $PRICE3

At places without a carwash, that's the same here too, but places with one...

Regular (w/ carwash): $PRICE1 - .10
Regular: $PRICE1
Premium: $PRICE3
posted by sparkletone at 1:18 PM on May 16, 2007

I'm kind of curious about the switching prices more than once during the day. I was under the impression (at least in Wisconsin), that legally, gas stations can only change their price once a day. I couldn't find any evidence to back that up though.
posted by drezdn at 1:45 PM on May 16, 2007

Illinois needs some consumer protection laws

Of course they do, but retailers are constantly looking for loopholes.

Each time a gas station gets a refill from the tanker truck they may pay a different price. The station then adjusts the price accordingly. If one station happens to need a fillup first when the price is changing then there will be a price differential.

That's exceedingly difficult to believe.

No, it's true. The retailer buys from the supplier, whose price is set by the refinery. The refinery changes its prices based primarily on the price it paid for oil, which is variable depending on where it came from and when it is bought. (At the refiner level there are ways to reduce the cost of variability including arbitrage and futures contracts.) The refiner may also be altering its formula to conform with emissions rules, e.g. it just became time for "summer blend" and so forth. So every time the tanker truck pulls up, it's a different price.

Coincidentally I was just reading an article about a full-service gas station in my paper today, and here's what it said:

But they're not paying more today. [Normally he charges about 25 cents more per gallon.] Davis' customers this morning paid the same price--$3.19--for a gallon of regular unleaded as others did to pump their own across the street....

Davis goes through less fuel, so his customers today still were paying last week's prices, he said. They'll see a big jump after this weekend's delivery.

Gas station owners don't set their prices.

There's some truth here in that they have to pay the wholesale price of the gas and then add to it, and if they are a franchise they have some requirements in there as well. But they have some reasonable freedom to alter their price, even if it's only a few cents a gallon. Obviously, an independent gas station coupled to a service station has the most freedom. A national brand franchisee is in a different situation, and a convenience store using gas as basically a loss leader is in another entirely.
posted by dhartung at 2:57 PM on May 16, 2007

"Each time a gas station gets a refill from the tanker truck they may pay a different price. The station then adjusts the price accordingly. If one station happens to need a fillup first when the price is changing then there will be a price differential.

That's exceedingly difficult to believe."

It's true for a lot of stations, at least here in Michigan. While I realize that this sounds like a hairdresser story, my girlfriend's former coworker used to run a gas station as a second job, and that's what happened all the time. It also supported the "there's no difference in gas" theory.
posted by klangklangston at 2:58 PM on May 16, 2007

The town where I grew up has two gas stations, right on Main Street, both next to each other. One charges $0.10 more a gallon than the other -- because that guy will fill it for you, and at the cheaper one (like everywhere else in the state) you have to pump your own. Everyone in town knows that (along with the owners' kids' grades, practically), but if you were just driving through, you'd see the two different prices and wonder why.
posted by booksandlibretti at 4:34 PM on May 16, 2007

My SO is a fuel broker. JJ86's explanation is the truth. A price per gallon is set by the refinery. Transportation charges are then added based on the distance the fuel must be transported from the refinery. So, while he may be able to get fuel at a cheaper price from a certain refinery, he may order it from a refinery closer by to avoid having to add as much freight charge.

If a gas station owner buys a tanker full (8500 gallons) of fuel at say, $2.50 a gallon, he is taking a chance that it may go up or down the next day. His $2.50 a gallon gas may only be worth $2.25 or it may be worth $2.75 the next day. Sometimes they guess wrong and have to either eat the difference or try to last it out and sell it if they can at their cost.

By-the-way, I promise there aren't any brokers or gas station owners getting rich in this thing. In fact, many, many gas station owners sell gas at their cost just to get you to come in a buy a coke or snacks. The broker makes a set margin per gallon so we actually eat better around here when the price is lower and people are driving their gas guzzlers than when the price is higher and everyone is riding their bikes to work.

p.s. I'd go get gas tonight if you can...it's going up tomorrow.
posted by rcavett at 7:53 PM on May 16, 2007

JJ86's comment, supported by klangklangston, rcavett, and dhartung, makes absolutely no sense to me.

If the price of oil (and the price of wholesale gasoline) doubled overnight, there's no effing way that station owners would charge their in-tank cost, rather than replacement cost.
posted by Kwantsar at 8:02 PM on May 16, 2007

I previewed when I meant to post. My point is that a strategy of charging the sunk cost, rather than the replacement cost, is easily dominated.
posted by Kwantsar at 8:05 PM on May 16, 2007