The Numbers Are Not Pretty
“I’ve never been much of a fighter, apologies for what you’re about to see” ~ Ser Davos, Game of Thrones
What is the normal price of oil?
When looking at this chart, it is evident that, just like the weather, there is no normal. We can talk about average and mean, but things are only average on rare occasions. We can also look at minimums, maximums, and percentiles and the corresponding booms and busts.
If you know your fixed and variable costs in producing a barrel of oil, you can determine what price you need to make a profit and thus be viable longer-term.
If that number comes out to say $65 per barrel, you can then look at the historical results and see what percentage of time oil has been above that figure. If the future is like the past, that proportion of time is when you will be making money. The remaining time you will be losing money. It is best to have a margin of safety.
It all boils down to one thing. The lower your total costs the more likely you are to be profitable more often.
As a producer, you can trim costs internally or encourage service companies and other suppliers to drive their prices lower.
What Can Service Companies Do?
In the race to lower costs, you have two choices as a service company:
- Compete as a commodity on price
- Compete on value and price at a premium
If you choose to compete on price, you are subject to the same market forces as any commodity, which are supply, demand, and speculation. You can then use a similar analysis as above to determine when you will be profitable and when you will likely be breaking even or even losing money. Your ability to manage costs and the going market rates determines your profit.
Competing on value requires three aspects to be in balance:
- Products and Services: The value you deliver to customers
- Marketing and Sales: The value you communicate to your target market and customers
- Brand: The value your target market perceives you deliver
If these three aspects of value are not in balance, you will end up competing on price or lose market share (or both).
The Foundation – Improving Delivered Value
If you are not working on increasing the value you provide to your customers, you can bet some of your competitors are. The companies that can deliver the best quality and experience consistently tend to outperform their competitors significantly both in revenue and profitability.
Each business is different, but the common elements are:
- Good, well-trained people
- Systems and processes to ensure quality and consistency
- A strong culture in alignment with strategy
- A focus on employees, customers, and creating value
Not every company can innovate on products, but most can innovate on delivery. Innovation can be game changing or incremental. Small changes are usually less risky and can compound for significant impact.
The Word on the Street – Perceived Value
There are several ways your target market can hear about your ability to deliver value:
- Your marketing
- Your customers and suppliers
- Your people
- Your competitors
- Rumour, speculation, and guessing
If you can’t deliver quality consistently, eventually the market will hear about it, and you value will be depressed or non-existent. Restaurants go under quickly when customers start getting disgruntled because of poor quality and service.
The market can also form an inaccurate and detrimental picture of your brand for a variety of reasons. You need to manage your brand actively.
Marketing and Sales – Communicating Value
In the past, many companies got away with very little marketing sophistication. During a hot market, sales are relatively easy, and salespeople become order-takers and relationship builders.
In a down market, activity and sales are low, so why bother chasing them in a tight market? You fall back on the excuse that no one is buying, you trim costs, and you wait it out.
You are ignoring two risks:
- You brand reputation
- The wait may be long
Companies that merely follow the market tend to lag the market and their competitors. In a hot market, you do well but not as well as your competitors. Your competitors know the secret of building in a down market. That primes them to jump on a rising market much faster and grow with fewer issues.
In any market, you should be investing some marketing dollars to maintaining your brand with existing clients and your overall target market. You are priming the pump for when the market rebounds as well as ensuring your competitors don’t poach your customers.
If you are thinking strategically, you will also invest some marketing budget to position your company as a trusted alternative if any of your competitors stumble. Most companies keep a short A-List of suppliers and a few B-Listers. The buy from the A-List first and only use the B-List if required. They never get to the C-List, but they may use them to force prices down.
If you have the option of entering a new market, either geographically or in another vertical, you will need to commit funds to marketing. The industry baseline is you should budget at least 10% of your target revenue for acquiring customers. This budget is a mix of marketing, PR, and sales. In a tight or highly competitive market, that percentage could increase significantly.
Hope and Help
If you want to sell your products and services at a premium based on value instead of cost, you need to keep working on the three aspects of value:
- Brand perception
In a down market, you have more time to tackle this, but you may have lost your in-house expertise or it may be something new. Outsourcing and working with specialists could get you up and running at a fraction of the cost of building out a full-time internal team. Plus, you get a deeper set of skills.
The bold create the future instead of waiting for it to happen.
Originally published in the May edition of the Oilfield Pulse