Article

Measure the right things

Metrics is a term used in academic and corporate business environments to define measurements that gauge quantifiable components of a company’s performance.

Retail propane distribution companies can use a variety of metrics. Some are highly valuable tools that measure progress. Other metrics are less valuable, and some are completely misleading barometers of performance.

Let’s examine what retail propane marketers should measure to evaluate our individual company’s performance. First, let’s eliminate common measurements used in the general business world that do not work for our industry.

Poor metrics
• Revenues – Because our pricing is a function of a volatile energy commodity, the revenue line becomes irrelevant. The past year is a great case in point. In 2009, many in the industry had one of their best years in terms of profitability, yet most had declining revenues year-over-year due to the huge drop in wholesale propane prices. (Few business writers get this one right.)

• Total gallons – This is one of the most common, yet least relevant, measurements in retail propane despite us knowing that all gallons are not of the same value. For example, a new tank leased to a residential customer will generate few incremental gallons, yet it will produce some of the highest return on capital. Conversely, gaining a large wholesale account can quickly add significant gallons, but will contribute little in the way of gross profits.

• Net income – Certainly more net income is better than less net income. However, measures of net income can easily be misleading. A growing business that has been adding new steel and increasing fleet size as a result will have much higher depreciation than an older company that sees little growth. Since higher depreciation decreases net income, it creates an illusion that a company that is not growing is worth more than one that has solid growth (all other things being equal). Also, companies with higher debt will report lower net income (because interest costs reduce net income), yet the overall pure performances of the two enterprises may be equal.

Good metrics
• EBITDA (earnings before interest, income taxes, depreciation and amortization) – This is the very best metric because it measures performance by netting gross margin and hard operating expenses. This is the most pure form of evaluation of your company’s performance because it takes away the influences of depreciation, debt levels and tax rates.

• Gross margin – This is clearly the number one driver of retail business performance. It should be measured by segment, preferably on a weekly basis. Watch this closely and your business’ performance will improve.

• Gallons by segment – It is very meaningful to track gallons by each customer type. Matching gallons with gross margin by segment should be your top metric.

Other good metrics
• Operating expenses – This metric is important, but needs little attention in this column because the propane industry watches expenses closely. If other metrics were watched as closely, most businesses would see significant improvement.

• Customer-owned tanks – Since the value of a customer with a leased residential tank is five to 10 times greater than the value of a residential customer who owns his own tank, this measurement is most critical. Oddly, many in the industry do not track this statistic.

• Customer counts – New customers less customers lost = net new customers. It’s common that companies keep track of their new tank sets or new customers added. I find it a bit curious that some companies have little interest in tracking tank pickups or customers lost. It only makes sense that retail propane businesses will gain new customers and also lose customers (for whatever reason). Net new customers should be another important value to track.

What gets watched gets done
When you clearly communicate which performance metrics are important to your company, your employees will see that those metrics are reached. Give it a try.