Paving contractor uses rising oil prices to their advantage
The paving business is a traditionally low margin, seasonal business. As an added bonus, the business is also susceptible to rising oil prices as a primary ingredient in asphalt is oil. It’s a construction-related business so work is bid and you must hold your pricing, even if oil prices double.
Critical move number one was looking into the crystal ball and predicting rising oil prices at the beginning of the paving season. Critical move number two was knowing that his business was a key customer for the asphalt material supplier. The paving CEO adeptly negotiated a year-long blanket purchase at a fixed price. As the price of material rose for all his competitors, the paving CEO had a huge price advantage.
His next key decision was to keep the “purchasing profit” vs. pass it on to customers. After a long discussion with his business advisor, he decided that little new business could be gained by offering industry-low pricing. He also decided that current customers would remain loyal without a price decrease and that new customers might switch away once the purchasing discount ended.
The end result was over double the average profit in a difficult industry environment. In fact, it was a record year for the paving company. As he watched some of his competitors go out of business, he raked in record profits.
This is not all the story, the CEO made several business model changes that were even more significant than the purchasing coup.
Read more about these business model changes