Bulk LPG Business in Portugal
Portugal has the largest LPG (Liquefied Petroleum Gas) share of primary
energy demand in the EU (about 5%).
The bulk LPG market in Portugal is mainly about small and medium
business clients and household consumers, in the regions where natural
gas is not available.
Financials - Average unit margin Financials - Net capital employed
98 99 00 01 02 03
Causal Loop Diagram
Fraction of new clients choosing LPG
per year
Average prices
mm LPG price
m= Substitute price
98 99 00 O01 02 03
Financials - NOPLAT and EVA Financials - ROCE and WACC
m= Roce
mm Wacc
== Noplat
mm Eva
Excluding cooking and special appliances, the alternative energy with the
most competitive price is heating diesel. This substitute energy has had a
very low price, with small variations, because it has been subsidized by
government.
Due to the increasing of LPG international cost in the last 4 years, the
distance between LPG bulk price and price of substitute energy has raised
to expressive values.
Because of the high price sensitivity of the consumers, the preference of
new consumers for equipment using substitute energy has been
increasing.
Clients lost and won per year
== Actual clients won
mm Actual clients lost
As we can see in the graphic above, existing LPG consumers have
switched as well to substitute energy.
The main driver for the consumer preference is the relative price between
bulk LPG and substitute energy. Due to LPG greater quality, consumers
are willing to pay a premium against substitute energy price. Then, until
certain price gap, consumers prefer LPG instead substitute energy.
Resource stock - Fraction of agents promoting and recommending LPG
equipment. Agents alter the equipment recommendation when they percept
some change in clients preference.
%
100
» 80
To select the source of energy, some consumers estimate and compare the
total costs (equipment, energy price, energy consumption and
maintenance) while others follow agents (equipment _ sellers)
recommendation.
Agents prefer to sell the kind of equipment that will meet consumer
requirements. So, agents are attentive to consumer options and opinions
in order to change their own perceptions and recommendations about the
most advantageous source of energy.
To minimize the market effect of high LPG cost, the margin was reduced.
As we can see in the following graphics such policy has deteriorated the
financial performance.
Market Dynamics, Pricing Strategies and Value Creation
Some strategic questions about pricing arise from recent evolution in bulk
LPG market.
Pricing strategies have to take into consideration some market dynamic
effects. Such effects are derived from consumer behaviour regarding his
willingness to switch to substitute energy and from the interest of
equipment sellers to promote LPG.
What are the best pricing strategies in terms of value creation, considering
different scenarios for the future evolution of LPG international cost. For
example, in a scenario of cyclic variation, fix price strategy would
deteriorate financial results, otherwise a fix margin would cause client
resource depletion.
Simulation Model
A simple system dynamics model was built, combined with Economic
Value Added framework, to evaluate some pricing strategies under
different scenarios of LPG international cost.
That model provide that policymakers visualize the impacts over time of
certain strategies, and with that they have a dynamical understanding of
the pricing policies that create more value for the organization.
To build this simulation model, we have used historical data (1998-2003) of
LPG business.
The LPG international cost is an exogenous variable, and is used to define
the different future scenarios.
To keep the model as simple as possible, we use relative variables and
non-linear graphical functions to describe the pricing effect in consumer
behaviour.
In the case of LPG consumers changing to substitute energy, the switching
rate is dependent upon the relative price between LPG and its substitute
energy. That function was calibrated against historical data, assuming one
year delay between consumer perception and action.
The acquisition rate of new consumers is also dependent upon the relative
price, and that function was calibrated against historical data as well.
It is assumed that agents influence the option in about 60% of new
consumers. The medium time to adjust agents perception about LPG
competitiveness and consumer preference is two years.
Le x)
Standaid Graph |
Non-linear graphical function ~~ i er =e
used for describing new a7 '
consumer behaviour. For a b
given price ratio, the function
gives the fraction of new
consumers preferring uray fF 7 15
. . p Points Kins Vass
substitute fuel instead LPG. Ports _ins | iz step iz es
fr Det {|| fo fax fo fiz
Financials
objectives
Financial
Financials - Gap
results
+ B1
+ Agents
recommendig
LPG equipment
Pricing ___————>
an Price
Clients won
Clients
switching to Unit cost
substitute Agents perception
about fraction of
LPG cost
clients prefering
LPG
NN
Clients
Susbtitute clients
: Susbtitute clients won Substitute clients closed Z
ZS
Market
Fraction of clients
switching to substitute
Clients switching to “ 7
; Clients renewin
New consumers substitute LU contract g
Market growth rate
Closing rate
I r '
Relative price
Lod
Clients ending contract
Contract term
Clients won Clients closed ‘
Claas eV)
Fraction of new clients
choosing LPG
Volume
e >, Contract term
oO Unit cost
ws i
Relative price
Susbtitute clients won Time to adjust agents YN
recommendation
Clients switching to ‘@h Substitute AS Price
substitute al} O Contract bonus
Change in agents
recommendation
Fraction of agents
recommending LPG Kt
equipment
2004 International Conference of the
System Dynamics Society
Oxford - England
25-29 July 2004
Historical vs Simulated Data
Resource flows - Clients lost and won per month. Actual vs simulated data.
== Actual clients won
== Actual clients lost
m= Clients won
== Clients lost
Scenario Planning and Strategies
Using that simulation model in cfs ValbhathGdanario planning method, we can
develop and evaluate alternative futures in uncertain environment, and test
alternative strategies as well.
For example, considering a scenario with a cyclical variation of LPG international
cost, we might be interesting in testing two alternative pricing policies: fix price and
fix margin.
Policy 1 — Fix margin. Price is driven by margin.
Policy 2 — Fix price. Margin will vary to absorb LPG cost variations.
Given that scenario for the future international cost, the following graphics show the
simulated impacts for those two pricing policies.
Policy 1- Prices and unit margin Policy 2- Prices and unit margin
mm Price mm Price
mm S price mm S price
m= Margin mm Margin
98990001020304050607080910111213 98990001020304050607080910111213
Policy 1 - Clients lost and won per month Policy 2 - Clients lost and won per month
m= Won m= Won
mm Lost am Lost
98990001020304050607080910 111213 '98990001020304050607080910 111213
Financials
Product cost O
Consumption per
Variable cost client
Volume
Wacc Q
Fix cost
Total cost
Tax rate
Roce
Change of
depreciation
OG
Depreciation rate he
Contract bonus O
Change of capital s
Net capital
Depreciation
Investment
“6 Investment per client
Clients won
©)
Clients renewing
contract
Policy 1- Fraction of new clients choosing LPG Policy 2- Fraction of new clients choosing LPG
98990001 02 030405 06 0708 09 101112 13 989900 0102 030405 0607 0809101112 13
Policy 1 - NOPLAT and EVA Policy 2 - NOPLAT and EVA
== Noplat == Noplat
mm Eva mm Eva
98990001020304050607080910111213 98990001020304050607080910111213
Policy 1 - ROCE and WACC Policy 2 - ROCE and WACC
m= Roce m= Roce
mm Wacc mm Wacc
98990001020304050607080910111213 98990001020304050607080910111213
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