Wouldn’t it be nice to pay $1.50 per gallon of gas when prices at the pump are $1.99 and up? Or how about having price protection on fuel for your company’s fleet of delivery or service vehicles – or offering it to employees? That’s the premise behind Pricelock, a growth-stage company looking to couple technology and price-protection hedging strategy to bring predictability to fuel prices for businesses and consumers.
“We looked at what had been done for Southwest Airlines and thought, ‘Why can’t we bring that concept to a whole new class of customers?’” explains Founder and CEO Bob Fell, referring to the huge cost advantage the airline reaped by locking in a fuel price of $51 a barrel before the going price hit $126.62. “It’s a simple statement, but not easy to implement.”
To make it happen, Pricelock needed to develop and patent technology covering all aspects of collecting and analyzing customer fuel requirements, risk management and delivering price protection through fuel cards issued for use at gas pumps. But that was just one piece of the puzzle, notes Fell. “We came up with the algorithms and methodologies, but we needed someone who could take on the risk,” he says. “Hedging demands both complex capabilities, strong balance sheet and exceptional experience. And we needed smart enough traders to be able to [hedge that risk by] trading against the indices.”
Enter Goldman Sachs. The company became a stakeholder when it provided both capital and an exclusive hedging framework to Pricelock in 2007, and it also acts as a partner by providing fuel price hedging to Pricelock clients. Venture capital firm Artiman Ventures stepped in to provide technology counsel and growth capital, and the company lured former Honeywell CEO Michael Bonsignore to serve as its founding chairman. Rounding out the roster, Naveen Agarwal, former president of E*TRADE Capital Management, joined the fold as chief operating officer in February 2009.
“This is a really original idea and you don’t get a chance to be involved in one of those very often,” says Bonsignore of the venture. “The thing that really resonated with me was that we have real potential here if we just do a few things right.”
Launched in 2006, Pricelock hit a home run virtually right out of the gate when it won a contract from Chrysler LLC to create the car maker’s “Let’s Refuel America” program, which let customers who bought Chryslers in May, June and July of 2008 lock in gasoline prices for three years. Buyers who signed on received a fuel card, similar to a credit card, that could be used to buy gas at $2.99 a gallon at any of 165,000 participating Pricelock gas stations in the U.S. (If prices fell below $2.99, buyers would simply forgo using the card and pay the lower going rate.) With gas at $4-plus per gallon at the time, the program proved popular, signing on 17,000 car buyers during the 87 days it was available.
Pricelock handles all operational aspects of the fuel card program, from providing the technology behind the program to offering customer service to participants. Chrysler contracted separately with Pricelock partner Goldman Sachs for a hedge that would protect them in the event of a much higher- than-anticipated price at the pump. Without that optional hedge, the car maker would have been on the hook for the entire price difference on a projected 50 million gallons of gas – an unpleasant prospect if gas prices had soared to $5. In hindsight, the hedge looks a lot less necessary at gas prices of less than $2 a gallon, but all three parties still came out of the deal happy, says Bonsignore.
“Chrysler wanted to increase dealer traffic – the program came out of an incentive budget they have for that – and traffic went up by 23 percent,” he explains. “It’s worked out very well all around. It was the longest running incentive program in Chrysler’s history.”
The auto industry isn’t the only market where Pricelock is making inroads. The company has also developed and executed price protection programs for employee recruitment and retention purposes and as a guard against budget-busting unforeseen price hikes. Aegis Communications, an international call center firm, offers a Pricelock program as an employee benefit that gives employees a 60-cent discount on the posted price of gas at virtually any filling station. And the company is currently designing a program to protect a building materials supply company from fuel price spikes that would affect the cost of operating its 4,000-vehicle delivery fleet.
“Aegis discovered that as fuel prices went up, their attrition skyrocketed because employees can’t afford to drive long distances to work when they’re making $10 an hour,” explains Bonsignore. “So they applied rehire-and-retrain dollars to this incentive to keep people from leaving in the first place.”
For ground transportation-dependent industries, price protection eliminates the headache of planning around a highly volatile commodity. “Right now, the CFOs of these companies are putting P&L budgets for the coming year together around a big variable cost they have no control over,” says Fell. “If gas is a significant part of your cost structure and you know you can live with $1.99 a gallon and be profitable, the ability to lock in that price is worth a lot.”
Founded when soaring gas prices were the talk of the country, Pricelock is operating in a very different environment today. Whether the concept will retain its appeal remains to be seen. “It will be interesting to see what happens in a declining price environment,” concedes Bonsignore. “But the point we’ve made for our customers is the idea of price protection in a volatile commodity environment. The actual price at any given point in time doesn’t really matter – it’s about not having to wonder, ‘What will my fuel bill be next year?’ ”