Market Dynamics

Retail gasoline is ‘sold on margin.’ What does that mean?

Really, it’s simple. A retailer buys its supply of gasoline at a certain price and then adds an amount in cents per litre — its ‘margin’– to set its sales price to consumers.

The mark-up tends to be the same regardless of the wholesale price. It stays relatively constant over time, but varies from place to place.

Many other goods sold at retail are priced based on a percentage mark-up, rather than ‘on margin.’ The retailer determines the price to charge by adding a certain percentage to the wholesale price paid. This mark-up must be large enough to cover costs and leave an acceptable profit.

The margin on gasoline seldom covers all the costs of the service station. Most stations offer a range of other goods and services to supplement margins on gasoline. Sometimes the volume of these non-gasoline sales is relatively small but the higher spread between product cost and selling price for these other goods make an important contribution to a retailer’s revenue.

Over the years, the importance of these “ancillary” businesses has grown. Many retail sites occuply prime real estate and this encourages efforts to obtain the maximum revenue possible to cover associated costs. Gasoline may be sold relatively cheaply, at low margins, to attract motorists in the hope they will also buy goods and services with higher mark-ups. Advertising at the pumps encourages such sales.

Some retailers cross-merchandise, offering coupons (based on a gasoline purchase) that can be spent at an associated store.

The volume of gasoline sold from station to station varies greatly. Yet most costs to sell gasoline are fixed. A big station selling more litres of gasoline at the same margin as a smaller one, has more revenue available to engage in price competition after paying similar base costs. Many of these larger stations are located in major urban centres. Their larger sales volumes and better opportunities for non-gasoline sales are major reasons prices in cities may be lower than in smaller centres.

Learn more by reading about > Price Impacts