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The pricing opportunity that chemical companies are missing

July 14, 2016
Energy & Chemical Value Chain

Chemical companies that dedicate enormous resources to reducing costs or selling greater volumes often overlook one of the most effective ways to boost margins: improving pricing capabilities.

There are plenty of reasons why: Some chemical executives think they can’t control pricing because they sell through partners or they can’t seem to stop price leakage in their own sales force. Many consider theirs a commodity business and believe they have to accept the price the market gives them.

But this passive approach causes chemical companies to forego a huge upside opportunity. Unrealized prices represent one of the biggest opportunities available to chemicals companies, and most can build better pricing capabilities in 12-18 months.

Perhaps most importantly, fixing pricing requires a fresh approach and a new mindset. Customers, even when buying commodities, take other things into account: their relationship with the supplier, reliability and value-added services. Sometimes they buy from a particular company just so they can work with technical experts who can teach them ways to improve their business.

Pricing is more critical today than ever before, as purchasing departments have become more sophisticated—and more aggressive. Greater price transparency online increases their ability to manage their expenditures closely, even in traditionally niche areas. For sellers, if you price too high you can be knocked out of consideration before even meeting potential customers. And price control is critical during a time of energy and feedstock price volatility, given the need to preserve stable margins amid uncertainty.

Understandably, many chemical companies are focused on other priorities: improving their products, increasing operational efficiency or selling out their production inventory. Some think of pricing as a one-time fix, a box to be checked.

However, as companies take a more determined approach, they should prioritize carefully. For short-term results, they can find pockets of underpriced product and begin to adjust prices in a test-and-learn manner. To build long-term capabilities, they should define the end state, choose the right tools and instill discipline from the ground up.

Whether aiming for short- or long-term results, any effort to improve pricing has to address both price setting and price getting.

Price setting includes defining target prices for each product or service in each market segment. Understanding real costs and margins is a critical first step. Most companies know their average costs, and so they know generally what to charge to bring in steady returns. Leaders go further, developing a more dynamic perspective on costs by asset and by customer, then adjusting their prices quickly as inputs change.

Leaders also try to understand a product’s value to customers by identifying its uses, especially those that are critical to their process or product, and so may be more highly valued. Some go further, evaluating how the product delivers returns to the customer, and how that compares to competitive offers. They learn which factors contribute to their customers’ success, and they incorporate this information into their pricing and sales approach.

Finally they invest time understanding their main competitors’ capabilities and offers, in order to get a picture of those costs and performance. They learn what customers think about the competition, especially compared with themselves.

Price getting means closing the gap between the price you want and the price you get. Table stakes for getting your price include building and implementing the right capabilities, processes and tools to ensure you are holding steady against your input costs.

Leaders go further, carefully delineating the people and processes for making pricing exceptions. They involve the sales team early, reinforcing the economics of price leakage and profitability. Sales incentive programs motivate the sales force on the same metrics that measure company growth and profitability.

Leaders also invest in pricing tools that allow information to be aggregated and displayed in a user-friendly way. These can be very sophisticated tools that communicate closely with SAP and Salesforce (such as Vendavo) or cloud-based tools that can be much quicker and easier to get up and running (such as KiniMetrix).

As pricing programs take off, leaders measure their success by setting up mechanisms that tell them whether they are capturing the prices they intend — and where to intervene if not. To do this, they need to see where price leakage occurs so that they can take corrective action — capabilities provided by most pricing tools, assuming that teams know how to use them.

Leading companies also set regular check-ins with the commercial leadership to review progress over time and deal with the inevitable outliers and exceptions. Typically, these are monthly scans that take an in-depth look at several product categories, reviewing the entire line over the course of a year.

No program to improve pricing will succeed without ongoing support from top management. And, while it is natural that any change program will have promoters and detractors at the outset, senior management will need to bring the team together to back the vision and reinforce critical pricing behavior with role modelling and the right incentives.

David Burns and Jason McLinn are partners with Bain & Company in Chicago. Mark Porter is a partner in Bain’s London office.

Source: Forbes

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