Naturally the production cost of a product is a key determiner of the price it will be sold at, and this has never be more true than today. As Dr. Andrea Maessen, Chemicals Industry specialist at the strategy and marketing consultancy, Simon-Kucher & partners, said “Capacity utilization and innovation were historically considered the major determinants of costs, volumes and profit in the chemical industry. In more recent times the volatility of input costs and increased competitive intensity has underlined the importance and potential of pricing in top and bottom-line results.”

But the question becomes trickier when your feedstock or energy prices change. If you were selling a product at a steady rate (because of high production costs), what should you do if the production costs drop? Should you pass on the benefit to your customers immediately? Should you pass on the benefits at all?

This is a question highlighted by Joanne Smith, former Corporate Head of Marketing, Pricing and Customer loyalty at DuPont, she is now president of Price to Profits Consulting, who says on the topic that, “You do not want to instantly pass along price relief or pass it along any faster than is fair to you. The fact is that you may NOT need to (nor should you) drop prices just because oil and energy prices have fallen. You must do a deep evaluation of your market and competitive dynamics as well as your cost structure to decide on the best appropriate course of action.”

Arthur Weiss, managing director of industrial consultants Aware, agrees that passing on the benefits or disadvantages of feedstock price changes should be considered carefully. His company are experts at helping businesses gain competitive intelligence. He agrees that price changes must be questioned fully, asking, “Is the price drop of your raw material only temporary? Is it just for you or for your competitors too? If it’s just you, then you have a competitive edge. It will depend on your customer base as to whether you want to pass it on or not. If your base is stable and you have a long term relationship/ binding commitment then it may be best not to pass on the benefit. However, if you are looking for new business, then it may be best to use this advantage to stand out on price against your competitors.”

Clearly every pricing decision is different, and there are many factors to be considered, but at some point each trader will need to ask themselves, ‘Do I want to price for profit now, or price for a long-term business relationship?’