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007 would be proud of the chemical industry. Although it doesn’t have car chases, glamourous locations, and seductive women, it does keep a lot of secrets. And in the highly secretive market of industrial chemicals the biggest secret of all is the price.

In most situations this leads chemical manufacturers and traders to ‘best guess’ their opening offer to prospective clients. Without additional information, a chemical sales team can only create offers based on past experience and hunches. It can never know what the true value of the chemical product is to the customer.

However, a more modern approach to pricing industrial chemicals has now been developed that suggests having a more open discussion about price. It even suggests that the value of a chemical should be based on a calculatable evaluation of the practical solution a chemical product provides.

The details of this theory by Dr Andrea Maessen (formerly at the Department of Trade and Marketing at the University of Hamburg) and Jan Haemer (formerly at the Department of Economics at the University of Toronto), have now been published in the industrial chemical journal, Business Chemistry. Their work at the industrial consultancy Simon-Kucher & Partners offers a great insight into the theory of pricing industrial chemicals.

Pricing theory that is also pleasingly practical.

For example, Maessen and Haemer have provided real-world examples of how their theory was applied in advice to the water specialists at Ecolab . Here they suggest not pricing chemical products by the kilo or tonne, but by the value it provides to the customer. On this topic they note, “The added value is the ability to identify ways to operate a specific water treatment plant more effectively and efficiently on a continuous basis, based on gathered information and benchmarks. The value is derived from the solution, the combination of water chemicals and services. A model based on kg or bags of water chemicals doesn’t align with this value.”

They suggest that chemical companies are not just supplying products, they are supplying problem solving solutions. A manufacturer of animal feed gains value by adding agrichemicals to his mix. These chemical raw materials give value to his product that can be measured in the additional growth and productivity of a farmer’s animals. The value of these chemical products is therefore measurable, providing a base point for price negotiations.

However, as any chemical product provider knows, the real profit for supplying industrial chemicals can often be found in the additional services that are purchased. Maessen and Haemer also believe that chemical suppliers need to show the value of these services. In doing so they not only allow a client to select the value that suits them and their needs, but they also help both parties find a mutually agreeable price.

For this reason, the researchers have also developed further pricing suggestions that give value to the services that chemical suppliers offer.

Here are some of the take-away points of their theory:

1. Treat services as products. This includes issuing services with a material number.
2. Be clear about what the standard service includes. This way clients understand why they must pay for additional services.
3. Include all services on the invoice. Enter a value of zero for those that are included in the standard service.
4. Automatically charge for services. It is easier to take a charge off the invoice than to add it later.
5. Avoid petty charges. The Ryanair business model does not apply in B2B industrial chemical markets.
6. Don’t display a price for all services. Some services are so special they are only ‘available on request’.
7. Use services and charges to influence customer behaviour. Increase charges on services that you may want to phase out, decrease charges on services that you want to promote or expand.

In recent years there has been much talk of ‘innovation’ as a driving force for the chemical industry. It is the power that focuses investment, creates new products, and solves the problems facing the modern world. However, innovation in pricing policy is perhaps even more important. As research costs become ever higher, health and safety testing of new products stretches into decades, and competition becomes ever stiffer, it is innovation towards accurate pricing that will increase profits for chemical companies.

As Maessen and Haemer note, “Innovations which can demonstrate true added value are the only way forward for the chemical industry. This also means business model innovation and not merely product and service innovation.”

Is it time to rethink your company’s approach to chemical pricing?

If you would like to read more about industrial chemicals and chemical pricing, then you can read more articles like this one at the SPOTCHEMI blog page.

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Despite rising global demand, the long-term trend in the competitive world of industrial chemicals has been downward pressure on prices. Increased competition has been an easy scapegoat for chemical sales teams, but logically, the significant increase in demand should have more than offset growing chemical supply.

So, what areas should chemical traders and sales teams focus on to maximise chemical product prices?

To help answer this question, chemical pricing specialists at industry consultancy Simon-Kucher & Partners conducted a survey of chemical suppliers to find out where new focus in chemical sales teams should be. The research concluding that, “The majority of the managers saw the most important improvement potential in establishing a value-selling culture.”

This posed a problem, however, as ‘value-selling’ has long been known as a technique for optimising price in chemical sales, and left the research team wondering what else could manufacturers do to optimise industrial chemical prices.

In a far-reaching study of chemical pricing strategy, Dr Andrea Maessen (formerly at the Department of Trade and Marketing at the University of Hamburg) and Jan Haemer (formerly at the Dept of Economics at the University of Toronto) outlined numerous ways that chemical companies can rethink their approach to pricing.

They have now published their findings in the Journal of Business Chemistry, in a report entitled ‘Value-Pricing in the Chemical Industry – Rebooted.’ Here they note that, “It’s time for companies to step back and reboot their thinking around value pricing.” Adding that, “The great news is that companies in all segments of the chemical industry have a lot to build on. Innovations which can demonstrate true added value are the only way forward for the chemical industry, if managers want to make value pricing finally work to their advantage. This also means business model innovation and not merely product and service innovation.”

Here follows an outline of their findings.

1. You can’t price without the ‘willingness-to-pay’ talk.

Chemical suppliers need to openly discuss with a customer what they are ‘willing to pay’. The researchers founded this idea on a hypothetical situation where a sales team knows the priorities of one of its customers. They are; firstly, superior quality consistency, secondly, technical support available on call, and finally, price.

As Maessen and Haemer note, “That is an ideal opportunity for value-selling. What implications would this information have on offer design, price positioning, and value communications? Knowing this separates the companies who can differentiate from the companies who merely compete.” Adding that, “The problem is that, so many companies never give themselves this opportunity. They never had the ‘willingness-to-pay’ talk with their customers. Without that talk, a pricing discussion during a sales call is like a pop quiz, a last-minute guessing game based on hunches or experience rather than knowing what this customer wants.”

2. Avoid rigid ‘One-size-fits-all’ solutions.

Many chemical sales teams offer only a handful of pricing policies, and as a result are in danger of losing ‘value added’ pricing. However, no two customers are the same, so why treat them the same?

As Maeseen and Haemer note, “In a recent consulting project for a coatings and adhesives producer, the client wanted to develop a customer segmentation in order to derive differentiated offerings. Their hypothesis was that they had two segments. The price sensitive segment would be best served with a ‘lean’ offer at a competitive price, without any value-added service. The value-seeking segment would be willing to pay a premium for a premium offer. Once in the box, the customer would receive either the lean or the premium offering.”

However, they believe that ‘pigeonholing’ customers in this way, prevents the from finding the value in price offers. Instead, in a situation like this, they recommend, “de-bundling the offer and using service fees as mark-ups on product prices in order to quantify the value and make the product and service value transparent to the customer.” Adding that, “[The] ultimate goal is to help customers self-select their segment, rather than selecting the segment for them and imposing a solution. Customers buy what they need and what meets their willingness or ability to pay. Providing them with options and letting them choose is how segmentation works best.”

3. Go beyond the traditional price metric.

Prices by kg, ton, or litre seldom reflect the true value of a product. Pricing by traditional units rarely reflects the true value of a product. To quote Peter Drucker, “Customers don’t buy products.” Instead, they buy the added value or the benefits that the product and the manufacturers provide. A monetization model needs to reflect added value, and if it is done correctly it can be a game changer and create a significant competitive advantage.

4. The pricing strategy: Pick the winning option.

Here the researchers advise giving customers options that enable each to find their own pay-point, and for the chemical supplier to maximise profit on each purchase.

As they note, “There are two basic options: price low for a penetration strategy or aim high for a skimming strategy. To make this decision a company needs to gather data on four pillars: value, price, cost, and volume. Understanding what customers are willing to pay, how the volume changes when you change the price, what potential competitive responses are, and how to react to them, is at the core here. The insights from this information shape the pricing strategy.” Adding that, “Our observation is that companies with well-defined pricing strategies are 40% more likely to capture their value potential than firms that don’t have them.”

5. Communicate the value in your chemical products and services.

Rather than explain how special a chemical coating is, better to communicate what the product does. For example, AkzoNobel used the line, ‘Shipping customers have achieved savings of up to 9% through improved ship fuel efficiency due to our recommendation of which coating to use’. Simple wording can let customers know the true added value of a chemical product.

While some of these 5 ideas, such as the ‘willingness to pay’ conversation, may sound unusual, it is simply part of the ‘reboot’ approach that is needed in many chemical companies.

As the survey by consultants at Simon-Kucher & Partners found, “almost three out of four new chemical products (72%) fail to achieve their profit targets. Furthermore, one in four companies does not have a single new product in their portfolio that has achieved its profit targets.”

With data like that, it is clear that many chemical manufacturers and sales teams are in need of a new approach to chemical product pricing. Many chemical traders focus on the economics of the chemical industry, but if Maeseen and Haemer are correct, then psychology is far more helpful. While these 5 tips may be rudimentary, they are heading in the right direction and that makes them an excellent place to start.

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The future of the biochemical industry became less certain last month, when two of the industry’s major players, DuPont and Beta Renewables announced that they are ‘pulling back from agricultural waste to ethanol’ technology. This has led many chemical suppliers and raw material manufacturers to wonder if cellulosic ethanol production is economically viable.

The fact that DuPont is trying to sell its Nevada, Iowa facility will come as a shock to many, as DuPont has long been a supporter of the use of plant waste as a chemical feedstock. As the chemical industry journal C&EN notes, the company has already invested, “more than $200 million [in the Iowa plant], which was intended to be the first of a string of facilities that would use DuPont enzymes and yeast to turn corn cobs, stems, and leaves into ethanol.”

While DuPont has downplayed the news, stating in a press release that, “we still believe in the future of cellulosic biofuels,” the sale announcement came at the same time as news that Beta Renewables has become financially uncertain. This is because Mossi & Ghisolfi, the parent company of the Italian cellulosic biofuel manufacturer, has declared bankruptcy, leaving Beta Renewables’ ethanol production plans unclear.

Meanwhile, another cellulosic ethanol plant, this time in Hugoton, Kansas, was sold last year by bankrupted Abengoa. This is adding uncertainty over the viability of cellulosic ethanol production as the buyer, Synata Bio, plans to “convert the plant into a natural-gas-based chemicals and fuels facility.”

These developments clearly show that bioethanol is struggling to compete with traditional chemical producers, and has many wondering what path biochemicals will now take.

In May 2017, a study was published in the scientific review journal, Current Opinion in Biotechnology, which found that the current state of technology for bioethanol was not price competitive with fossil fuel alternatives. The analysis was conducted by a team from the University of California, the National Renewable Energy Laboratory, Argonne National Laboratory, & Thayer School of Engineering, entitled, Cellulosic Ethanol: Status and Innovation. It reviewed the current economic viability of technology, as well as studying scientific developments and their application to real-world industrial chemical production. The research concluded that, “Although the purchase price of cellulosic feedstocks is competitive with petroleum on an energy basis, the cost of lignocellulose conversion to ethanol using today’s technology is high.” The study goes on to report that, “Cost reductions need to be pursued via innovation, for example, consolidated bioprocessing using thermophilic bacteria combined with milling during fermentation (cotreatment).”

If this study is accurate, then ‘paradigm innovation’ is required to make bioethanol the normal chemical production route. The alternative is if public opinion towards fossil fuel use changes, and demand for cellulosic ethanol and similar biochemical raw materials grows.

At present, cheaper production of ethanol from fossil fuel is more popular, but opinion is changing. A recent survey by bioengineering firm Genomatica in cooperation with ICIS, found that “Producers report that 65% of their customers are interested in sustainably-produced chemicals. While 63% report a higher level of interest from their customers than three years ago.”

While the opinion of chemical buyers is adjusting to environmental concerns, technology is also lowering costs, making bioethanol an increasingly attractive option. As the environmental journal, Earth Island, reports, “[America’s] National Renewable Energy Laboratory (NREL) has been working on cellulosic ethanol since 1980. The tedious process of turning cellulose into biofuel involves breaking up the complex cellulose-hemicellulose-lignin structure before fermentation begins. A big part of the challenge for researchers has been finding enzymes to facilitate this process.”

The cost of these enzymes makes a significant difference at the marketplace, as the journal makes clear, “A decade ago, the enzymes to produce cellulosic ethanol cost $3 a gallon. [But now] NREL has reduced the cost to 30 cents, and is figuring out how to cut that amount in half by bioengineering more effective enzymes that will accelerate the process.” Adding that, “Over the past decade, NREL has brought down the cost of cellulosic ethanol from about $10 a gallon to $2.15 a gallon, primarily by bioengineering better enzymes.”

With costs falling and technology providing newer, more cost-effective enzymes every year, there is good reason for supporters of bioethanol to be hopeful. Even despite DuPont and Beta Renewables problems with greener industrial chemicals, Clariant is moving ahead with the construction of a cellulosic ethanol production plant in Romania. As the industry journal Chemicals-Technology reports, “With an annual capacity of 50,000t, the plant will use Clariant’s sunliquid technology to produce cellulosic ethanol from agricultural residues, including wheat straw and corn stover that will be sourced from local farmers.”

The success of this facility remains to be seen, but the history of companies attempting to break fossil fuels grip on chemicals production is not promising. As Forbes magazine reported last year, “the advanced biofuel sector has proved to be a good way for investors to lose money. KiOR (now renamed Inaeris Technologies) is probably the most famous publicly-traded example, going from an IPO that valued the company at $1.5 billion in 2011 to being bankrupt in 2014. Other companies that have competed in the advanced renewable hydrocarbon space have seen 90% or greater losses since their IPO (e.g., Solazyme, Gevo, Amyris).”

The report continues by giving the layman’s reason for such dismal results, stating that, “Advanced biofuels are attempting to compete with petroleum, but the reality is that with petroleum, nobody had to plant or harvest the biomass, and nobody had to apply the heat and pressure to convert it into an energy-dense liquid fuel. With biofuels, you have inputs of energy and manpower at every step — and the cost of those inputs adds up. That’s why petroleum made from ancient algae can be produced for a couple of dollars per gallon, but renewable petroleum produced from algae can be more than 10 times that cost. That’s why you don’t see many large-scale biofuel operations.”

And until key changes are made in this situation, biochemicals will never compete on price with petrochemicals.

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