One of the most important and dangerous tasks in the work of a chemicals trader is deciding what is the right price for a product. Industrial chemical trading is a riddle. Unlike other world commodities, industrial chemicals are both a niche market AND a vast global industry. They are traded by few people, and yet are a vital component of the global economy. The public doesn’t want to buy them, and yet everyone needs them. The trade is global and yet location and logistics are essential.

As a rule, supply rates of products change slowly, as building and closing mines and production plants takes time and planning. Demand changes are also slow, caused by shifting trends for new materials following public demand. Yet despite this, prices can rise and fall rapidly in the space of weeks.

This complexity may be one reason why the issue of pricing has been overlooked by many in the industry. Indeed experts on chemical pricing at global consultants Wipro believe that, “Evaluating the pricing function has largely been ignored and undervalued in chemicals and plastics. Massive over-discounting, inefficiencies due to lack of standardization, and lack of awareness into profit leaks remain prevalent in the industry, preventing organizations from realizing the large margin gains possible with next generation pricing systems.”

These experts further state how badly many industry traders are valuing their products by stating, “Price is the largest lever available to improve organizational profitability. Small improvements in pricing can have significant impact to operating profit, but the pricing function is often under-managed or too widely dispersed to be effective. Organizations must find ways to elevate the pricing function, gain control over their discounting structures and better understand their customer segments.”

Finding the right price for your products is clearly an important, yet delicate and tactical business. Whilst it is important that prices are set to maximize profit, the general rule of business is that the customer must always be placed foremost. How can the competent chemicals trader balance these two tasks?

One expert who may have the answers is Joanne Smith, former Corporate Head of Marketing, Pricing and Customer loyalty at DuPont, she is now president of Price to Profits Consulting and author of The Pricing and Profit Playbook. When asked about the role of pricing in the chemicals industry, Joanne said, “At the core of good pricing is the fair treatment of the customer base and trust with the market. On one hand, passing along price decreases may appear to be the best move for long-term customer loyalty and/or growth with your customers. On the other hand, good pricing also means that you capture your fair share of the value you deliver relative to competitors.”

So it seems that there is a balance to be struck between passing value on to customers whilst being fair to yourself in taking due profits. But beyond the obvious supply and demand formula, your price depends on three main factors:  your costs, your competitors’ prices and your long-term business plan. With the help of chemicals pricing experts, we will look at each of these in turn over the next issues of this blog.