For many, the pricing of chemical products may seem to be a short-term policy, designed to maximize profits in the present (or near future) by valuing a product for what the market will pay. However, there is much to be said for taking a longer term view on pricing, and seeing the value you and your clients assign to your products as part of your overall business strategy.

This is a point made by business consultants Walter L. Baker, Michael V. Marn and Craig C. Zawada from McKinsey, when they discussed the importance of product pricing in their report, ‘Do you have a long term price strategy’. They observed how , “In the late 1990s, the world’s three major independent producers of hard-disk drives invested about $6.5 billion in research and development in the course of just four years. During the next decade, the bytes that can be stored per unit of a drive’s surface area increased a thousand-fold—while the price per unit of that surface area dropped 70 percent. The three companies created enormous value for customers. Yet their failure to price products correctly throughout this period of significant innovation contributed to net losses totalling almost $800 million.”

Clearly long-term price planning is crucial to success, and should be considered carefully. Joanne Smith, former Corporate Head of Marketing, Pricing and Customer loyalty at DuPont, and currently president of Price to Profits Consulting believes that traders should ask many questions about the market before deciding to act. She notes that it is often tempting to change prices based on short-term fluctuations in demand or feedstock supply, but asks if it is possible for chemical companies to, “…  make pricing decisions in a way that optimizes their profits while maintaining long-term customer loyalty? How do you establish a systematic approach to manage these cyclical and volatile market conditions?”

In her book, ‘The Pricing and Profit Playbook’ she continues to outline key decision factors when considering adjusting chemical prices. Noting that, “There are many key factors that must be taken into account to decide the best course of action. These include:

• What have been my price increase practices and messages to the industry in the past? Have all my customers fully accepted my past price increases?
• Do I have any fair rationale for holding, or even increasing prices, at this time? Do my competitors? Logic and a feeling for the industry trend is an invaluable resource.”

Smith’s last point is also crucial in long-term pricing policy; the ability to understand your products and to ‘feel the industry trend’. Whilst experience is certainly invaluable in this area, product knowledge is also a major advantage.

This is especially true when considering the supply of raw materials. Jeff Zamek from the College of Ceramics, in New York State, considers the problems of a long-term supply ending in his book ‘Pottery Production Practice’. In it he notes that, “Awareness of the current raw material market is essential. While every one of the hundreds of materials do not have to be monitored, it is advisable to keep in touch with your suppliers about the raw materials used in your formulas. Do not assume that the material is still being produced [or will be long term] just because your stocks are full.”

This is another good reason to take pricing as a long-term, planning decision, as supplies and prices of your feedstocks increase and decrease over time. Being aware of supply trends can make all the difference to your bottom line.

Being prepared for cost increases, will allow you to warn your customers of possible price adjustments well ahead of time. Whilst cost reductions can also be foreseen, resulting in the difficult decision of whether or not to pass the reduction on. A pricing challenge summed up by Smith when she notes, “Chemical companies are torn between enjoying high profits [by keeping prices high] and reacting to the customers’ requests for price relief. What’s a business to do?”