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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?”

One of the great untapped sources of information in your industry are your customers. As a famous quote by Bill Gates doing the rounds on social media states, “Your most unhappy customers are your greatest source of learning.” Finding out if price is a factor in your customer’s discontent can form a base to your pricing strategy.

This is a philosophy supported by Becky Sheetz-Runkle, author of ‘Sun Tzu for Women: The Art of War for Winning in Business’. She recommends the following good business practice, “Whenever you win a new customer, find out who they used before, and why they switched to you (i.e. the reason they were dissatisfied with their previous supplier). Do the same when you lose a customer—identify what they preferred about your competitor.”

If price was an issue, it is important to learn from the experience and study the market. One useful tool for this is use online sales sites to compare prices and gauge what the ‘going rate is’. Websites such as Alibaba will sell almost anything (including industrial chemicals), whilst other companies, like Spotchemi offer an E-commerce hub designed specifically to serve the chemical industry. Whilst this article must declare that it is paid for in part by Spotchemi, this does not deny the fact that such a service allows price tracking of wholesale chemical prices from actual offers to buy and sell in real time.

If you do not want to track prices yourself, then it may be worth using other industry specialist services. As Sheetz-Runkle says, “I recommend routinely tracking what the industry analyst firms, like Gartner, are reporting about your industry, as well as trade associations and advocacy groups. These organizations are doing research and studies that evaluate the people who are and should be your competitors. What are they telling you about where the industry is trending? Where are the unmet market needs that you can fill? How are prices trending”

Another strategy to find out more about your competitors is to hire employees from competing firms—especially those from the sales department. As Sheetz-Runkle suggests, “No one knows more about the inside of those organizations than the employees,” she says. “Find out all that you can about how these companies operate, and more importantly, what’s on the horizon for them? Where are they taking their business? What markets are they venturing into? How are they leveraging innovation to cut costs and advance productivity? Where is the highest level of dissatisfaction with their products or services? No one has more and better intelligence when it comes to sales than disgruntled sales people.”

If hiring new staff is not a possibility then a much more cost effective way to gain information on your customers’ prices and actions is to simply call them up and play the part of a prospective customer. According to Jordan Harbinger, the co-founder of ‘The Art of Charm’, “You’d be surprised how often companies will tell you everything you’d like to learn over the phone, especially if the question is phrased in a context that makes sense. For example, if you want to know how many people work there, you can say: ‘I’m looking for individualized attention, and my fear is that your organization is too large, and I’ll get lost in the shuffle. How many coaches do you have on staff? Oh, wow, that’s quite a few. How much support staff do you need for a team that size?’ This approach has served me very well.”

Tips like these can be very useful to finding out what your competitors are doing and how they are pricing their products. Do you know of any other ways to use your competitors to help you price chemical products?

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?’