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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