For chemicals manufacturers, market volatility is the new normal. It’s a daunting fact to accept, but it is the truth. With oil prices having reached a six-and-a-half year low, multiple industries are noticing the effect external market forces can have on their business.
Even industries beyond what you’d expect are feeling the impact. According to the American Chemistry Council, sales of chemicals to the machinery, construction and fabricated materials industries accounted for roughly $24 billion in 2014 alone. Further from American Chemistry, “over 96 percent of all manufactured goods are directly touched by chemistry.” This leads to sales across the chemicals industries that almost reach in the trillions.
As a result, companies are forced to rethink their pricing strategies in order to stay competitive. The traditional strategy of pricing from the gut no longer suffices. The massive amounts of data available to any given company ensure the potential for optimized pricing is readily available.
So, the question becomes: how can chemical companies utilize data and analytics to insulate their prices amidst market volatility and pressure from buyers?
For this, companies can look to Polya’s four-step problem solving techniques, which I will modify slightly to three steps. Your company must (1) understand the problem, then (2) devise a plan and execute before (3) looking back on the plan and checking your work.
Lather. Rinse. Repeat.
Before I dive into how each section will be carried out, I must emphasize the importance of the above review and repeat section. Since the new norm is constant fluctuation, every aspect of your plan must be reviewed on a regular basis to ensure new opportunities are not slipping past you. You can even consider creating alerts calling attention to the fact that the situation has changed significantly since your last review.
To begin revitalizing your pricing, you need to understand how the market is impacting your company and direct competition. Have you noticed customer defections or increased pressure to pass along price drops? Are your competitors aggressively changing their prices or taking a wait-and-see approach?
First, look internally. How has your company typically reacted when raw materials costs have changed? By digging into your own historical data, you will know what has worked in the past at the product, customer and regional levels.
It is crucial to also see how your competitors reacted to the same volatility.
From there, segment the data into buckets that give you visibility into which customers accepted price changes fully, partially or not at all. When you begin forming the plan, your data will tell you where you can take risks—such as increasing prices for a customer that will not have a large effect if they defect—and where you must be cautious with your price changes.
Take special care in looking closely at your pricing waterfall, as this analysis will give you the best visibility into where your company is losing profit opportunities.
Your data-based insights now give your pricing decisions the needed justification for stakeholders and customers alike.
Plan And Execute
Price realization is the goal. You included previous achievement rates into your analyses to understand the problem. Now, you must use this knowledge to adapt.
When you set target prices, organize them in a way that takes advantage of opportunities you found at the granular levels. You can then use these target prices, as well as the historical and competitive data, to set goals that will represent the impact of your price changes on company profitability.
The execution of your plan is much more straightforward as a result of your due diligence. Firstly, you have to be using more than standard emails and spreadsheets to disseminate the information throughout your company.
Your sales team will require the updated pricing data at their disposal at all times, so you need the ability to automatically give them the insights and support they need for their negotiations. With data-based support, your sales representatives can get the most profitable price from each deal.
Augment this by experimenting with different pricing options for less influential customers to see the range of reactions.
The options can vacillate between partial price drops, selective and granular—which segments the price changes even further to the raw material level—delayed drops or even temporary decreases. These different options give you flexibility in your pricing decisions as you go about spreading the target prices across your customer base.
The last step is letting them know.
During the execution phase, you are in a tough position. Prices are about to change—potentially in a manner that will disappoint customers. How do you get ahead and not only keep the customers, but also retain a positive image in relation to your competition?
Communication is key— internally and externally. You established a clear position that decided where, when and how you will change prices. Be clear about the rationale behind the price change when going public. I don’t mean go into extreme detail. Find a happy medium that allows you to get the point across without giving away secrets.
For the best impact, the announcement must be visible and first. If your competitors beat you to this stage, the impact is lessened considerably.
Check Your Work
Last, but not least, after you have given your strategies a chance and the market has inevitably readjusted, you have to take a look back at what worked and why. The “why” is crucial. Simply repeating the same actions will not garner the same results in the new market environment.
The good news is you have already set your foundation in the initial analysis phase. It is easier to compile the data, but it never gets easier creating innovative, fresh and transparent pricing decisions.
With these steps, your laser focus on prices prevents market fluctuations from taking control of your business’ performance. Data is king in the new technological marketplace. Now you have the groundwork to use it to your advantage regardless of volatile conditions.
Mitchell Lee is a Business Consultant for Vendavo.