Many view the chemical category as a market which is very commoditized, with standard pricing commonly accepted. With a category such as chemicals, does this have to be the norm? When examined it is discovered that there is a large underdeveloped opportunity for savings within chemicals. When companies allocate a huge amount of energy to sell larger quantities and towards developing strategies to reduce costs, they tend to spend less attention on establishing price.
Due to the nature of this industry being to sell by way of partnership, upper management holds a standard belief that the price leakage cannot be controlled through their sales force. It is also common to see companies sourcing chemicals with internal management viewing pricing as an isolated activity without the need for re-visitation.
“We solidified pricing 5 years ago”
With this mindset and approach comes a foregoing of a large upside potential. Pricing which is unrealized presents a large opportunity for companies in the chemical field, but the paradigm shift must take place before they can venture to improve pricing models. Price development requires the development of the right internal skills that acquire the unrealized price.
On the customer side when purchasing “commodities”, consider a few things such as the supplier relationship, the supplier’s reliability and the supplier’s value of service provided.
On average, chemical businesses can achieve enhanced pricing capabilities within 12 to 18 months. The root of this change begins with focused effort and ongoing support from senior leadership. “Any major changes in mid to large sized corporations will have to be undergirded by senior leadership. Change management is a top-down activity,” Sam Datta, Principal of PGV Advisors proclaims. Once the internal cross functional team defines their profitability versus how their actual price differs from the one they’ve set; once they have understood their customers value, analyzed disruptive competition and prevented price leakage, higher quality pricing capabilities are achievable.
Higher quality capabilities towards pricing development places them in the position for an increased premium and upward growth potential to continuous improvement. From PGV’s experience, chemical businesses that apply these principles can grow 200 to 300 basis points to their margin during that same 12-18 months.
There are 3 trending points which make pricing more critical in this economic time than in the recent past. This article will present the first concept, with the following 2 in the latter part of this complete series on chemical related business strategy.
The Evolution of Purchasing Departments
Internal purchasing teams have become more strategic and sophisticated while expanding the categories of spend which are carefully managed. This often includes the smaller volume categories, which specialty chemicals typically fall under. The internet has made it increasingly easier to obtain pricing, which causes supplier elimination before one can even meet the potential customer.
Digital competitors take this as an opportunity to disrupt the pricing norms. Due to the fluid visibility of pricing, this enhances the importance of price even the more. Of course, many chemical companies have other priorities such as product improvement or enhancing operational functionality, which supports the common failure to make long-term pricing a priority for their organization. It is these companies which can identify the values of working external experts in order to guide them towards their organizational short-term or long-term goals in increased profitability.