The chemical industry in Europe is facing various economic problems: long life-cycles result in margin decays, Asian competitors bring heavy price-pressure into the market and costs saving measures seem to be exhausted.
However, various methods and possibilities still do exist in order to increase company’s profitability – the most important being value pricing.
The central idea of value pricing is to measure the customers perceived value (i.e. “his willingness to pay up to X”) and to set the price accordingly.
However, investigation on this topic proofed that most companies in the chemical industry have no or limited professional pricing methods since pricing seems to be perceived as not manageable.
This is an amazing finding, as value pricing is the most powerful lever for profitability increases.
Arthur D. Little, jointly with Warwick Business School, conducted a pricing survey with the participation of managers from all chemical industry segments in which measures for profitability increases were investigated.
Results show that managers believe innovation to be important for market success with the latest and promising trend being value based pricing.
The majority of interviewees indicate that in the future customer specific contribution margins will play a more significant role. Among other interesting insights of the survey is the finding that it is not sufficient to introduce professional price finding methods in the company.
The key success factor is the commitment and alignment of the top-management that will translate into sales force’s pricing rules. Overall intuitive negotiating should be avoided and a systematic and structured approach be introduced.
Innovation and pricing are the topics most discussed in the chemical industry today. Survey results give evidence for the positive sensitivity effect of professional pricing.
Price increases of 1% lever the profit (EBIT) by 8%. Variable costs and sales volumes - being considered key performance indicators by top management - have a lesser effect: changes of 1% lever profit (EBIT) by 4% on average.
Bearing this in mind, it is particularly interesting that for roughly half of the interviewees pricing is not considered as a top management issue, although optimised pricing could offer attractive opportunities.