Taming the Volatility Beast in Chemicals Markets
September 3, 2012-
Rob Glenn, general manager for the EMEA region at PROS, looks at better pricing practices and advanced technology
Companies in the chemicals sector face unprecedented business pressures, ranging from the increased volatility of raw material costs to broader market fluctuations that affect the global economy, as well as challenges created by regional or national government regulations and environmental requirements. In the face of economic uncertainty and increased competition, many organisations in the chemicals industry are seeking ways of pricing that will help protect and enhance profitability in support of both short- and long-term growth plans.
Automated pricing optimisation
Far too many chemicals companies today still use spreadsheets, databases, paper reports and analyst intuition to help drive their pricing decisions. Marketing often sets prices that sales teams believe are high, while the finance department looks for the greatest levels of profitability and there is little collaboration or agreement on pricing between the groups.
Unfortunately, the world is too complex and moves too quickly for these traditional techniques to suffice any longer. However, by leveraging existing investments and applying scientific analytics through pricing optimisation software technology, chemicals companies can gain a powerful tool that delivers consistent and substantial profit improvement.
While many organisations have made significant investments in customer relationship management, business intelligence and ERP systems, few have exploited their full potential for pricing advantage. These repositories of ‘big data’ contain valuable transactional information and buying patterns that pricing optimisation software can use to segment customers and determine pricing according to an individual customer’s willingness-to-pay.
Just as important, pricing optimisation helps empower sales organisations with pricing guidance and enables them to price products with far greater confidence when negotiating contracts. It provides sales and pricing staff with better quality information to make price decisions, including the true profitability and cost for each customer, as well as readily accessible data on the wider market trends around commodity prices.
Based on this information, companies can evaluate their own prices much more effectively and ensure that they are meeting targeted margin and demand levels. Pricing optimisation software helps to manage the complexity and accelerate the speed at which price decisions can be made, based on multiple cost and market variables. The results are significant. McKinsey has found that as little as a 1% improvement in price can yield up to an 8% increase in profit.
Cost volatility management
Setting prices that are subject to wild swings in raw material and energy costs is an ongoing challenge in the current economic environment. This highly volatile situation creates tension with customers who may want longer-term contracts with stable pricing. Managing cost fluctuations and keeping prices in sync is essential to preserving margins.
Every day, chemicals companies make hundreds or thousands of pricing decisions. Whenever prices for chemical commodities fluctuate, there are potential impacts on profitability. When commodity costs go up, the company either has to absorb the cost increases or raise its own prices to maintain margins.
Pricing optimisation software helps make the right pricing decision by assessing the impact on the business from a cost and profit perspective, as well as factoring in the market’s ability to withstand price increases, or whether those increases will lead to customers seeking better deals elsewhere. It opens the opportunity to be more proactive in changing prices as the cost of goods goes up or down, using specific threshold levels that can automatically trigger price alerts.
This also provides opportunities for improved margins based on the scarcity of product, or the ability to respond to potential challenges ahead of the wider market. By taking advantage of the automated power of pricing software tools, companies can integrate competitive market information into their decision-making and respond more quickly to changing conditions.
The reality is that chemicals companies have multiple commodities or products that they will have to track. This makes pricing decisions complex, and raises the risk that margins can erode. Whilst some cost increases to the company may have to be passed on, others may be offset by other commodity prices falling or currency fluctuations, so they effectively cancel each other out. Balancing this influx of information with price changes makes effective modelling a sound investment.
Pricing optimisation technology also makes it much easier to see where keeping prices the same could be beneficial for customer stability and when to prioritise longer-term revenue performance against short-term profit goals. Its use and value to multiple internal stakeholders encourages more strategic thinking and evaluation within the business, helping the company to stay ahead of its competition.
Visibility into profitability
For many chemicals companies, customer knowledge is largely contained within operational siloes and is not easily accessible. And, because chemicals companies are often dispersed geographically, there can very easily be huge variations in pricing approaches at field offices.
Thus, it is not surprising that chemicals companies often have little or no ability to see the ‘full picture’ around customer accounts, or how these accounts compare across the broader industry sector. Applying pricing optimisation can address this problem by mapping how customers are performing across different regions or geographies. This capability makes it much easier to identify those buyers that are lower in value or profitability due to regional variations in pricing policy and provide recommendations to bring them into alignment with profit goals.
When negotiating contracts with key customers, the software can also be used to support modelling around price adjustments. If a customer requests extra discounts, these cost reductions and their impact on profit can be properly assessed and managed against minimum profitability guidelines in real time, in the field. Similarly, proactive approaches such as discount campaigns, service surcharges or rebate offers can be evaluated in advance for their impact both on demand for product and cost of sale, and integrated into the negotiation process.
Ultimately, pricing optimisation software facilitates much greater collaboration between sales and finance departments in setting and enforcing rules for discounting and sales packages before they are presented to customers. This is especially useful when preparing and negotiating longer-term contracts when market conditions are in constant flux.
By collaborating with sales on pricing strategies using price optimisation technology, finance can help ensure that sales activities avoid less profitable deals, while protecting against the volatility created by economic uncertainty. This also helps the organisations to maximise their profitability over the demand cycle and to improve customer retention when rolling out offers.
The overall aim of pricing optimisation is to help companies make better pricing decisions and improve overall pricing confidence. More and more, the ability to manage pricing dynamically is viewed as a critical component of wider business strategy, supporting company-wide alignment with goals for profitability. For the chemicals industry, implementing pricing optimisation technologies is now critical to creating and securing business relationships as well as keeping profitability as high as possible in dynamic, volatile markets.