How to Protect Your Margins in a Competitive Landscape (Chemical Process Industry)
April 20th, 2021 | 7 min. read
By Robert Smith
How to Protect Your Margins in a Competitive Landscape
Consider recent news headlines from the Wall Street Journal, reflective of ongoing change in the COVID landscape:
March 18, 2021 – Oil Prices Fall on Fresh Fears of Dwindling Demand
“Oil prices fell more than 7% on Thursday, recording their biggest one-day drop since September…”
March 24, 2021 – Leap in Gas Prices Puts $3 a Gallon in Sight
“Some analysts see further gains ahead…Booming gas prices join a recent rally in other commodities…Supporting gasoline’s climb is a rebound in crude-oil prices and a big drop in the amount of storage.”
What’s a pricing leader to believe? Should I lower prices or raise them? Or just keep them steady, ride out changes, and hope for the best outcome?
The headlines above are illustrative of challenges that repeat themselves frequently in the chemical industry. Costs for raw materials and energy rise and fall, sometimes in cyclical patters, and in other cases due to unpredictable events. The speed in which these changes occur challenge the producer to adjust prices quickly enough to compensate and maintain acceptable margins. Even in businesses with significant differentiation in value versus competitive offerings, the swings in costs are often too great to bear without seeking price adjustments to support margin targets.
Let’s look at the key factors to address in this landscape.
Avoiding margin compression
Your business has earnings targets that are put at risk by ongoing raw material and energy cost changes. In many cases these costs flow immediately into your business, and you are constrained from passing them on to customers immediately due to various types of price protection that you have agreed to with the customer. Delaying price increases creates margin erosion that must be addressed later through compensating actions (perhaps even larger price increases, to reflect the lag in cost recovery.)
The headlines above illustrate the public nature of pricing for many sources of raw material and energy. This transparency works for and against you as the seller. While it makes clear to customers that selling price increases are likely as costs increase, it also causes them to demand (instantaneously!) reductions in price when these trends reverse. Moving too quickly to satisfy customers in this way is another contributor to margin compression.
Having insight from analytics to see the impact of costs on margins, and having the ability to plan price changes to enable sufficient margin recovery to support earnings goals is critical in this environment. We need to know exactly how the business is being impacted by cost changes and develop product and account-specific plans to address needed price changes to compensate for margin compression.
Avoiding costly errors
In some cases, cost changes are addressed where customers have index or formula-based pricing which automatically passes on the changes to the customer, with an agreed upon time lag. This is helpful, but not all customers have or want such arrangements. Indices or formulas mitigate some pricing risk, but some customers prefer to continually search for the lowest price available and are willing to do so with the risk of taking on higher pricing when the market turns against them.
For those customers with index or formula-based pricing, many are large in size, and accuracy and timing of applying changes in formulas is critical. Reliance on manual calculation and input of these prices, including the use of Excel spreadsheets to manage them, can result in costly errors and delays in cash flow and margin realization. Customers may not notice when errors in calculations favor them but will immediately point them out when they don’t! Consequences are unintended loss of revenue and margin, as well as reduction or delay in cash flows when customers short pay or withhold payment on invoices they believe are in error.
Speed of implementing pricing actions
All the above factors point to the need to be able to plan and implement pricing actions quickly. Having a pricing engine, integrated seamlessly to ERP and CRM systems, is a key to being able to rapidly address pricing changes across complex product and customer portfolios. Manual updating of pricing by sales or administrative personnel impairs the ability to enact important price changes accurately and rapidly. Transmission of the resulting changes needs to be done efficiently through integration with CRM systems or by the pricing system itself. The inability to do so again compromises earnings realization and leads to additional actions to recoup lost earnings, if the market allows.
A particular challenge with respect to speed of implementation goes back to the two headlines at the beginning of this article. The winds of change shift quickly. A delay in pursuing cost recovery actions when underlying costs increase may lose the opportunity for change if cost directions have reversed by the time a price increase is announced. Timely execution of price changes is critical!
Your Pricing Knight to The Rescue
How can a pricing team successfully address the challenges outlined above? Pricefx offers a flexible solution that addresses all these issues, and many more, to support your team’s ability to achieve profitability goals. Additionally, it’s fast to implement and to capture value, and user friendly and intuitive to use.
Pricefx is a software-as-a-service price management solution that seamlessly integrates with your team’s existing technology stack to bring all pricing data into one place for excellent visibility, management, collaboration, analysis, and execution. Consider the potential contribution of these modules to your pricing effectiveness:
- The PriceAnalyzer module shows you where the pain points are – which products and accounts need adjustment based on ongoing changes in market prices and underlying costs. As broader price change initiatives are implemented, opportunities for additional adjustments can be identified here.
- The PriceBuilder module enables you to structure your product and customer-specific price lists, evaluate what-if simulations of price changes for impact on key goals, and set pricing policies and guidelines. It enables rapid execution of mass price changes to address margin compression issues.
- The PromotionManager module enables definition and automatic calculation of index and formula-based pricing to eliminate errors in calculation and to enable speed of implementation of price changes. Additionally, external indices and price markers can be fed automatically into PromotionManager, enabling speed in execution and eliminating errors from rekeying of data.
- PriceOptimizerAI allows the determination of product and customer-specific target prices and guardrails for timely execution by sales teams. It can also help determine the appropriate timing of price changes to avoid margin compression in light of customer-specific price change constraints. PriceOptimizerAI is a “clear box” methodology, meaning you can see and understand how guidance is calculated and make adjustments as necessary to support your objectives.
- The QuoteConfigurator module lets you leverage price and margin targets and guardrails, and empowers the sales team with automated approval workflows, clear pricing guardrails, and pricing rules for quicker and more confident quoting than ever before.
- As a cloud-native application, when new features and technology emerge, your pricing team has rapid access to these capabilities without costly upgrades. A recent example of new capabilities that can help in margin realization is Pricefx’s Velo module. Velo enables recognition of value drivers for differentiated products and applies them to price setting activities to ensure differential value is not negotiated away.
Pricefx is your knight in pricing armor. It slays your monster, sharpens your view of pricing, eliminates errors, accelerates processes, ensures accurate quoting, fast-tracks approvals and will give its life to protect your margins.