Key Metrics for Profitable Chemical Industry Pricing
July 11th, 2022 (Updated 03/10/2023) | 8 min. read
By Robert Smith
We all presumed that as the world emerged out of the shadow of the global pandemic that the chemical industry would calm down from the challenges of the previous 2 years, where issues like sales volumes, prices, costs, and resulting margins abounded. However, then along came the war in Ukraine, which doubled–down the pressures on chemical industry worldwide, as companies remain under siege by an ever-evolving series of challenges. Shortages of raw materials, supply chain bottlenecks, shipping and trucking delays, unprecedented cost increases and inflation, plant shutdowns and restrictions on movement have increased rather than abated by any measure. In that light, we are going to re-examine the key metrics that you will need to keep track of for your chemical company to remain profitable moving forward in the current environment.
At Pricefx, helping chemical companies implement and make the most from their pricing software solutions is a huge part of what we have done for the last decade or so, and part of that process means providing tips on the best key indicators to track in their business to maximize profit and prevent margin leakage.
In this article, we’ll explore some of the key challenges chemical companies are currently facing, and the key pricing metrics they should be focusing on to ensure continued profitability and growth.
Setting the Scene: Today’s Chemical Industry
The last few years have been a whirlwind of unsettling events that have not just disrupted the status quo in the chemical industry but looks like it may have permanently rewritten some of its genetic code. What you and your business always thought to be true has been challenged.
The potential success of your chemical company’s pricing strategy is that you have one and it is communicated clearly to all relevant stakeholders in the organization.
Become more focused, flexible, proactive, and agile in your pricing reactions – pricing is not a ‘set and forget.’
Setting data-driven and innovative pricing strategies to increase profit will require constant attention and updating as the rate of change and uncertainty is not expected to stagnate in the year ahead.
Major supply chain instability followed by a spike in demand, the meeting of which has been hampered by severe logistics backlogs has placed an enormous strain on chemical manufacturers. Raw materials and components of production have increased in price by record amounts, resulting in margin compression. Labor shortages have required simplified operations and the price of fuel has seen distribution costs skyrocket.
Learn More Here About Managing Price Fluctuation, Supply Chain Problems & Avoiding Margin Leakage
The Russian Federation and Ukraine both play leading supply roles in global markets of fertilizers, where exportable supplies are often concentrated in a handful of countries. This concentration could expose these markets to increased vulnerability to shocks and volatility. The Russian Federation until recently stood as the world’s top exporter of nitrogen fertilizers, the second leading supplier of potassium fertilizers and the third largest exporter of phosphorous fertilizers. Ripple effects are being seen worldwide as the chemical industry struggles to plug the gaps in supply caused by the conflict and the associated economic sanctions and shortages of other fertilizer components like ammonia threaten a worldwide food shortage. What’s more, the prospect of curtailed supply of natural gas from Russia to Europe is threatening the ability of chemical producers to maintain continuity of supply on a number of products.
Urea used in Diesel Exhaust Fluid is also in short supply, and it is needed to keep diesel trucks running to deliver food. China, the world’s largest producer of urea, has ceased exports of the chemical due to the enormous rise in diesel prices – and it is all coming at a time of worldwide truck driver shortages.
In that scenario of a double-whammy quickly becoming a triple-whammy, more than ever before, companies in the Chemical Industry will have to understand the challenges they face and focus in on key essential metrics to help them navigate an ever-more complex and competitive landscape.
Key Pricing Metrics in the Chemical Industry
Key to your chemical company’s pricing strategy for the year ahead will be protecting margins, optimizing prices, staying informed, remaining nimble, and underpinning your strategy with the right technology. More than ever, a laser-like focus on your traditional key pricing metrics to monitor your forecasted business outcomes and advancements in your pricing strategy. However, in combination with traditional Chemical Industry pricing metrics you will need to get granular when tracking several additional metrics that may soon become industry pricing metric staples as market uncertainty continues to evolve into the ’new normal.’
‘Traditional’ Chemical Industry Pricing Metrics
Yes, there are a range of pricing metrics that require a new set of eyes to drill down in depth for the first time, don’t forget that the ‘devil is in the detail’ too with your traditional everyday pricing metrics.
Total revenue, volume, contribution margin, earnings, and direct and indirect costs should continue to be watched as closely as they ever were. Contribution margin (the revenue remaining after subtracting the variable costs that go into producing a product) remains one of the most important metrics requiring attention at every level (product, market, and customer level) across your entire business.
Sure, you feel like all you are doing with your pricing is putting out spot fires as they occur now, but don’t forget there is also the future of changing customer needs to consider too. Your Research & Development Spend and Vitality Index (Revenue Growth from New Products) are your long-term profit lifelines, even if it does not feel that way right now.
The Rising ‘New World Order’ Chemical Industry Pricing Metrics
To deal appropriately with what feels like the beginning of a new chapter for the chemical industry (and perhaps even the entire global economy), chemical industry businesses will continually need to review and adjust their strategic pricing plans on the fly.
Of course, doing that means paying attention to a different range of pricing metrics that not only support your short-term earnings but may require constant ongoing focus to ensure long-term business successes;
1. On-Time Delivery Percentage
What percentage of your products are arriving to your customers on time? If your chemicals are being delivered late, how late do they arrive?
Ever since the arrival of the pandemic in March 2020, customer satisfaction with on-time delivery has sharpened in importance and focus and evolved into key metric to keep your eyes on. Keep your on-time delivery percentage high and keep delighted customers coming back and buying more from you more often.
2. Distribution Costs
Keep a keen eye on your unpredictable distribution costs. Shortages of trucks, ships, railway carriages, containers, wooden pallet availability, fuel price fluctuations, and work force shortages (and the accompanying increased wage bills) are beginning to feel like they all could be around for some time to come. And what is worse – they all come with extra costs for your business.
Chemical industry companies should remain on guard against these costs and maintain diligence in passing on increased costs to meet their organizational margin and earnings goals. Distribution costs are often overlooked in some company pricing systems – they must be made transparent and readily available to allow for agility in your organization’s related pricing actions.
3. Customer Retention Rate
Accenture’s 2020 Global Buyer Values Study for Chemicals found that customers often consider changing suppliers and materials if their needs are not met, and it is a trend that shows no evidence of slowing down.
The preparedness to switch can place a considerable portion of a chemical company’s revenue at risk due to customer churn that can be difficult to reverse if it is left unaddressed.
Look to focus on protecting your organization’s key customer relationships and be prepared to win over new customers to stay on the front foot to defend against customer churn.
What’s more, an increased use of data and analytics will be required moving forward to continually monitor your company’s wins and losses and unearth why they occur. Finding new customers is an expensive pastime – it costs a lot less to retain your customers. Use the data and the technology to help put the spotlight on the reasons your current customers are loyal (or not) and on the flip side, creating a strategy that will help you gain new clients.
Data – The Secret of Your Chemical Company’s Pricing Success
To be successful in your pricing journey, the most effective projects include a strategy and a vision to improve your go-to-market, and data analytics to build a fact base and supporting processes.
Data analytics informed by artificial intelligence (AI) are beginning to make it easier for chemical industry players to forecast their pricing and predict their sales numbers.
These types of technologies such as Pricefx’s AI-informed pricing software can empower chemical company sales teams to hit their targets and become nimbler in their price adjustments as a pathway to meeting their profit and margin goals.
Changing static behaviors and mind-sets into proactive ones are crucial for a successful implementation of these new and exciting pricing journeys. By leveraging data analytics to unlock the power of the above key metrics, you will be able to effectively stay on top of the anticipated rapid changes in the chemical industry.
To learn more about Important Pricing Metrics & KPIs to track in your business, check out this handy article below: