Pricing Decisions in Chemical: Using Past & Future Insights

The best pricing decisions require an understanding of both what’s worked in the past (performance) and what could happen in the future (forecasting). When combined, businesses have a holistic view that allows them to make more informed, and ultimately more profitable, pricing decisions.

Now, how can chemical companies take advantage of past and future insights to inform smarter pricing now?

At Pricefx, as the leading enterprise pricing software vendor with chemical companies among the core industries we serve, we appreciate the intense competition that characterizes the industry today – which is why employing a multifaceted approach to pricing, one which pulls from past lessons and future predictions, is key.

In this article, we’ll outline a few key strategies for making better pricing decisions in chemical and process manufacturing industries, starting with performance analytics and followed by forecasting use cases.

Let’s dive in.

Looking to the Past With Performance Analytics

Through assessing how well prices align with key business objectives over time, performance analytics are essential for chemical companies to make more informed pricing decisions later.

Here are a few ways chemical companies can use performance analytics to support effective future pricing, as well as their benefits:

Track & Improve Long-Term Contract Performance

With pricing locked into year-long contracts, contract renewals present chemical companies with a window of opportunity for setting more optimal pricing for the next cycle. However, that window is a short one, and with countless factors to consider in price adjustment calculations, missing the renewal deadline is all too common.

Instead of scrambling to negotiate an offer when contract renewal season comes around, and possibly delaying the process, your company would benefit from having a bird’s-eye view of its active contracts, when they’re up for renewal, and their historical performance against your company’s financial goals. Pricing managers can easily zero in on the most impactful opportunities for improvement by using analytics to assess how older contracts performed in the past and rank them in order of performance.

This way, revised contracts are optimized efficiently, and, with access to the same insights, your sales and pricing teams are aligned on how to do that.

Measure the Effectiveness of Price Changes in the Market

When price changes are needed, understanding the impact of those decisions on margins is vital to your chemical company’s long-term financial health. And, as most of your pricing will be valid for longer periods, you wouldn’t release new prices into the world and leave them there without checking how they’re doing.

To do that, chemical companies should have a means to easily track performance on margin, volume, and other key objectives across its entire customer and product portfolios. To make this complex task more manageable, your company can first get a general picture of the financial health of its customers from above with customer health scoring systems. Underperforming customer profiles can then be explored at a granular level to pinpoint where exactly that underperformance came from.

With price realization analytics KPIs to monitor market responses to your pricing and price performance overall, your company not only ensures its prices remain profitable, but also supports its financial stability in the long term.

Understand Cost-to-Serve and Improve Cost Recovery

If your company isn’t keeping track of its cost-to-serve elements – ship-to costs like freight, warehousing, and packaging – and ensuring these variable costs are reflected in pricing, it’s likely ingesting those extra costs and cutting into its own profit margins in the long term.

Passing off the extra costs of premium services like special packaging or extensive warehousing to customers ensures they pay fair prices for the added value. Through cost recovery KPIs, cost-to-serve analysis provides companies with a comprehensive view of shipping costs across customers and products to enable them to keep cost data accurate and up to date. And, by understanding how their high cost-to-serve customers perform, companies can quickly act and target underpricing when it surfaces.

Identify and Improve Underperforming Areas

If, year after year, your company is bringing in lower margins than expected from its customers and products, it’s likely a sign that sales teams are negotiating prices at lower rates than they’re valued.

Whether due to over discounting, negating cost to serve, or missing the mark on willingness to pay, the underlying causes will continue if your company lacks the tools to track margin performance over time.

Margin performance analytics through KPIs like gross margin change enable your company to easily visualize how its customer and product groups performed against their ideal margins or compared to other customers. And, to know where to start, companies can turn to their “worst” performers to apply the most impactful changes first.

With greater visibility into underperforming areas across its customers and products, your company can quickly single out and address major outliers and, ultimately, meet its margin targets in the long term.

Looking to the Future With Forecasting

Smart pricing decision-making in the chemical industry isn’t just about picking up on what the past taught us to inform the present. In equal measure, it’s about predicting outcomes in the face of future market conditions. To do that reliably, we’ll need forecasting.

Here are some key uses of forecasting for chemical pricing and their benefits:

Simulate Price Change Scenarios for Better Price Realization

An age-old struggle for chemical businesses has been meeting annual business objectives while up against fluctuations in variable costs, such as those from raw materials (e.g., petrochemicals and polymers) or freight. Problem is, sales and pricing executives rarely have the time to cover all the factors needed for making smart pricing decisions consistently when running manual calculations.

For quick but well-informed price adjustments, teams could simulate multiple pricing scenarios simultaneously to evaluate their impact on margin based on diverse cost factors at the product, market, and geographic level. These simulations allow execs to understand their best option in negotiations and, as they’ve already seen their projected impact, improve price realization in the long term.

Improve Margins With Forecasting Across Similar Products

Chemical and process manufacturing industries are subject to rapidly evolving market conditions; with raw material costs and supply and demand levels among the most influential.

In these sectors, where competitive and geopolitical pressures are key drivers, accurate forecasting isn’t a nice-to-have, it’s imperative – not only for identifying optimal times to act, but also for knowing when to pull back planned production and stock levels.

Companies with vast product portfolios struggling to maintain profitable margins can run simulations for products with similar production components, such as raw materials, to forecast cost or supply and demand changes. By grouping products according to their common resources in simulations, chemical companies can react quickly and accurately in their prices to forecasted instabilities, like supply chain disruptions, raw material shortages, or shifting demand levels, in one fell swoop.

How Can We Support Your Company’s Future Pricing Success?

In this article, we’ve outlined a few ways chemical and process manufacturing companies, like yours, can take advantage of performance analytics and forecasting to make better pricing decisions in the future.

The strategies we’ve called out in this article are ones which your company can benefit from through our pricing software. Want to discover more about how Pricefx solutions enhance chemical industry pricing?

Consider making the article below your next stop to find out: