The Key to Keeping Customers Happy in the Chemical Industry
In this article, we’ll explore what makes pricing in the chemical industry uniquely complex, why companies are often dealing with thousands of price points, the impact of ever-changing input costs and discover the key to winning more opportunities while protecting the bottom line!
Pricing in the chemical industry is more complicated than for other industries as you often have complex product portfolios and customer pricing is often negotiated individually. This pricing can come in the form of spot or negotiated pricing for customers, or indexed or formula pricing for contracts, also often individually negotiated. This all leads to a lot to manage with sales and pricing teams in an environment of rapidly changing underlying costs.
If one of our goals is to keep customers happy, then customers must feel the pricing process is treating them fairly in light of market conditions and competitive dynamics. With the complexity faced by chemical producers in terms of managing costs and product availability, what factors need to be addressed?
1. Speed and agility – quoting
In today’s digital world, customers expect sellers to know their markets and to be able to respond quickly to requests for new or updated pricing. Managing thousands of individually negotiated prices without a governing structure, target prices, and guardrails for price guidance makes it difficult to respond to a customer with the right price in a timely manner. Speed wins business!
2. Speed and agility – approvals
Without a formalized and automated approach to approve price changes, excessive time can be taken to process a price change that a customer would expect to be addressed almost instantaneously. This results in putting business at risk to competitors who do respond quickly and delight the customer with speed and the desired price.
3. Efficiency in updating and communicating price changes
With high levels of transparency for raw material and energy pricing, customers can see the factors that will impact price changes before sellers are able to communicate with them on actual price changes. When underlying costs are declining, customers expect price changes to be communicated quickly and efficiently. Price management using Excel and antiquated processes makes customer satisfaction in this area unattainable.
Delays in updating customer pricing can lead to delays in price and margin realization, and to problems in the invoice and payment process. Due to the transparency and availability of the external price indices, customers recognize invoices with incorrect or delayed application of indices and hold them for payment until corrected or short pay them in accordance with what they believe is correct pricing, leading to cash flow issues for the seller.
Special Customer Agreements Add Complexity
And as if this wasn’t complicated enough, not every customer has the same mechanisms or indices in use for price increases. Some contracts might be updated according to this month’s material index change, others last month’s, and some on a rolling three-month basis, and some with an index from one information service while others prefer another…
So, the level of complexity needing to be managed increases significantly due to the outcome of customer price negotiations, where flexibility in negotiating price formulas and the timing of their application is typical in practice. When every customer price formula is unique, substantial complexity is added to price administration and the generation of timely and accurate invoices.
Pricing Errors Eating Away at Resources
You can imagine that the scenario described above, when managed manually with spreadsheets, leads to the potential for massive pricing and invoicing errors. We’ve all heard horror stories of millions of dollars in losses due to incorrectly placed decimal points or typos. Any manual touchpoints create space for error. And even little errors can be costly, to time, money, and reputation.
Updating pricing with errors will do little to instill trust in your customers. And while they may be very vocal about errors in your favor, you may find them uncharacteristically silent when the error is in theirs. This can mean that some pricing mistakes are totally missed, and money is left on the table.
Any errors that are picked up end up costing the pricing team their time. Having already spent hours manually copying and pasting (no doubt when the error occurred), updates from indexes into their ERP or from there to a PDF, now they must do the work all over again and double check everything else for accuracy. Time spent fixing errors is time they can’t be optimizing prices, maximizing profits, or boosting revenue… Additionally, consider the additional effort required on the part of sales, customer service, accounts receivable, and credit personnel to resolve invoicing and payment issues because of these pricing errors. The cost of rework becomes substantial, and in some cases simply provides the customer with fodder for other issues they wish to negotiate with the seller.
What’s the Solution?
1. Automated Processes
In the chemical industry, your input costs can shift so dramatically from month to month that you can very easily go from making money to losing money if you don’t protect yourself. This doesn’t mean eliminating price change mechanisms and setting your prices so high that they absorb the volatility because you’re never to going to win opportunities being overpriced. It means building in price-change mechanisms that take that volatility into account to calculate prices off them that ensure profitability.
It’s true, everyone in the industry is using the same mechanisms, but the way you win the opportunity is by having the right price upfront. And the only way to do this is through automation.
By automating the process of updating your target pricing and guidance, you can ensure you’re being competitive in the marketplace and winning those opportunities, while still protecting your bottom line. Price optimization enables the sales and pricing teams to have segment-specific, updated price targets and guidance at the frequency necessary to stay current with the market.
Not only will your pricing team save hours each month, but you eradicate the risk of errors. And having a seamlessly automated process for updating prices makes for better interactions with customers.
Getting your prices right the first time is the new competitive battle ground in the chemical industry.
Besides, pricing worksheets that rely on one or two people to operate effectively are not only prone to error but are unscalable and cannot shift when market forces require an innovative approach.
2. Negotiation Power
Being able to implement price and method change mechanisms in response to negotiations, makes you a friendlier partner to do business with. To do this safely, you need the flexibility in your system to be able to easily calculate the impact of these negotiations, e.g., whether a change falls within the price guard rails set by the pricing strategy team, and what effect it would have on the bottom line.
By having inline analytics and all the relevant information related to the deal to hand when you’re making these kinds of decisions, you’re able to confidently change your quote based on the terms of the negotiation because you know the inputs are correct.
3. Speed and Accuracy
Quote turnarounds can be painstakingly slow as they must go through multiple departments before they’re approved. It could take days. And even then, the quote might be way off mark. Slow and/or inaccurate turnarounds lose customers. Inline analytics can give you real negotiation insight into the impact of your price choices and automated inputs mean you can quickly provide a confident quote to your customer without having to wait for a colleague (inevitably the one who’s on vacation) to respond to a query.
This is your competitive edge: a quicker price means a faster close.
Pricefx – Your Differentiator
Pricefx is price management software that seamlessly integrates with your price lists, Excel, ERP, and CRM systems to bring all your pricing data into one place.
You can systematize all your price points across customers and products with pre-validated prices and rules for quoting and tools for analysis of special price efficacy that guide you toward a quick and confident quote and through any pushback or negotiation in a way that not only keeps the customer happy but ensures profitability.
Pricefx’s Price Optimization with POAI enables business teams to develop and then rapidly update price targets and guidance for use by sales teams, in consideration of market segmentation. The “clear box” approach to price optimization from POAI enables businesses to understand how targets and guidance are developed and to adjust as needed to align with the market. Updating guidance is easy and removes excuses for out-of-date targets and floors, which makes it easier to reduce the number of approval escalations. Approval escalations slow down the quoting process and ultimately impact win rates.
And at the end of the month, you can replace error-prone copy and pasting from indexes with seamless automated importing directly into your ERP. This can save you hours, perhaps days, each month, and move you away from merely administrating price toward being able to strategize price.
By having solid price mechanisms in place and automating prices for thousands of various products, you’re not only able to embrace the volatility of cost inputs but offer competitive prices to your customers while protecting your bottom line.
And for those engaged in large, complex deals, Pricefx’s Velo offering is a one-stop deal-planning and negotiating tool designed to help you maximize value from such deals, by supporting faster, more precise price setting.
With Pricefx, not only can you make confident data-driven pricing decisions, but your analytics will uncover opportunities for uplift, point out anomalies and flag any issues.
But most importantly, you can be getting the right price to the customer upfront, closing those deals faster and ensuring your bottom line is heading in the right direction.
If you’re looking to carve out your competitive edge, Pricefx will take you there.