Compared with other industries, chemical companies are among the least confident in their pricing decisions and the least likely to raise prices effectively. Until recently, they haven’t had to do so, but as the cost of raw materials begins to rise, they will want to build up their atrophied pricing muscles to preserve their margins.
Bain & Company studied pricing behavior in chemicals and found that top performers were far more likely to use dynamic pricing—namely, reacting quickly to market changes and taking full advantage of upswings and downturns. Leaders were also more likely to price in ways that reflected their products’ value to customers, rather than just using the production cost to formulate a price. One company learned from its own technology service team that its additive removed heavy metals and thus vastly increased the life span of a customer’s turbines. Another learned that its product was specified in a customer’s formulation and so had no simple substitutes. Both of these discoveries revealed sources of value that the companies were able to capture.
There’s never a bad time to improve pricing capabilities, but there’s no better time than now. Companies that follow the formula for pricing success can outperform the market and maintain a healthy bottom line.
David Burns is a partner with Bain & Company in Chicago, and David Schottland is a Bain principal in New York. Both work with Bain's Global Chemicals practice.
Focusing on value, dynamic pricing and proper incentives can help companies preserve margins.