Most chemical companies lack confidence in their pricing decisions and often don't raise prices regularly over time. Dave Schottland, a partner with Bain's Chemicals practice, describes the three methods best-in-class companies use to make pricing decisions that bring results.
Read the transcript below.
DAVID SCHOTTLAND: Compared to other industries, companies in the chemical industry are among the least confident in their pricing decisions. They're also the least likely to raise prices regularly over time.
The companies in chemicals that have gotten this right have been rewarded very handsomely. When they can improve their pricing capabilities, they're usually adding 200 to 400 basis points to the bottom line. These best-in-class companies consistently raise price over time, and they can then expand margins above and beyond any sort of cost increases.
In particular, they do three things well. First, they price to reflect value. They understand very well what customers care about and what they're willing to pay for. There may be a customer who cares a lot about service levels. These companies understand that and take price up to capture the value.
Second, they use dynamic pricing. They see changes in the market, and they react quickly to take advantage both of market upswings and downturns.
Third, they align incentives. They know that the sales force needs to be paid, not just to grow volume and revenue, but to generate profit for the company.
It's uncertain times in chemicals. Raw material costs are going up. Freight costs are going up. There might be tariffs. It's a big challenge, but it's also a big opportunity.
Best-in-class companies are taking advantage of the uncertainty, and they're pushing their pricing capabilities as far as they can, because they know that it's going to allow them to expand margins over time.
Focusing on value, dynamic pricing and proper incentives can help companies preserve margins.