How price optimization and management solutions turn the inflation problem into an opportunity for global specialty chemicals manufacturers to differentiate themselves.
Inflation and its Impact
Cost volatility is nothing new for specialty chemicals manufacturers. Yet, even the most seasoned veterans in the field have not seen the level of input price inflation that has happened over the past two years. Natural gas and petroleum price inflation due to geopolitical tensions is just the latest factor in an across-the-board rise in raw material costs for the industry.
Specialty chemicals manufacturers are feeling more pain than their commodity chemicals peers, due to the nature of their respective pricing approaches. It is much easier to pass through a cost change by adjusting numbers in a formula. Specialty chemicals manufacturers don't generally have the luxury of formula-based pricing to fall back on. Kearney explains:
One explanation for why inflation is squeezing specialty chemicals harder than commodities chemicals comes down to the pricing structure. The costs of commodity chemicals are largely derived from pricing formulas, but prices for specialty chemicals are set through value-based pricing, where formula-based pricing plays little or no role.
There is a glass-half-full way of looking at this conundrum, however. Our new market reality has opened up a major pricing opportunity that specialty chemicals companies can use as a differentiator. It is possible to automate the cost pass-through and price update process, keeping price waterfalls freshly aligned while the competition plays catch-up. Further, by identifying the real value delivered to customers and using it to inform precise price increases based on elasticity measurement, manufacturers can capture greater margins while helping their sales reps defend unavoidable price increases.
To execute this, though, most will need to rapidly transform their pricing capabilities.
Where Manual Pricing Breaks Down
Even prior to these generational levels of inflation, the status quo methods of deriving and managing price in the chemicals industry was reaching its breaking point. The typical price change process might look like this:
- Receive an input cost change
- Comb through agreements to identify affected customers
- Alert those customers that you are triggering the price change clause due to a commodity cost increase
- Factor in each component's cost change one-by-one for very specific product formulations, then aggregate and put into market