Be it rising prices for raw materials, volatile foreign exchange rates, supply chain bottlenecks, (or all three), many chemicals companies in Asia are left with no other option but to increase their prices.
By nature, margins in chemicals are already low. In Asia, the industry is hit even harder due to its strong dependence on:
- Oil and gas prices. We’ve already seen 2023 kick off on a worrying note with oil prices hitting seven-year highs. And considering the ongoing geopolitical instability, things could just be getting started.
- Imported materials. As many Asian currencies depreciated against the US dollar, companies with trading contracts in USD faced increased input costs.
- Petrochemicals like benzene, ethylene, and propylene. Here, price surges have a direct impact on many downstream chemicals, making it difficult to protect profits.
Inflation can have a significant impact on profitability and competitiveness. If chemicals companies don’t tackle the challenges urgently, margins will further decline, and the impact will be felt across the globe. So, what can be done?
How to mitigate the impact of inflation
Asian chemical companies must take steps to mitigate the impact. One of the most effective strategies is to increase prices for products, enabling companies to maintain margins and keep up with the rising costs.
Too few companies are putting pricing at the top of their priority list. Even companies that recognize the urgent need to raise prices will likely fail to implement them. In our Global Pricing Study 2021, we found that only 15 percent of companies achieved at least 80 percent of their planned price increases. On average, companies managed to enforce just one-third of the increase they asked for.
Price increase best practices for chemicals
Most businesses attempt to transfer price increases but lack the right plan or method. Through our extensive experience helping chemicals companies achieve their price increase targets, we have identified the following best practices:
- Be swift and systematic: Asian chemical companies must make strong efforts to keep pace in this volatile environment. At the same time, a haphazard approach can irreversibly damage a company’s reputation, leading to a surge in customer churn. Price targets should be set only once thorough assessments are conducted and all departments have provided input.
- Be robust and repeatable: Inflation may call for several price adjustments. Develop high-level targets and strategies, as well as product-specific and customer-specific price targets.
- Keep it simple: It’s harder to justify increases with an overly complex model. Make sure the price increase criteria and logic are easy to explain to customers.
- Remember the commercial aspects: Price sensitivities, contracts, and supply demand will all play a role in how effectively you can increase prices. And don’t forget, there are many ways to adjust prices beyond list and net prices. Offering discounts and introducing specific surcharges are viable alternatives.
- Throw tradition out of the window: Stop leaving huge time gaps between price adjustments. “Once a year” will no longer cut it. Given the rapidly evolving geopolitical situation of today’s dynamic world, prices need to be adjusted half-yearly or even quarterly (the nature and timing of price changes may vary by segment and product line).
- Create a meticulous change management plan: Prepare internally by creating guidelines and escalation rules, engaging with sales teams, and developing a communication plan. Price increase campaigns require full backing from sales, and reps should be trained in detail on how to handle the many facets of price increase initiatives, e.g., negotiations, value selling. This is particularly crucial when the customers’ willingness to pay needs aligning with the current input costs.
- Monitor and track: Define what you will track (your KPIs), how often (frequency), and how (data sources), then keep everyone up to date through standardized dashboards. Have a plan for correcting course where necessary.
Start your price increase process today
Chemical companies must increase prices and transfer costs to their customers. The good news? Despite facing similar cost pressures, many customers will accept price increases right now due to inflation. This won’t last forever, so you need to be fast. Inflation will eventually fall, but your cost increases are here to stay.
Reach out to Kiran Pudi to get started!
