Businesses in the chemical industry face several unique obstacles to profitability and revenue growth. Perhaps the most prevalent challenge that chemical companies face is the ongoing fight against product commoditization - constantly searching for ways to innovate and differentiate themselves from their competition. Other common concerns include the growing influence of procurement in the buying process, responding to aggressive competitors, fluctuating raw material costs, and successfully communicating differentiated value. To make things worse, most companies under-manage the pricing function and respond with tactics focused on the short term, most notably cost-cutting.
Pricing professionals will tell you the answer is value-based pricing, yet skeptics claim it's too difficult to implement in the chemical industry. Originally published in the "Practitioner's Section" of the Journal of Business Chemistry in January 2007, this study is now even more relevant and a must-read for executives across all functions - product development, marketing, pricing, and sales - in the chemical industry.
The article addresses the benefits of value-based pricing and details how BASF has effectively implemented a value-based strategy to leverage pricing as the most powerful lever for increasing profitability. Five years later, the value-based approach continues to be a key strategic component for BASF revenue growth, and is one of the main principles evangelized company-wide. It has also produced some impressive results. Last year, the chemicals segment contributed more to BASF earnings than any other business unit, even though other segments produced more sales (see below from the BASF Report 2011 Chart Gallery).
Sales by Segment
Contributions to EBITDA by Segment
How would a value-based strategy affect the bottom line of your organization?