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Understanding the value you provide to your customers is always important when you set prices, but it is even more crucial in commodity product industries.  Take this example of a European chemical manufacturer:

A large customer continued to pressure a sales rep of a chemical commodity products manufacturer for lower prices on a specific product line using “cheaper competition from Asia” as his leverage.  The manufacturer complied with many of these requests because it was a “commodity product” and the manufacturer felt they would lose the business if they did not lower prices.

A year later, during performance reviews, it became apparent the product line was losing money, so the manufacturer decided to discontinue production.  To everyone’s surprise, once the customer was notified about this decision, the customer went into panic mode saying that their production would be impacted, as the Asian competitors could not provide the same level of product quality or JIT delivery service.  They were now willing to renegotiate the contract.  The end result was a renegotiated contract that included a 20% price increase that kept the product line alive.

In the commodity products industry, a distinction must be made between commodity product and a commodity offer.  While the product may be perceived as the commodity, the offer provides opportunity for differentiation and capitalizing on differentiation via product customization, service levels, product quality, delivery, marketing support, etc.  As evidenced by the story above, it’s essential that commodity products companies understand the value they provide to different customers and differentiate offers for each segment.

The key to optimal pricing decisions is understanding the value that you provide to your customers and then testing those findings in a real market place.  There are many analysis approaches, such as Economic Value Mapping, that intend to determine the value you provide your customers based on surveys, customer interviews, etc. The challenge with these types of approaches especially in commodity industries is that they can be difficult to implement in practice and, because they are static in nature, their results may become quickly outdated.  In most cases, the best answer to the value question lies in your data.  The right approach is to implement tools that (1) mine your data to understand the willingness to pay of different customers for your product and service offerings and (2) provide you a framework to make and evaluate your decisions in an automated fashion to support sustainable optimal pricing processes and decisions.  With pricing optimization tools, you can change the role of your pricing organization from price entry based on gut feel and sparse information to a continuous process of analyzing the business, testing new strategies, evaluating results and implementing across the board.

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Martin Simoncic

Martin Simoncic serves as vice president of professional services at PROS. He has led PROS customer implementations in numerous industries, including petroleum, chemical, oil field services, office products distribution and shipping services. Prior to joining the company, Simoncic worked in the transportation industry where he developed integrated pricing management and optimization systems. He earned an M.B.A. with a concentration in logistics and finance from the University of Arkansas, and a B.S. in computer information systems from Louisiana Tech University.

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