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Chemicals and Construction

How is your
pricing?
An online survey report and five key
insights for your pricing
Dr. Karl-Heinz Sebastian
Dr. Andrea Maessen

SIMON  KUCHER & PARTNERS


Strategy & Marketing Consultants

www.simon-kucher.com

ow is your pricing? What type of answers


would you expect when asking managers,
sales or marketing directors this question? A short
and concise reply? Probably not. Most likely they
will provide you with long explanations that facing
the current cost dynamics margin protection or
improvements are the highest priority. But, they
would continue, irrational competitors and price
aggression force them to make price concessions.
They will point out that the value-to-customer and
the customers willingness to pay are extremely
important for pricing decisions. At the same time,
they will complain that customers have turned into
price buyers who care little about the value of
products and services.
But, the good news first: It is not only implementation
that counts like Alfred Brittain stated You can come up
with the best strategy in the world, the implementation is
90 percent of it. Pricing strategy, price determination as
well as price implementation is important. This is the
result of a survey conducted among nearly 200 European
managers from the chemicals and construction industry in
May/June 2011. The managers were asked to evaluate ten
core elements of their pricing. The following report
summarizes the key findings.

Pricing strategy
reactive and driven by competition
Is your pricing strategy driven by your own business
strategy specifics and the relative competitive advantage?
Or is it rather geared toward industry best practices and
benchmarks? These were the first questions posed to
managers. 60% stated that their pricing strategies are
based on their own strength and differentiation power.
20% were neutral in their judgments and another 20%
use best practices and benchmarks as the basis for their
pricing strategy.
In terms of strategic targets in pricing, the direction of the
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answers is clear. 57% of the managers stated that margin


and market share targets are carefully balanced in their
pricing strategy. Only every fourth respondent admitted
that their pricing strategy is primarily volume driven und
dominated by a keep the plant filled mentality. Based on
our experience, the importance of market share is still
over-estimated in many companies. Any gains in market
share that are not backed by clear performance
advantages will negatively impact prices and margins. This
effect is typically recognized too late. Price levels are hard
to correct at this stage and margins erode.
The pricing strategy is driven by competition, too. About
40% of the managers in the survey apply a tit-for-tat
principle in these cases. Only one-third uses specific
methods and tools (e.g. scenario techniques, market
simulation models, or approaches of game theory) to back
up their strategic decisions.

Fig. 1: Overall result

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Price determination good progress,


but still a way to go
In price determination, 40% of the respondents still focus
primarily on product features and costs. However, at least
with a narrow majority, 44% consider product value in
applications and the overall value of the offering as
important when setting prices. The application-based
approach to price determination was favored particularly
by the marketing directors represented in the sample. If
this trend continues, marketers may no longer be the
lone voice in the wilderness. Only one-third of the
respondents considers the value of their own product
throughout the entire value chain as a key driver for their
price decision. This means that value-based pricing is
obviously becoming more widely spread, but there is still
way to go. This is especially true for respondents from the
chemical industry. Only 29% set their prices based on a
thorough understanding of the value chain.
In most of the responses, the prices follow the allinclusive approach which means they include both the
value of the product and the value of the services
provided to the customer. At least one-third de-bundles
the product and service offering in pricing. The
respondents from the chemical industry are strongly
driven by this all-inclusive approach.
How are customer prices set? Here the answer is clear,
but incomplete. 57% of the respondents answered that
they differentiate prices for customers according to
customer size and potential. Only 27% base their
customer prices on customer profiles or customer behavior
dimensions. The link between customer segmentation and
price differentiation is obviously not yet fully aligned in the
industries represented in the sample and shows potential
for margin improvements.

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Price execution among customers


lots of freedom, little structure
When net price agreements exist, price execution tends to
follow the principle We try to get the best prices all the
time. Only less than 40% of the managers interviewed
from the chemical industry follow a pre-defined structure
in price execution. When price and discount schemes are
the prevailing industry practice, like they are in most
construction markets, more respondents agreed to follow
a given price structure. However, more than 40% feel that
these structures are frequently not applied in a consistent
and predictable manner.
This is also confirmed by the finding that in the majority of
cases, the sales force is granted a high level of freedom in
price negotiations. Less than 40% analyze their position of
power systematically, flesh out their negotiation strategy
and plan potential concessions so that they are well
prepared for negotiations. Based on our observations, this
is one reason why price increase initiatives fall short of
their targets and why increasing raw material costs put
pressure on margins. A rule of thumb: Good negotiation
preparation is 80% of the success.
Finally, the majority of managers in the survey agrees that
the pricing and sales capabilities of the own organization
are more important for price execution
than tools und IT systems. 53% agree
Explanatory notes:
that capabilities are drivers of price
execution, while 26% felt the driver is
The online survey was conducted in
tools. Tools, systems, and software
May/June 2011. Nearly 200 managers
are necessary prerequisites for
responded. Two-thirds of the respondents
pricing. Crucial, however, is the
work in the construction industry, one-third
organizations pricing capability.
in the chemicals industry. 34% of the
respondents
are
members
of
the
management board, 22% are marketing
managers, 25% are sales managers and
19% have other functions.

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Five key insights for your pricing


1.

Pricing strategies are strongly reactive and driven by


competition. They lack backing from alternatives, options
and scenarios.

2.

Focusing exclusively on the product value is not sufficient in


pricing. Critical is application-based value and value along
the value chain. This value determines your pricing power
and is the key driver for price setting.

3.

Customer size and potential are criteria that can be


quantified sufficiently well for customer pricing. However,
they are not sufficient to capture the various degrees of
customer price differentiation. Behavioral dimensions and
customer segmentation approaches are necessary to fully
exploit differentiation potential.

4.

If there is value and performance competition mainly in


specialty market environments all-inclusive offerings are
appropriate. If price competition prevails, products and
services should be de-bundled and priced separately.

5.

Freedom in price negotiations is important and necessary,


but it needs to be supported by a systematic assessment of
the companys own position of power. A forward-looking
concession plan is also a part of it.

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Abb. 2: Survey results from the chemicals and construction industry

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Dr. Karl-Heinz Sebastian is a senior partner of SIMON  KUCHER &


PARTNERS, Strategy & Marketing Consultants. He leads the
competence center 'Chemicals & Construction' at SKP and specializes
in the development, implementation, controlling, and steering of
pricing initiatives.
Dr. Andrea Maessen is a partner of SIMON  KUCHER & PARTNERS,
Strategy & Marketing Consultants, a member of the competence
center 'Construction & Chemicals' and head of the Chemicals unit.
She specializes in the development of price strategies and the
improvement of pricing processes.
Simon-Kucher & Partners, Strategy & Marketing Consultants is a
global consulting firm with 500 professionals in 23 offices worldwide
focusing on Smart Profit GrowthSM. Founded in 1985, the company
has more than 25 years of experience providing strategy and marketing consulting and is regarded as the worlds leading pricing advisor.
Cologne, August 2011

SIMON  KUCHER & PARTNERS


Strategy & Marketing Consultants

Cologne office:
Gustav-Heinemann-Ufer 56 D-50968 Cologne Germany
Tel.
++49-221-36794-400
Fax
++49-221-36794-498
E-mail karl-heinz.sebastian@simon-kucher.com
andrea.maessen@simon-kucher.com
www.simon-kucher.com