The last three years have been chaotic for most companies. Chemical producers who’ve had to deal with commodity cost inflation, supply chain crises, labor shortages, and energy spikes were arguably the most adversely impacted. As a result, most chemical companies passed on massive price increases just to survive, without much regard to customer sentiment or competitive response. This was no time for surgical pricing actions, mostly broad-brush pricing actions. No time for scalpels, only sledgehammers.

Now that most of the chaos seems to be behind us, companies are wondering why they seem to be rapidly losing sales in some segments, while some other areas seem to be growing rosily. Why is this happening? Is it market-driven or self-inflicted? How do you fix this?

My name is Pradeep Suresh, and I am a partner in the chemicals sector within Oliver Wyman’s Energy and Natural Resources Practice. I am a PhD chemical engineer and started my career in Dow Chemicals’ R&D laboratories 15 years ago. Solving complex business problems and creating tangible impact for clients was why I fell in love with management consulting, and the field of pricing, in particular. Today, I bring my deep chemicals knowledge and extensive experience to unlock value for clients, solving some of the most challenging problems in pricing.

While pricing can be a company’s single biggest growth driver, getting pricing wrong not only impacts a company’s brand perception and value proposition but can even lead to customer churn and sales decline. How is this possible? Well, it’s a concept called “price-volume equilibrium”. In B2B industries, such as chemicals, where pricing is usually opaque or hard to compare between producers, pricing within a zone of indifference for a given product and customer combination usually results in no change in the customer’s buying behaviors.

In the last three years, with most chemical raw material costs inflating by more than 20%, customers have had a hard time figuring out what they are willing to pay for a product and have not had time to compare the value proposition of competing products. Chemical producers who have used ‘sledgehammer’ type pricing approaches have made the cardinal mistake, in some cases, of overstepping a product’s price-value equation, despite only attempting to cover cost increases. This then upsets the price-volume equilibrium of this product in the market vis-à-vis competition and the customer’s value proposition.

So, what can happen as a result? Customers figure out that certain product prices are completely out of whack compared to their competitive value proposition. In the best-case scenario, they “cherry-pick” these products to selectively put out to bid. Worst-case scenario, customers feel price gouged in prior years and decide to switch all their business to competition. Neither is a good outcome. This is very real and happening to several of my clients as we speak.

Irresponsible pricing can be very damaging to clients’ profit and loss statements and can wreck a company’s valuation in the long term. My clients ask me, “Is there is a fix?” “How do you restore this equilibrium?”

First, to fix this problem, one must realize that they have this problem and to what extent. Getting granular visibility to price/cost trends is the first step towards restoring this equilibrium.

Second, companies should develop risk scorecards that highlight areas where their portfolio is most exposed to churn risk. Factors such as product/service differentiation, volume trends, and competitive intensity must be factored into these scorecards to have a holistic view.

Finally, actions such as targeted promotions, growth rebates, and volume discounts need to be discussed, tested, and implemented in areas where the price-volume equilibrium needs to be restored. Areas where churn risk is imminent need to be shored up with “price defense” plays and targeted negotiation training programs for the salesforce. Some other areas where the scorecard reveals that pricing has undershot market entitlement should be targets for further price increases to boost margins.

Understanding price-volume equilibrium and better leveraging it can help chemical companies pick up market share in a slow-growth market while protecting or even boosting margins.

I’m Pradeep Suresh, and this is my take on price-volume equilibrium in the chemicals industry.