Pricing

Percentages and Absolutes in Changing Environments

By Mitchell Lee
April 7, 2015

Early in April, Joanne Smith and I were in a webinar discussing pricing challenges and response tactics for when companies see their costs drop, particularly related to the difficulties chemical companies are experiencing now with crude prices dropping. Joanne had a lot of great ideas about organizing your thoughts and options moving forward.

In case you missed it, watch a replay of the webinar here.

The case of dropping costs got me thinking about what we see going on in our life as consumers — specifically, buyers of gasoline — as a framework for considering what we do back at the office in our pricing-related roles.

There’s a fair number of people that figure the extra expensive premium gas is worth it for their cars, in terms of performance and specifically, fuel efficiency: even though they might pay 10% more per gallon, they’ll go 10% farther on each gallon of gas. For the sake of argument, let’s just take that as a given.

So, someone that buys premium on the performance basis (and has the option to buy regular without any issues other than its lower performance) would not be second guessing what to buy or asking the premium v. regular question at each visit to the gas station if the relative difference from regular to premium was 10%, even as prices go up.

Or, in numbers — if regular was $3.00, those performance-based buyers would be OK with paying $3.30 for premium.

And, when prices for regular went to $4.00, those buyers would expect $4.40 for premium.

This is all pretty straight forward: regular is the anchor. It moves up and down due to whatever is going on in the world — including whether a big driving vacation period is coming up — and premium is simply priced relative to that anchor.

But, sometimes prices come down. And recently, I’ve noticed an interesting behavior that you’ve likely seen yourself: that 10% performance difference disappeared, at least for a while, and the absolute difference at the high price (40 cents in this case) stayed around the same as prices came down. Premium would be offered at $3.40 when regular dropped back to $3.00 at the pump.

So, there’s at least a couple of things going on here:

Somebody figured out that there is some “stickiness” for a premium product when prices go down. Or put another way, while some “performance-based” buyers would do the calculations once or twice, they then relied on that concept and simply looked for the lowest price for premium. And, it would be a while before they thought to again calculate the relative percentage for premium: “Wait…if premium is 40 cents more than $3.00 regular, I’m not getting value for my money by buying premium. The difference is greater than 10%, and I only expect 10% performance improvement. Back to regular — at least at these prices…”

And, during that time (before the buyer does the value calculation again), the seller has 10 cents more per gallon than if it had been the same 10% relationship on the down, as it had been on the way up.

How might that “stickiness” concept work for your “premium” products — relative to your “regular” products? It’s especially important to think about that in situations when there are general cost drops. That’s certainly the case now for many chemicals that are based on petroleum.

For a library of resources related to pricing best practices for the chemicals industry and to download our latest Pricing in Chemicals eBook, visit us at vendavo.com/chems.

  • chemicals , oil and gas , petroleum , pricing

    Mitchell Lee

    Mitch is a Business Consultant at Vendavo with 25+ years of experience in the technical, operational, marketing, and commercial arenas of the chemical industry. Prior to Vendavo, Mitch was with BASF and Orica in product marketing and business management, driving operational optimization, pricing excellence, and margin improvement, as well as personal engagement in high value sales negotiations. Mitch also has deep experience with raw materials supplier portfolio management having negotiated large scale and long-term agreements with leading suppliers.