Value-based and performance-oriented price management for manufacturers of paints and coatings

In specialty chemicals in particular, companies should focus on proactive price management during this time in order to avoid being driven by the market and ultimately being left behind.

Systematic price differentiation instead of cost-plus

Cost-plus pricing has traditionally been established in most companies in the coatings industry. With this method, prices are set based on costs plus a flat-rate mark-up to achieve the desired margin. This pricing strategy is widely used due to its uncomplicated and quick application, but often leads to prices that do not reflect the customer’s actual willingness to pay. As a rule, the result is either prices that are too high and limit the sales potential or prices that are too low and do not skim off the willingness to pay available on the market. In both cases, profitability suffers.

This problem is exacerbated in the current market environment, as raw material prices and demand are subject to considerable fluctuations and the risks associated with this pricing strategy increase further.
The biggest disadvantage of the cost-plus approach is that the actual value that a product or service represents for the respective customer is not taken into account. In an increasingly differentiated market that specifically demands tailor-made solutions for a wide range of applications and is characterized by widely varying willingness to pay, cost-plus pricing often leads to strategic misalignments. It is therefore advisable to turn your back on exclusively cost-based pricing and focus on a market- and value-oriented pricing approach. A promising approach for this is the introduction of dynamic pricing systems.

Dynamic value pricing in the coatings industry

Two innovative approaches to market-oriented and dynamic pricing can be found in the form of peer pricing or the development of a target price calculator. In the former, a reference price for similar, current requests is determined on the basis of historical order data. In a first step, comparable orders are identified using criteria such as product, container, region, customer type and sales volume. With the help of correction factors, for example for a changed cost basis, price points are derived in the second step to determine the offer price. AI logic is increasingly being used to continuously optimize the identification of suitable old orders and the parameterization of correction factors. A major advantage of peer pricing is the high level of acceptance in the sales teams, as the methodology is based on prices that have already been successfully implemented. Conversely, it must be taken into account that any errors from the past should be corrected manually and that innovations must be priced using dedicated methods for new product pricing due to a lack of historical price points.
The approach with the greatest flexibility for mapping all market requirements is the target price calculator. This can be used to set prices based on a variety of relevant factors in a value-oriented manner. The first step is to systematically identify and evaluate the value drivers of a product from the customer’s perspective. Typical value drivers in the coatings industry are, for example, product properties such as heat resistance, anti-graffiti, UV protection, shorter cleaning times or lower frictional resistance. However, sustainability aspects such as the CO₂ footprint are also becoming increasingly important. The value drivers are then linked to market and order factors such as country, industry, customer type, order quantity, delivery and payment terms, etc., so that a market and value-oriented target price can be determined for each inquiry. This method leads to a high degree of flexibility and market orientation in pricing, but at the same time places higher demands on the development and calibration of the system.

Successful introduction and implementation

In addition to determining value and market-oriented prices, employee acceptance, communication with customers, technical implementation and controlling are crucial for long-term success. In order to convince employees of a new pricing approach, they should be involved in its development at an early stage. It is therefore essential to draw on the expertise of the sales team to identify and evaluate the value drivers. It is also advisable not to define rigid target prices, but to work with target corridors. In order to successfully communicate the added value of the products, sales staff should also be trained in value selling and equipped with suitable tools such as benefit calculators or battle cards. This ensures that customers understand and accept the connection between value and price. At a technical level, peer pricing approaches and target price calculators should first be designed and fine-tuned in prototypes based on Excel and Power BI, for example, before being transferred to CRM or pricing software after a test phase. Finally, the determination of suitable KPIs for measuring price quality is of great importance for tracking and controlling the new processes.

In the current market environment, the development of a value-oriented pricing strategy offers companies in the coatings industry great opportunities to sustainably improve their own earnings situation and gain a decisive competitive advantage.

Tip

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