Pricing Products in the Chemical and AgChem Industry

Continuing the journey of writing about the agrochemical industry, this week, I would like to talk about something I used to teach in college when I was in charge of designing and implementing a pricing department in a company Chile: Pricing. Having said that, my goal with this article is to show you some techniques that can be useful no matter whether you are a manager or analyst who works in this industry or whether you work in another industry.

Introduction

Pricing is a key element in driving profitability and market competitiveness across industries, and the chemical sector, specifically in the ag input industries, is no exception. In this article, we aim to provide you with a set of pricing techniques and strategies that are not only applicable to the chemical industry but can also be adapted to other sectors. Whether you are a marketing manager (or a PM) setting strategic price points or an analyst fine-tuning price models, the concepts shared here will help enhance your decision-making process.

We will begin by exploring fundamental concepts like value and price elasticity, which will provide a foundation for deeper analyses. From there, we’ll dive into value-pricing methods, pricing promotions, pocket price waterfalls, and variance analysis. Each section is designed to equip you with the tools and insights to better understand your pricing dynamics, improve profitability, and ensure your products are positioned effectively in the marketplace.

What is value?

Well, let me quote Warren Buffet to give you a glimpse of what value is: “Price is what you pay, and Value is what you get”; Having said that; value is something defined by our customers, and as companies, our job is building products that allow customers to solve a problem and, thus, maximize their value on a specific task they perform, in this case, increase crop yield by protecting the crops.

I- Price elasticity drivers - factors that affect pricing

In this section, we will explore some of the critical factors that influence pricing decisions, especially within the agrochemical industry.

1. Product Uniqueness: Consumers tend to be less price-sensitive when a product or service is unique or has limited substitutes. For example, imagine you’re selling a product in a market with only one competitor. Now, if your competitor starts phasing out their product, leaving yours as the sole option, what would you do? Logic suggests that if your product solves a crucial problem for growers, you could raise the price, as the lack of alternatives reduces price sensitivity. In fact, I applied this approach successfully in 2011, doubling the price of a product. The result? Sales revenue and profit doubled while the sales volume remained almost constant throughout the year.
2. Relative Purchase Cost: Price sensitivity decreases when the cost of the product is relatively low compared to the buyer's overall budget. This concept is particularly important when analyzing our primary customers: growers. Do you know what portion of a grower’s total production costs is allocated to agrochemicals? It’s around 10-15%, depending on the crop. Growers face other significant expenses, such as labor, energy, water, fertilizers, and seeds. Furthermore, agrochemical costs must be split among herbicides, fungicides, and insecticides. This raises an important question: just how price-sensitive are growers regarding your product? The answer depends on several factors, including the number of competitors in the market, the price of the crop that season, and more. However, the general principle remains the same—growers' sensitivity to price is often lower when agrochemical costs are a smaller part of their overall expenses.
3. Customer Switching Costs: When switching costs are high, customers become less sensitive to price changes. For instance, if a business signs a long-term contract with a major ERP or CRM provider, switching to a new vendor in the near future is unlikely due to the costs and risks involved in such a change.
4. Perceived Risk: Consumers are also less price-sensitive when the perceived risk of using a different product or service is high. This factor is particularly relevant for large R&D companies with well-established brands. Their years of proven experience and reputation for quality allow them to charge premium prices because customers trust their products. On the other hand, companies offering off-patent or generic products face a greater challenge in overcoming this barrier. That said, there are tactics to mitigate these risks, though I won’t delve into them here. In my experience, perceived risk plays a critical role in shaping post-patent strategies for active ingredients, allowing businesses to leverage their competitive advantages effectively.
5. Relative Cost Compared to End Benefit: Price sensitivity is also lower when the cost of the product is small compared to the overall benefit it provides. In the agrochemical context, this could mean highlighting how your product improves crop yields. A strong value proposition that emphasizes this connection can help establish the product’s value in the grower’s mind, reducing their focus on price.
6. Product Price Positioning: Consumers tend to be less price-sensitive with super-premium products compared to core or low-priced alternatives. The perceived exclusivity and added value of premium products often justify higher price points.
7. Awareness and Understanding: Price sensitivity decreases when the product is complex or difficult to understand, especially in cases where the purchase is infrequent. While this is less common in the agrochemical industry, it’s worth considering for niche or highly specialized products.
8. Price-Quality Perception: Consumers are less price-sensitive when they perceive a strong correlation between price and quality. When the perception is that “you get what you pay for,” customers are more likely to accept a higher price point.
9. Product Uniqueness: Consumers are less price-sensitive if a product or service is unique or has few substitutes. For instance, let's say that you are selling a product in the industry that only has one competitor, However, during the year you check with your business intelligence and sales team that the competitor is phasing out this product and you are the only product available in the market, what would you do? The logic would say that if your product is essential for the grower's problem, you may charge more for this product. In fact, this is something that I, successfully, did in 2011 doubling the price of a product, and in consequence, doubling the budget sales and profit since the volume sold remained almost constant throughout that year.

II- Basic KPIs

In this section, we will show you a glimpse of how you can start analyzing your data for your pricing analysis. As you may know, you need to establish an ETL (Extract, Transform, and Load) process in order to obtain in a timely manner the information you need to improve your decision-making.

Step 1- Pareto Analysis

This analysis is one of the simplest and most relevant ways to organize your priorities managing your product portfolio. The logic behind it just follows the 80/20 principle, which helps you to focus your energies on the products that either provide more gross profit or sales to your company (if your strategic focus is on market share, sales. Otherwise, profit).

Step 2- Product Sales vs Gross Margin vs Volume sold

After selecting your main products, you must establish certain criteria in order to dig, even, deeper into your understanding of them. Here I recommend creating a bubble chart that helps you to map your key products in terms of sales vs gross margin, and add as a size of the bubbles the volume-sales of those products.

Step 3- Historical trendline 

Finally, you can create a trendline matching price and quantity and see whether there is either a positive or a negative correlation between price and quantity sold (this chart could be yearly or monthly for a maximum of 5 years to understand the seasonality of your product). In the image below, for instance, we can see the negative correlation between price and quantity of product A (price increase, volume decreases). This insight is relevant because it allows you to ask the right questions about your product and its price elasticity; you can allocate resources for market research to validate that assumption.

The following steps involve that you create a pivot table with your customers and seeing how these key products are ranked among them, then checking their DSO (days sales outstanding) to get a clear overview of what is going on with your portfolio, financially. Another checking point you must do is to review (if data is available) the sell-out of your product compared with your sell-in to see whether you are overstocking the inventory of your distribution channel.

Finally, as a complementary analysis, we recommend you establish a range management process to focus on reviewing your product codes with minimum volumes sold and decide, later, whether you have to remove some of those products from your portfolio; the reason behind this is that maybe you are selling a product with a very peculiar packaging that reduces the scale of your operation and affects company's efficiency.

Tip: "Remember, in your analysis is always better to go from general to specific in order to tell a story about your product"

III- Value-pricing concept

The value-pricing approach to product pricing is driven by a few factors. One of those factors is the true economic value, which is a measure of the benefits that the product delivers to the customer, relative to other products, regardless of whether your customer recognizes those benefits. Another factor is the perceived value, which is the value that your customer perceives, and it is influenced by the price of substitutes and your marketing efforts. Then you have our product price (our goal), and finally, the cost of goods sold (COGS) of your product. In the image below we can see that the incentive of the consumer to buy a product is the difference between the perceived value and product price. On the other hand, the incentive of the company to sell a product is the difference between the product price and the COGS.

What happens if we want to set a price from scratch? Well, we have to calculate the price focusing on the price of the best alternative available, measure the product differentials (or incremental benefits), and consider other costs such as initial cost (adoption cost) and post-purchase cost (maintenance). For further details, I recommend you to check the table below, which explains to you in detail with a few tips about what to do.

Value Map

As you may have noticed, I've been trying to explain complex concepts with several images and tables in order to ensure that the message is clear for you. In this section, I will continue doing this because explaining a value map is a complex task, but with images, it makes my life easier, and I'm pretty sure that yours as well.

What is a value map? It is a visual and quantitative representation of the Perceived Benefits of your product, which is composed of the Key Buying Factors (KBF) of your product, and the Perceived Value of your product, which is a component of the product price, dose (or rate) per acre (or hectare). This technique often uses market share to add a weight of relative importance among different products in your visualization. One of the main components of this technique is that you can calculate a regression between those two variables and establish a line, which is defined as a fair-price line, above and below this line you can calculate one-standard deviation to establish a range of fair-price line (see the image below).

How can we interpret this chart?

• You can create a matrix of 4-quadrants (calculating the averages of your perceived values and perceived benefits separately)
• With these 4-quadrants you can evaluate how is the competitive position of your product related to your competitors.
• Remember: the closer to the fair-price line, the better for your product (no matter in which quadrant you are in)
• On the top left, your product is perceived as expensive and delivers just a few benefits. This means that your product is about to die: Value disadvantage
• On the bottom-left, your product is not considered expensive and provides just a few benefits. This means that it could be a fighting brand or commodity
• On the bottom right, your product is not considered expensive and provides several benefits to the customer. This means that you are giving away value for two main reasons: either you did not set the price correctly in the first place or you want to penetrate the market aggressively gaining market share (you are consciously giving away producer surplus to the customer).
• On the top right, your product is considered expensive enough due to the perceived benefits it delivers to your customers. In this case, you are extracting value with your product.

Value Map Example

As we can see from the table below, we can quantify the different levels of attributes (KBF) of each product by measuring those using a Likert scale (1 to 10, where 1 is the lowest and 10 is the highest grade possible). After that, we have to calculate their relative weights -if you have resources, you can obtain these from market research. Otherwise, you can collect data from a small survey and send it to experts within and outside your company- to calculate the perceived benefit of your product. Next, we can add the price, dose (or rate) per acre (or hectare) in order to calculate the perceived value of your product. Finally, we can add the market share (if you have data available) to show the relative importance of the products in the analysis.

Before moving forward with the analysis, there is something that I have to mention: "if the technical evaluation of your KBFs are excellent compared with your competitors in your specific segment, then you should use them as differentiators of your value proposition in your campaign communication, don't you think? 

Now let’s focus on the analysis:

• Product B: this product, in terms of perceived benefits, is the second-highest among its competitors. In terms of its perceived value is relatively low (third-lowest among competitors). Additionally, the product lies outside the fair-price line range, which means that it is giving away value, presumably This could be because it is performing an aggressive penetration strategy to increase its market share.
• Product A: this product, in terms of perceived benefits, does not outperform, on average, its competitors. In terms of its perceived value is the most expensive among competitors. Additionally, the product lies outside the fair-price line range, which means that two things may happen: One, the product is going to a slow death in the market, or two, the commercial team will decide to adjust this price-differential in order to be more competitive in the market.
• Product C: this product, in terms of perceived benefits, is the highest among its competitors. In terms of its perceived value is the second-highest among competitors. Additionally, the product lies inside the fair-price line range, which means that its price was perfectly set.
• Products G and F: these products, in terms of perceived benefits, are the lowest among their competitors. In terms of its perceived value is the lowest among its competitors. Additionally, these products lie inside the fair-price line range, which means that their price was perfectly set. Another insight that we can get from this, is that these products are, apparently, off-patent (or generics).

Finally, to conclude this section, I would like to remind you that this picture cannot be static because products change, and companies launch new and better solutions. In consequence, my recommendation is to do this exercise every two years or before (at least 3 months) launching a new product (real-world example Fungicides, Corn in the US).

IV - Pricing Discounts techniques

In this section, we will show why it is important to know your product's profitability to decide whether it is possible to apply a price reduction. As you may know, some products are more sensitive to price reduction than others. Thus, in this section, we will use the break-even analysis to elaborate on a quantitative KPI that allows us to verify our success in our campaign by reviewing two cases (for further details you can review the chapter on financial analysis of the book the strategy and tactics of pricing of Thomas Nagle).

Price discounts for products with low gross margin

In this case, the additional volume needed to compensate for the price discount is extremely high (see chart below), making it almost impossible to compensate for the price decrease to at least maintain your profitability.

Price discounts for products with high gross margin 

In this case, the additional volume needed to compensate for the price discount is extremely low, which gives you a great competitive advantage if your brand positioning is good and your timing in the promotion is right. As an example, I remember that back in 2015, in Mexico, we decided to run a promotion campaign to increase the volume sold of a product that I was in charge of. One of the key points of our campaign was that we used this methodology as a KPI to measure our success in doing that price reduction. After the campaign, reviewing the numbers, we were impressed with the result because we not only accomplished our budget but also doubled it. This tactic and methodology helped us to avoid removing that product from the portfolio in that country. 

To finish this section, I want to remind you that before deciding on any price-discount campaign, you must have established a price policy beforehand. Otherwise, you may receive a terrible surprise, and you will have to worry about a huge credit note that you have to send to your partner at the distribution channel level.

V- Pocket Price Waterfall

In this section, I will show you why it is important to build a robust ETL process in order to use the granularity of Pocket Price Waterfall (see image below) to improve your efficiency and your decision-making of your product portfolio.

First of all, do you know how much you pay for rebates per product? let me rephrase this question; do you know how much you pay for rebates in the top-5 products of your portfolio? Well, in reality, almost no one in this industry knows what actually happens, so don't feel bad about it. But why I should care about this. The answer to this is efficiency. Now, Imagine that you know exactly the amount you pay for rebates for your products and you just figured out that you are paying for products that are not essential for your long-term strategy, would you change that? of course! This is the power of this level of granularity.

Let's go for a couple of examples; Imagine that you can review your marketing investments per product, what can you do with that information? Well, you can measure your return on marketing investments (ROMI), which gives you more control over how you can organize your budget and measure the impact of your marketing activities.

To conclude this section, I would like to encourage you to calculate this KPI since I consider that you can improve not only your marketing efforts, but also other efforts such as supply, finance, and sales.

VI- Variance Analysis

This financial analysis is extremely important to measure your performance establishing a pivot that allows you to compare two- different periods. When I was a Business Intelligence analyst (many years ago) I used to calculate this indicator to show the global teams how successful we were during the year applying our pricing strategies and tactics. What can you see here? Well, you can see the Price Variance, Quantity Variance, and Cogs Variance compared to your previous year or your budget. Why this type of analysis is so important? Well is because a "1% improvement in price, assuming no loss of volume, increases operating profit by 11.1%". by contrast, a 1% improvement in volume increases your operating profit by 3.3%.

Conclusion

In conclusion, pricing in the chemical industry requires a nuanced understanding of value, price elasticity drivers, and advanced pricing techniques. From identifying factors like product uniqueness and perceived risk to using tools such as value-pricing, the value map, and pocket price waterfall, each method provides key insights for setting and adjusting prices effectively. Through careful financial analysis, such as variance analysis, businesses can not only optimize their pricing strategies but also drive profitability by making informed, data-driven decisions. Whether you are a manager or analyst, these techniques are essential for maintaining competitive advantage and ensuring sustainable growth.