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Design Thinking & Pricing: Specialty Chemicals challenges & opportunities

Pricing for Multimodal Transport of Chemicals

In the bulk chemical logistics sector, there are basically three different ways companies transport bulk chemical products for clients. There is the all-truck scenario, the all-rail mode, and the multimodal service, which uses a combination of truck tankers and rail cars to convey goods from suppliers to buyers.

Compared to other sectors, the pricing strategies used by logistic companies are far less mature, and research attributes this majorly to low digitization in the sector. However, there is currently a great urgency for businesses in the industry to improve their pricing strategies due to the financial shortfall caused by the pandemic.

Here, we reveal the benefits an efficient pricing approach will bring to your business. In addition, you get to discover four ways you can revamp your pricing strategy and, in turn, boost the revenue of your multimodal bulk chemical transportation by as much as 20 percent.

Benefits of Pricing Your Multimodal Logistics Business Right

Going by past and recent studies, no other lever in business has the biggest and fastest impact on profits like pricing. While initiatives such as volume increase and investments in digital solutions will also boost margin, the downside is that they take time before they deliver. Besides, their payoff is not as impressive as that of pricing.

For example, current research revealed that improving volume by 1% results in a 3.3% increase in profits. Likewise, a 1% decrease in variable costs or fixed cost yields a 7.8% and 2.3% increase in profitability, respectively. And a 1% improvement in price (given there’s no loss of volume) gives an 11% surge in operating profit. Another study whose results are shown below had similar findings that confirm that pricing indeed brings higher returns than other elements in the marketing mix. However, the researchers specifically pointed out that price only brings positive returns, provided the increase does not cause a drop in sales.

Source: Researchgate

In 2004, a pricing analyst (Hinterhuber) conducted a study on over 200 Fortune 500 companies. The results showed that not only did pricing performed better than other business improvement initiatives, but a 5% increase in average selling price boosted EBIT by 22%. When it comes to the logistics companies, in particular, industry reports reveal that a one-year improvement in pricing strategy could boost revenue by 2-4% – which translates roughly to a 30-60% increase in EBIT margin.

4 Ways You Can Improve the Pricing Strategy of Your Bulk Chemical logistics Company

Know your competitors

One of the first steps before effecting a pricing transformation for any company is to understand the competition. An in-depth competitive analysis should consider the response various price points will elicit from rivals and the effectiveness of different pricing strategies in your niche. It should also look at customers’ pain points and how competitors are alleviating those needs.

Doing a competitive analysis of your field should help you prepare ahead on how to respond without losing volume when rivals try to cut into your customer base. Your findings should also guide your pricing team on what quality customers really need and what premium price to charge without losing considerable sales.

Above all, a study of the competition should specifically look out for unexplored markets, better segmentation by others, and underserved/unserved needs or niches your company can tackle.

Determine and communicate the value you offer to customers

A second important step when developing your new pricing strategy is to determine the value your service offers to customers and how customers perceive that value. Think about it, if customers can’t fully identify what unique value your product or service brings to them, that would negatively impact their willingness-to-pay your premium charge.

Hence, to determine and communicate your firm’s value to clients in order to develop a value-based pricing strategy, you can focus on these three fundamental principles:

First, define the value of your service from your buyers’ point of view and not your own. Where most business owners get it wrong is that they tend to overemphasize their product or service features rather than the benefits customers perceive from the service. Secondly, find out what customers think is their return on investment when they use your haulage service.

Secondly, get down to work with your team to ensure the value your services offer is far and clearly superior when compared to other competing alternatives. If you don’t do this, you might find yourself enmeshed in pricing wars where prices are being set or manipulated either by very aggressive competitors or less-sophisticated rivals.

Lastly, make sure you and your team explore all possible sources of client value and communicate these benefits to clients in a way they will understand.

Segment pricing according to contract duration and type of material being transported

Most logistics firms have clients with varying contract durations. On the one hand, there are higher frequency clients who need to haul chemicals on a regular basis. In contrast, some clients are more of the short-term or medium-term contract type.

This combination of spot cargo, medium- and long-term contracts could affect optimal pricing strategy if it not well-thought-out. Therefore, it is necessary you develop a different pricing approach for each contract duration and depending on what chemical is being transported. For instance, there are hazardous and non-hazardous chemical products.

Obviously, hazardous products will require you to observe more safety protocols than usual. They may also need that you use a different tanker and other materials to ensure the safe haulage of this product. So, this is an area where you can find what unique value you can offer to customers that would support a value-based pricing.

Creating flexible financial solutions not only creates more value for your customers, but it also increases clients’ willingness-to-pay. Another way to multiply revenue is to encourage long-term haulage service and make this type of duration more attractive to customers. One way great to go about this is to add more juicy value offerings to the package.

Understand your customer willingness-to-pay using both qualitative and quantitative insights

You can’t have a fully optimal pricing strategy that wouldn’t result in a dismal volume loss if you don’t understand your customer’s willingness to pay. While there are many methods of calculating a customer’s willingness-to-pay, some of the best ways use series of competitive simulations, price optimizations as well as estimates of client reactions.

Using these factors should guide you on what premium price – which although may be higher than those of competitors – but would nevertheless be convenient for clients to pay.

 

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