I never cease to be amazed at how the market can drive down pricing on even the oldest, most venerable products on your product list. I’m not talking about the prices in the Aldrich or Strem catalogs.  Catalog prices are basically of a retail nature and are set in an atmosphere of open information. That is to say, pricing can be set against a background of easily available competitive intelligence. If you want to be competitive, you can match or undercut your competitors pricing. 

This discussion pertains to specialty chemicals, as opposed to commodity chemicals. There is a large difference in the pricing approaches in these two market domains. Commodity chemicals are the domain of high volume, low margin.  Raw material costs tend to be price drivers.  Commodity chemicals are frequently made with continuous flow processing and the economy of scale has been maximized to the fullest.  Many commodity chemicals are actually economic indicators- sulfuric acid, superphosphate, hydrocarbons, etc.

There are several ways to set prices of a chemical product.  One way is to calculate your unit costs and add your profit by applying a predetermined multiplier for the markup.  This is the cleanest way from the accounting point of view. It allows for easier sales forecasting too.  If you can estimate the unit sales for the year, you can estimate the expected profit as well.  This helps immensely if you need to plan for capital expenditures with your future cash flows.  And if you are in a growth period, this can be critical.

In a rational setting, pricing is optimized to afford maximum profit.  Pricing needs to be low enough to attract a maximum of orders, but high enough to afford a maximum profit. Notice the use of the word “maximum”.  Profit is about extrema on curves.  You seek to find the cost minima and profit maxima. Sounds straightforward enough.

But pricing is rarely a purely rational decision. In the commodity arena, raw materials are also commodities and their rough pricing is readily available to all players.  Their negotiated prices may not be, though. But by and large, commodity raw material costs are fairly well understood by all.  In the commodity arena, pricing should be most “rational”.

In the chemical specialty arena, that is, the arena of non-commodity chemicals, there is a greater chance that pricing may not be entirely rational. That is to say, absolute or global cost minima may not have been found and profit maxima may not have been realized. 

Specialty chemicals are for the most part lower volume, higher margin, products where labor costs are often the driver. They may be “Fine Chemicals”, which I’ll define as public domain products that are above what you might call a “technical grade”.  Public domain products are those products that are free in composition to any and all buyers. However, while many chemicals are public domain in composition of matter, they may be severely restricted in “use”.

A specialty chemical, by it’s nature as a lower volume domain, is subject to pricing complications that commodity chemcials may not be.  Many chemical catalog companies have a bulk chemicals division that isn’t easliy visible to the R&D scale consumer.  While their bulk product list may be generally available, pricing is often obtained only through a quoting process.  In other words, bulk pricing isn’t posted for all to see. To get a bulk price you have to ask for a quote, which means revealing your identity and how much of what product you need. Bulk specialty chemical business tends to be fairly secretive about pricing. One way around having to disclose yourself to a vendor is to use a sourcing firm.  But this comes at a price. Minimally you’ll spend ~7 % or more to do your purchasing this way.

Here is some insight into the process.  Specialty chemicals are frequently used in proprietary processes by a customer.  There is an understanding that a vendor will not disclose the details of who inquired about what.  Mainly, it is because the vendor does not want the competition to court the potential customer and take away the business. Another reason is that the customer regards secrecy as important because costs and volumes can be a giveaway to their competitors as to intimate details of their business. You just don’t blab about who wants what.  It is a silo effect.  It is quite difficult to find out who is buying what.

The secretive nature of bulk pricing means that a company is often poorly informed about the competitive pricing picture of its products. In order for a market to be rational on a short time frame, there needs to be prompt feedback, particularly on why a bid was not won.  This seems obvious, but in practice, a sales group may be quoting many more bids than that can follow up on.  It is easy to fall into the trap of being more busy chumming the waters with bait than hauling in the fish. A properly operating sales force is busy sending out quotes and doing follow up communications to see how the quote was received.  This allows the sales people to adjust prices and terms on the fly.  This is absolutely critical to maximizing sales. And a really good sales manager is one who insists on followup data to energize the feedback loop.