The chemical industry is at a crossroads. Faced with market unpredictability, increased regulations, and products that are quickly moving toward commoditization, it is becoming increasingly difficult to maintain reasonable margins. A few companies are finding success by developing breakthrough products, but true revolutionary innovations are hard to uncover.
Instead, most chemical manufacturers have responded by reducing costs with operational efficiencies. One area that is often overlooked, however, is sales and marketing. This department continues to deploy traditional approaches to selling, despite rising expenses. In fact, a recent study from McKinsey indicates that average sales, general, and administrative (SG&A) costs increased by as much as 10% over the last decade.
Fortunately, new technology solutions and data analytics are offering surprising models for selling products and related services. With these new strategies, chemical companies are finding it is possible to preserve margins while adding new revenue streams.
Traditional approach to sales and marketing
In the past, chemical companies developed specialty products that met individual customer requirements. To help justify the high purchase prices of these custom solutions, chemical companies included free, comprehensive support services. Rather than limiting top-tier services to top-tier customers who are willing to pay for them, the same deep level of service was provided to all customers. By following a “same level of service to all” approach, some chemical companies ended up hurting their own profitability and devaluing the provided services.
The old-school approach still works well when there are strong margins and customers see value in both the customized products and the support services. However, when customers make purchasing decisions based on the lowest price and feel they no longer need support, chemical manufacturers must find new ways to add value and differentiate their offerings. Fortunately, some visionary companies are leading the way by combining the latest technology with insightful customer knowledge to develop innovative approaches to selling. Below are three examples of new sales approaches made possible by the digital economy that could bolster revenue:
- Offer multiple service levels: Rather than bundling the same service with all product purchases, chemical companies could offer multiple service levels at different price points based on customer need. For example, chemical companies could start by including only essential services with their standard products. To lower costs, technology could be used to automate and standardize business processes such as delivery and payment terms. However, in addition to basic services, chemical companies also offer additional layers of services if a customer wants to upgrade and pay for it. Data analytics can help provide direction as to which level of service would be most appealing to which customers. From an IT perspective, this requires customer segmentation supported by a thorough price waterfall analysis, along with real-time insights into prices and margins at customer and product level.
- Product-only pricing: Some customers view chemical products as pure commodities. To accommodate this mindset, chemical companies could unbundle services from their products. With this model, customers can purchase products only online. Digital technologies with artificial intelligence help determine the rules. Dow Corning adopted this approach in 2002 when it launched Xiameter, an online, low-cost sales channel for its silicone products. Through this online channel, Dow can meet the low-pricing demands of customers willing to buy in bulk that do not need support services. Seven years later, Dow Corning reported the new sales model resulted in five times the number of products sold and sales continue to grow (McKinsey & Company, May 2011). This is an ideal application for the IoT, where chemicals may be ordered machine-to-machine, and many sales may proceed entirely without human intervention.
- Separate business units: Developing a separate business unit often is an effective strategy to compete in situations with intense competitive pricing pressure. In this way, companies can be low-cost providers without the risk of “cross-contamination” with services they still provide to customers who are paying high prices for chemicals that retain specialty status. Using a separate business unit is clear cut and eliminates confusion in both customers and employees about the services provided as well as the processes used.
The role of technology and a 360° view of the customer
In order to define and implement the right service strategies for each customer segment, companies need the latest technology, not only to gain a deep understanding of customer needs, but also to drive seamless, end-to-end execution of process automation and execution along different channels. Here are a few examples:
- Leverage sensors and telemetry to implement vendor/supplier-managed inventory concepts and completely automate the replenishment process (no- or low-touch order-to-delivery).
- Monitor your customers’ manufacturing process parameters in real-time via sensor technology. Leverage advanced algorithms to correlate process parameters with quality of (semi-) finished products. Start selling first-pass quality as business outcome instead of selling products, which provides an opportunity to offer benchmark data as a service.
- Use advanced algorithms to better understand customers’ buying behavior/patterns, adjust product and service portfolio, and identify cross-selling opportunities to increase customer loyalty and share of wallet. With this information, it is possible to better understand and respond to demand patterns without direct point-of-sale information.
- Get visibility into customer/market sentiment via capturing and processing unstructured data from social media, then responding with appropriate marketing campaigns and innovative service offerings.
Commoditization in the chemical industry is not going away. To be successful, chemical companies must move beyond selling products. Instead, to improve profitability, they must be willing to transform their business models in a way that allows them to sell business outcomes and results. Top performers have already started bundling products with value-adding services that differentiate their offerings, increase customer loyalty, and grab a larger share of the customer wallet.
For more on marketing in a data-driven era, see Influencing Customers Through Infinite Personalization.
Original article posted on Manufacturing Today