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Pricing strategy09/12/2016

How oil and gas companies can stay afloat in a volatile market

MITCHELL LEE, VENDAVO, DENVER

ORGANIZATIONS IN the oil and gas sector are no strangers to market volatility, especially within the lastyear. Since January of 2016, the price of oil per barrel has crashed to $27 and since recovered to around $50.With such massive fluctuations in such a short amount of time, it becomes a serious challenge to create a tacticalstrategy that stabilizes margins and retains profit growth.

The market may influence prices, but your corporate leaders are the ultimate decision­makers when it comes topricing and, more specifically, pricing strategy. But ask yourself: How are you currently executing your planamidst external changes? Has your situation changed since yesterday? Do predictive analytics and data analysesplay a role in your strategy?

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In an unpredictable economic landscape, risks­and the consequences of errors­are amplified. Companies mustcontinue building upon existing confidence by compiling and preparing relevant information to leverage at thepoint of decision. Context is needed at every step of the process for improved decisions over time.

Here are five steps you can take to establish your business as a confident pricing master amidst the volatility.

Embrace the complexity

Too often, business leaders balk at the first sign of complexity and volatility in the market. Gut reactions­knee­jerk overreactions, even­take control and strategies are created on weak foundations with simplistic views of themarketplace.

This mindset has to disappear.

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Like a Formula 1 driver leaning into the curve, you too must lean into the volatility. The fluctuations areinevitable, so the sooner you accept it, the sooner you can be in control.

The first step is collecting data­as much as you can. I know what you're thinking, "that will only furthercomplicate everything!" True, but also not true. By collecting internal, historical transaction data and externalmarket data, the landscape of pricing options becomes much easier to see. You will be able to digest that datainto the information that matters. Patterns emerge and you not only better understand what is best for yourbusiness, but what is best for the market.

Look at how you, your customers and your competitors reacted at the last wave of change. You have the resultsfrom this swing and know what tactics were used then. It all becomes much simpler when you stop andcompartmentalize everything you know.

Stress test your strategy

You have the base level knowledge of where you stand and what you have done before. Now comes theexperimental phase of this process. Be critical of your past, present and future.

What happened in the past when you changed prices during a strong or weak market? Why did that fail? Whydid it not succeed as much as it should have? Are you currently in control of your prices or are you at the will ofyour competitors and the market? If you stay on this path, how severely will further fluctuations affect yourprofitability?

Define the variations you might encounter along the way. If you increase or even just maintain your prices whileeveryone else is lowering theirs, what will happen? What will your customers think if you lead with priceincreases?

Competitive intelligence plays an essential role in understanding what else can be done. Is one competitormaking moves you didn't think about that are also working? Maybe the moves are not exactly pricing, but highlyconnected: capacity additions or perhaps rationalizations. Remember, you are not working in a vacuum andfailure is not final. In pricing strategy, the game is a constant give and take. You have to be ever­vigilant andwilling to poke holes in your own plans to expect everything.

Stick to the plan

Allow me to pose a hypothetical situation for this next step. The price per barrel is dropping…quickly. It'sheading towards the $27/barrel mark again. What do you do?

From step one, you know what you did earlier this year when prices were at that level. Let's say you droppedyour prices to salvage margins. Since then, you've likely had trouble increasing your prices to catch up. Thistime around though, you will not decrease prices; you will offer rebates or other short term adjustments thatdon't impact the current "price on the table." Now your prices can remain the same while acknowledging thechanging market to your customers. When the market hits another upswing, the short­term "relief" goes away,and you won't have to increase prices.

Tactics are short­term, but they must support your strategy at all times. You might have to try different paths, butyou must focus on the end goal. You know that more changes are coming. Resist the temptation to change yourobjectives just because the market is moving differently than you predicted. Success is expressed with the "and."You have to be successful now and in the future to maintain profitable growth.

Customize your KPIs

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Above I mentioned goals and tactics. To reach the goals you must understand which tactics are working andwhich ones need tweaking. Establish a set of KPIs that are fine­tuned for your business. No one KPI is enoughto drive the organization so some have to be short­term while others are long­term.

When working with standard, internal KPIs like margin and revenue, look closer at the details. Segmenting yourKPIs by product, customer, region, size, industry, etc. can give you a much clearer view of how your tactics areperforming on a granular level.

Internal KPIs are important, but do not ignore external factors. You are no doubt tracking market trends andwhat your current competitors are doing. What about new competition? New capacities? Understanding how themarket players are performing gives insight into your relative success.

Communicate at every step

Pricing is not an exclusive finance project by any means. The aforementioned steps should be spearheaded bythe finance function, especially the CFO, but this does not exclude sales and marketing and IT fromcontributing.

Communicate the strategy and tactics to the rest of the organization and how they are tied to your company'ssuccess. In doing so, they can incorporate the objectives into their own strategies while also contributing to theself­critique process.

Specifically, sales is an indispensable source of information for pricing strategies. No one knows your customersbetter than your sales reps. Be transparent with them and collect their feedback to improve tactics andunderstand how the market conditions play out on the front lines. Providing the sales reps with relevantcontextual information that is useful as they have conversations with their accounts closes the loop­stiffens thespine if you will­setting expectations for those tougher conversations around future price changes. Transparencyboth ways will instill confidence in your organization's strategies.

Prepare for the inevitable fluctuations

There is no stopping further fluctuations from occurring. The five steps outlined serve as a pseudo­checklist tofollow on the path towards combating the volatility of the oil and gas market.

These steps will help protect your company from short­term damage by having sorted the available options priorto the need, so that you are ready to deploy when things occur. By looking internally, continually checking yourstrategies against the market, and creating a dedicated, corporate­wide commitment to pricing, you can achievelong­term success stabilizing margins and boosting profitability.

ABOUT THE AUTHOR

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Mitch Lee is a business consultant at Vendavo with over 25 years of experience in the technical, operational,marketing, and commercial arenas of the chemical industry. Prior to Vendavo, Lee was with BASF and Orica inproduct marketing and business management. Lee also has experience with raw materials supplier portfoliomanagement.