Pricing Strategy, Industrials Sector
Capturing the Full Value:
Why Industrial Firms Must Shift Away From Cost-plus Pricing
A Wake Up Call For Industrial Leaders
"Our margins are shrinking – but we haven’t changed a thing.”
In 2024, ChemicalCo, a global chemical manufacturer, faced this reality. Despite steady volumes, profits eroded year after year. The culprit? An outdated cost-plus pricing model that simply layered a fixed markup over costs.
A closer look revealed why: a specialty polymer priced at €2.50 per kilogram under cost-plus delivered €11.80 per kilogram in value to customers. ChemicalCo was leaving money on the table.
This scenario is common in industrial markets. Cost-plus pricing, long seen as “safe,” quietly drains margins. Studies show industrial firms using cost-based models earn margins 7–10 percentage points lower than those using value-based pricing. Why? Cost-plus ignores what customers are willing to pay and fails to capture the premium on differentiated, high-value products.
Yet fewer than 25% of industrial firms have adopted value-based pricing. The message is clear: in an era of tightening margins, leaders need a new path anchored in value-based pricing.
Value-Based Pricing:
Pricing for What It’s Worth
Value-based pricing means setting prices according to the economic value your product delivers to each customer, rather than simply adding a margin to production costs. It requires industrial companies to ask, “What is this solution truly worth to the customer?” and “What will they be willing to pay based on outcomes, not inputs?”
This is particularly critical for commoditized markets where cost-plus pricing has become a race to the bottom. Value-based pricing offers a path out of the commodity trap by shifting the basis of competition from price alone to the measurable value your product delivers – be it reduced downtime, improved yield, energy savings, or lower total cost of ownership.
If a specialty chemical saves a customer $1 million annually by improving uptime or reducing scrap, capturing even a portion of that value unlocks substantial profit potential. Research consistently shows that a 1% price improvement can increase operating profits by 8–11%, far outpacing the impact of equivalent cost cuts or volume gains.
In a cost-driven industry, pricing based on customer value is transformative, allowing leaders to shape the market on their terms while protecting and expanding margins.
The Hard Part: Hurdles in Adopting Value-Based Pricing
The reality is that shifting from a cost-plus mindset to a value-based approach is challenging. Industrial companies often encounter several common hurdles:
- People & Capabilities: The biggest hurdle is the mindset shift. Our work with Chemical Co. revealed that product managers and sales teams may default to gut feelings or match-the-competitor tactics. At Chemical Co, this was compounded by misaligned incentives. While Product Managers are incentivized to protect the Gross Margin of their product, Sales Team are more inclined to chase volumes to secure Net Direct Contribution which, in return, motivates them to push for discounts
- Customer Readiness: Industrial customers, especially procurement departments, are accustomed to cost-based pricing discussions and may push back on any price increase. Suppliers must bring proof – case studies, ROI models, pilot data – to show that paying more delivers better outcomes. Regional dynamics add complexity: in APAC, fierce competition with hundreds of local competitors forces Chemical Co. to compete aggressively on price to defend their market position, while in EMEA, market consolidation gives more room to price for value as customers prioritize reliability and performance over price alone.
- Tools & Data Gaps: ChemicalCo’s product managers lacked timely access to application performance data and customer feedback, preventing them from identifying valued product attributes and willingness to pay. Without integrated pricing tools or value calculators, teams fell back on “safe” cost-plus markups instead of capturing differentiated value.
- Process & Governance Issues: Pricing often spans product, application and sales – yet these functions remain siloed, leading to systematic value leakage. At Chemical Co., this misalignment created a cycle where PLMs, aware of a product’s technical superiority, lacked insight into which benefits mattered most to customers, while sales teams, under pressure to close deals, defaulted to discounting. Value-based pricing requires cross-functional governance: product and application teams must model value, and sales must deliver the value story confidently.
A Step-by-Step Framework to Implement Value-Based Pricing
How can an industrial company actually make the leap from cost-plus to value-based pricing? SprintlyWorks outlines a four-step framework to guide the transformation.
Step 1. Customer Segmentation:
Start by segmenting your customers based on their needs and value drivers, rather than just by industry or size.
ChemicalCo tackled this head-on by defining need-based customer segments grounded in value and ROI expectations. For example, one segment of paper industry clients urgently needed to reduce machine downtime, while another cared most about energy efficiency and sustainability.
These needs-based customer segments will guide where you apply value-based pricing first. Ask questions like: Which customers would get a significant economic benefit from our product’s differentiators? Who has high “pain points” that we can solve (and quantify)?
Step 2. Product Selection:
Focus on offerings that are highly differentiated and map closely to the needs of the target customer segments. In general, you’re looking for products where your value proposition is strongest and most quantifiable. One useful exercise is to assess your portfolio on two dimensions:
- Customer Value: How much value (cost savings, revenue gains, performance improvement) does this product deliver for the customer?
- Cost-to-Serve: What is the total cost, including variable costs and any dedicated support or service, required to deliver it?
Products that rank high on customer value and manageable on cost-to-serve are prime candidates for value-based pricing.
In the case of Chemical Co, the team prioritized an emulsion polymer that significantly improves machine runnability, provides energy savings, and reduces treatment costs. This product is a strong candidate for value-based pricing to customers that seek to improve their throughout and productivity while cutting operating costs. What’s more, this product does not require any additional cost-to-serve, such as on-site application support or additional equipment installed (e.g., pumps).
Step 3. Value Quantification:
Identify the key value drivers of your product and quantify their economic value to customers. A value driver is any way the product creates either a cost saving or a revenue/profit uplift for the customer.
Case in Point:
At ChemicalCo, trials showed their polymer saved 200 tons of additives, cut 100 hours of downtime, and boosted 5% of output, creating €1.18M/year in customer value or €11.80 of value per kg of polymer used.
Given this analysis, ChemicalCo realized their current price of €2.50/kg was far too low given the value. Even capturing just 10–20% of the value delivered would justify a price 1.5x or more higher than the old cost-plus price, potentially doubling the net margin on that product.
In practice, value quantification involves close collaboration between technical teams (to validate the performance benefits), product team/ pricing analysts (to crunch the numbers), sales team (to tell the value story) sometimes the customer themselves (to agree on the assumptions).
Step 4. Sales Enablement and Execution:
Companies need to empower sales teams with practical aids, such as “value playbooks” or battle cards, that translate the technical benefits of the product into a customer-centric value story for sales conversations.
Sales teams are then trained to steer the discussion toward total cost of ownership and ROI, rather than price per unit.
This cultural shift to selling on value is significant, requiring not just training, but also support from leadership (e.g. backing sales when they hold price for value) and potentially adjusted incentive plans to reward margin, not just volume.
Early Wins: ChemicalCo’s Results
ChemicalCo’s journey from cost-plus to value-based pricing is still ongoing, but the initial results from their pilot have been encouraging. The company realized several tangible benefits:
15%
net margin increase for pilot product. Importantly, this was accomplished without losing volume or customer goodwill – a testament to effectively communicating the value.
20
product line managers across 3 regions (i.e., APAC, EMEA, Americas) were trained and upskilled. PLMs began acting as strategic pricing partners to sales, using value quantification to guide pricing decisions.
30%
reduction in time spent on cross-regional price alignment. This efficiency gain freed up time for more strategic activities (like deeper market research and more customer engagement on value).
Conclusion: A Call to Action for Industrial Leaders
The final call to action: Don’t wait. Every day on cost-plus is margin lost and value uncaptured. Start by evaluating your own pricing: Are you truly capturing the value you deliver, or just covering your costs? If the answer is the latter, consider launching a value-based pricing pilot on a small scale, or bring in experts to conduct a pricing diagnostic.
Admittedly, this transition is a journey, but you don’t have to navigate it alone. In ChemicalCo’s case, an external partner (SprintlyWorks) was instrumental in accelerating the shift. At SprintlyWorks, we support clients through targeted diagnostics to identify the highest-value opportunities, proven frameworks to redesign pricing strategies, and hands-on capability-building programs to embed these changes in the organization.
"Industrial leaders who make this shift will drive a new era of profitable growth, one built on value."
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