Out of the Box Learnings for Chemical Companies: How the Software Industry Optimizes Product Packaging
Chemical companies are often focused on operational excellence; to cope with the industry’s increasing challenges, they have to up their game regarding commercial excellence. Thinking outside the box is now in order: What can chemical companies learn from other industries? Our four-part series is all about experts from other sectors sharing their knowledge and how it can be applied to the chemical industry. In the third part, we focus on packaging approaches in the software industry.
Have you ever noticed that whenever you’re buying software, there is a choice of at least three packages, increasingly expensive and with more and more functionalities? This is no coincidence but rather a clever strategy. More than any other industry, software companies are experts in profitably packaging and bundling products and services. In doing this, they are able to extract the maximum willingness-to-pay of each customer.
How do they decide which bundles work and at what price points they should offer it to customers? Key is determining your target group’s value drivers. In order to identify what attributes of your product or service really drives value for the customers, the minimum viable product (MVP) needs to be showcased as early as possible. Executives need to ask themselves: Who are we primarily selling to? Where do we create the most value for them? What functionalities drive value in our portfolio? How much are customers willing to pay for it? And what does all this imply for the packaging and pricing of our portfolio build-up?
It is crucial to reflect on how products and services can best be monetized. The challenge here is to address customers’ differing needs in terms of which attributes they value; some will need the full version, others only specific features. Companies typically tackle this issue best in doing careful value and price differentiation. Ultimately, their price model needs to be aligned with the value their products deliver and differentiated according to their customer preferences.
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3 questions to Joshua Bloom, Global head of Software, Internet and Media, about monetization through clever packagingJoshua, how is the software industry currently monetizing their products? Joshua Bloom: Due to our project experience, we were able to detect some key factors that typically enable software companies to monetize their products successfully. First, companies need to match their price model to their customers’ value drivers and preferred forms of consumption. For instance, if customers want easy access to a software or service, use a subscription fee model. If they are known to buy single product units, a tiered price model works better. How does this relate to different product packages? Joshua Bloom: Matching your price models to your customers’ requirements is a prerequisite for the successful monetization of every product. To find out what kind of packages or bundles your company should offer, you should also listen to your target group. Start with understanding the role of the different features for your customers. Which features have the highest adoption and perceived value? These are your leaders for which people buy your solution. Features with high adoption, but relative low perceived value are fillers. Bundle the fillers together with the right leaders to increase their adoption and the total value of the bundle. Features with low adoption and high perceived value should be positioned as add-ons, as they would be a killers to the bundle. With this knowledge, create a variety of product packages that each have a specific use case in mind. Sales representatives then ideally present these packages to potential customers and collect feedback regarding monetization components (for which part of the package are they willing to pay?) and levels (how much are they willing to pay?). What happens next? Joshua Bloom: At this time, companies know for which product features customers are willing to pay and how much. After gaining this knowledge from market testing, companies need to consolidate and then implement it into their offering. The goal is to achieve a simpler price model as well as align prices better to the attributes that create real value for your customers. |
What chemical companies can learn from this?
A clever packaging strategy can come in quite different forms and is a handy tool to increase customer loyalty, especially if you bundle products with attractive services. While doing so, packages can include different service offerings tailored to specific customer segment’s needs, for example in terms of delivery times, access to product experts, and reduced small order fees. Packages could also consist of bundles of product (groups) to encourage cross-selling.
Service packages for special customer segments
As of yet, use of packaging is uncommon among chemical companies, even though it might be highly profitable. As in any other industry, different customers have different needs, and creating packages that are tailored to these needs increases the likelihood to extract the full willingness-to-pay. Keep in mind: You don’t need to create a package for every product in your product portfolio. Especially when offering commodity chemicals, your packaging strategy could only consist of different service bundles.
To define relevant packages, start with developing a proactive and structured segmentation approach for proposition and price differentiation. You should identify and prioritize growth opportunities using multiple dimensions in order to create a clear understanding of where your revenue and profit opportunities are. Try to segment your market based on both macro dimensions (e.g. geography, value chain) and micro dimensions (e.g. application, customer size) to identify every segment’s needs. The next step is to determine each segment’s purchasing patterns, such as sold-with analyses, to determine cross-sell opportunities.
A smart way to design profitable bundles is to base them on specific use cases while also taking into account the needs of different target segments and align the pricing with their willingness-to-pay. For example, you could include logistics services to reach a customer segment that is focused on delivery speed and flexibility. Keep in mind to differentiate your offering: One size does not fit all.
To sum up, right now, chemical companies do not use clever packaging techniques. By looking at the software industry and their approach to the topic, they could quickly improve their product portfolio differentiation and meet their customers’ needs more exactly. Versioning your product and services into packages is a clever way to increase customer loyalty and customer lifetime value.
Read more from our series: Chemical companies learning from others
Part 1: How the Travel Industry Digitalizes Customer Journeys
Part 2: How Airlines Maximize Profits Through Dynamic Pricing