Understanding sustainability needs downstream in the value chain helps you identify pockets of premium value for specific customer segments. 

It’s crucial to cultivate an overall understanding of the intricate dynamics and sustainability needs of the end- markets served by your downstream customers. This allows you to tailor your green product offerings to the sustainability potential across different market segments. A first overview (see table below) can serve as a preliminary scan based on some key metrics, but should be followed by a deeper analysis to pinpoint specific pockets of value in sub-segments and client clusters.  

These client clusters consist out of direct customers, but to assess the viability of pricing a green premium to a specific cluster, their downstream clients and respective sustainability requirements should also be examined. This, because the sustainability requirements and willingness to pay for a green premium for your direct customer is inherently linked to the needs within the industries they serve. This exercise will allow you to accurately price the sustainability value generated for your key customers, or partners in your distribution channels serving those customers. 

Unlock sustainable value through a hybrid approach based on circular cost parameters, complemented with a value-based green premium 

Sustainability is no different from any other product or service feature. Becoming more sustainable or transitioning to net-zero carbon emissions has a cost, but it also brings value. To quantify this, you need to look at it through the eyes of your direct customer. 

Current pricing in the chemicals industry is based on the marginal production cost of virgin fossil production, supplemented with an agreed-upon margin (cost-plus method). Prices of circular products are currently based on the same cost-structure as virgin fossil production, but are of course subject to different market dynamics. We observe in the market companies often struggle with developing a well-structured methodology for a (green) margin to charge on top of costs (the ‘plus’). Sustainability characteristics however create real additional value for customers, which should be reflected through a value-based green premium charged on top of the base margin. 

Moving away from a crude-oil cost structure towards circular cost-parameters 

Currently, prices of both virgin and circular chemical products are based on the production cost of the marginal required capacity to satisfy market demand. This cost is heavily influenced by crude oil prices. A circular approach shifts the cost build-up of circular chemical products away from virgin fossil production, to directly include circular production costs and corresponding feedstock fluctuations. An independent party can facilitate this approach, bringing actors together throughout the value chain to define standardised indices for circular products. 

Incorporating a green value margin 

The additional margin charged on top of circular costs should include the base margin complemented with a green mark-up based on the value generated for the identified clustered client sub-segments as discussed on page x. By doing so, we should identify the willingness to pay of end-customers and retailers for sustainability features completely downstream of the value chain. This identified value can then be translated back to the willingness to pay of direct clients, enabling sharing of part of the green premium generated at the end-customer. 

The value estimation principle aligns prices with the customer’s perception of the product or service value. By quantifying the incremental benefits for customers, more accurate prices can be set and better defended. This creates a cost-plus margin on top of the cost-structure, complemented with an additional green premium for the product based on the Willingness To Pay depending on the cluster the specific client sits in. 

Currently, many companies however focus exclusively on the emotional value of sustainability in their customer communication. As a result, the willingness to pay is underestimated. To increase customer willingness to pay, it is key to also point out potential savings, especially in times of inflation. 

Key takeaways on green premium pricing… 

1. Regulations and end-customer sentiments are putting a monetary value on circular products. 
2. A significant portion of the premium for green products is generated at the end-customer level, but investments in upstream value-chain activities are critical to produce these products. 
3. Circular production costs should be incorporated in the price of circular products, while a green value margin should be based on the Willingness To Pay of specific end-customers. 
4. By setting up innovative pricing structures, green premiums from circular efforts can be shared along the value chain. 

…and how Deloitte can support you 

1. Develop a thorough understanding of the sustainability requirements of your downstream clients and the market and regulatory environment they operate in. 
2. Identify pockets of value within particular sub-segments, and assess Willingness To Pay for specific client clusters. This will allow you to accurately price the sustainability value generated. 
3. Put a strategic initial focus on incorporating circularity in high-quality and specialised segments. In these end-markets, chemical companies have higher pricing power, creating more leeway to incorporate an increased premium for circular products. 
4. Explore and set up innovative pricing options, bringing customers and suppliers together to strengthen novel partnerships, scale circular solutions, and capture a shared green premium.