Pricing Power – Objectives and Policies: Why Private Equity Should Hire More Pricing Managers
Strategic pricing managers are in demand for private equity. Because there is often a need to set clear pricing objectives and policies, pricing power has to be exercised to manage pricing changes. Here’s why private equity needs to hire more strategic pricing managers.
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Private equity has been increasingly prominent in the Australian corporate landscape in recent years. PEP-backed Link Group represented the biggest IPO on the Sydney market with a market cap of c. $2 billion. Now, private equity is commonly based on holding an investment for 3-5 years. That must happen before seeking an exit from a hopefully transformed business by either a listing or a trade sale.
This model has traditionally relied on financial engineering by utilising debt. Then, combined with a renewed management focus that is often through management shareholders driving the turnaround. Therefore, we note that shareholders John McMurtrie (CEO) and John Hawkins (CFO) managed the Link Group. They both possesed a considerable financial interest in a successful exit.
The points to gain from this revenue and commercial model are threefold:
1. The vital importance of engaged and capable senior management and a strategic pricing manager to manage price changes.
2. The potential utilisation of pricing power as a lever to increase exit valuations for a business.
3. The currently untapped opportunity presented to private equity of pricing power and optimisation role.
Importance of an engaged and capable strategic pricing manager in exercising pricing objectives and policies
A fish rots from the head down. It’s quite a provocative saying but anyone who has worked in corporates for any period of time will recognise this. Lack of vision, leadership, and strategy can pervade an entire business enterprise. Thus, a pricing function will require a mandate and clear support from senior management to deliver its potential. So, no matter how skilled or strategic the pricing manager is, this is especially applicable in managing price changes. They both need to work together with the help of price management tools.
Pricing power optimisation includes setting price objectives and policies with management tools. It is a multi-departmental role that requires strategic support from the pricing manager and executive leadership to ensure that pricing benefits can be achieved. When managing price changes, the team must be set up in the right way and be given the appropriate remit.
At Taylor Wells, we believe that a private equity-backed business with engaged management can provide this environment. This is done to cut through office politics and turf protection as all parties have a clear financial objective to achieve in a short space of time. As a leading lever to achieve “quick wins” in profitability, pricing should be key on any PE company’s radar.
Valuation multiples in Pricing Objectives and Policies
In general, private equity as with the financial community will commonly utilise certain metrics to value a company such as EV/EBIT, EV/EBITDA, P/E etc. multiples. Wherefore, these metrics will often be a multiple of a variable definition of “profit”. Other things being equal (ceteris paribus for the economists out there), a dollar increase in revenue from managing price changes and adjustments will result in a dollar (one for one) increase.
Pricing power optimisation is an empirically proven mechanism to provide 1-2% profit increases. It should be a prerequisite component of the business model rationalisation with a 1-2 year period. and business turnaround is required for an optimal exit.
Taylor Wells believes that the majority of PE companies currently do not have sufficient in-house expertise in pricing power to deliver on this potential value creation.
If the primary guide in the company value is the EBITDA, thus, it is logical to concentrate on the guide with a bigger influence on the EBITDA to increase revenues. Analyses have shown that an improvement in pricing management tools can impact an EBITDA 10 to 12 times. While a reduced fixed cost for the private equity investment is around 2 to 5 times leverage on the EBITDA.
It seems the high valuation impact of managing price changes has a bigger influence. So, why aren’t Private Equity firms focusing on pricing optimization and management tools for their portfolio companies?
There are Five Levels of World Class Pricing Power in Setting Objectives and Policies:
Level 1: Fire extinguishing
It seems a large number of companies are always in fire extinguishing mode in their pricing strategy. It isn’t working and the sales force is difficult to control. So, sales teams are pressured to meet quarterly deadlines. This comes after the price, volume, and customer value are disrupted. Then, they are obligated to give huge discounts to close the deal.
Therefore, the purchasing departments are the driving force in negotiating for the price with the best dealers getting the best price. The company’s revenue loss from a number of accounts will be huge because of low pricing, hidden costs, and out-of-control discounting.
Level 2: Safeguarding
Sometimes, getting the pricing process under control comes from hiring a strategic pricing manager. The role entails policing and directly managing price changes. Thus, a pricing book can be implemented and the salespeople ought to be trained on volume discounts. Although some Excel spreadsheets and price management tools are applied to control the process if the pricing is based on costs and target margins, it can still be unreliable and unscientific.
Level 3: Partnering and Collaboration
To reach level 3, private equity companies need to redesign their pricing strategy to include micro-segmentation. A report on customer research and key performance indicators to succeed confirms this.
Unfortunately, very few companies ever achieve this on their own. As a result, they lack the processes and price management tools that create a value or challenge selling program for the sales team. This would take a value partner stance in supporting and managing the higher price changes. Moreover, companies that achieve this level have 10 to 12 times EBITDA leverage with a 25% increase in EBITDA resulting in a 2% revenue increase.
Level 4: Price Optimisation
Industries with rich data sources can use AI price management tools and machine learning computers to stay competitive. These are key steps in analysing and managing price strategies and changes. Thus, industries like restaurants and online retailers are examples of industries that use AI to achieve level 4 and expect a good return on their investments.
Level 5: Mastery and Expertise
The company that achieved this level has strategic pricing mastery by optimising all products and services on the basis of value and hard analyses. Hence, it unlocks all the available market value, bigger EBITDA and better revenue than the competition.
A Strategic Pricing Manager Should Prioritise Setting Objectives and Policies
Though pricing doesn’t look important on the company portfolio surface, there are factors that actually make a big impact, influencing the profitability and pricing of the company. Thus, it cannot only increase the EBITDA leverage to 10 to 12 times but shareholders keep the value for every transaction making higher EBITDA and long-term company value.
With a strategic pricing manager and strategy, you can eliminate hidden costs by using profit-driven key performance indicators. Therefore, the effect is a higher EBITDA and firm value.
Managers will often blame “market forces” as the reason behind a company’s poor pricing structure. Additionally, this is just an excuse for the poor incentives and lack of sophistication. But focusing on the pricing strategy of affiliate companies and the factors that are often influencing pricing policy, investors can expect better and long-term revenues.
Pricing power potential in a private equity model
Private equity houses tend to be staffed by former consultants and investment bankers of financial industry employees. Thus, it is rare for the standard CV to have a significant commercial background in a B2B environment. It may be a clear advantage in cutting through corporate politics and focusing on the financial turnaround of the business.
But Taylor Wells believes that it can underperform in engaging, motivating, and delivering on sales staff performance particularly from a pricing perspective. Moreover, topline revenue growth can often seem less tangible than more seemingly concrete and secure cost reductions.
A P&L has two components. That is how revenue and cost-optimal results require optimising both aspects. Another common perception of PE-driven businesses is how the cost control focus can lead to an unwillingness to invest in talented staff or sales force drive.
Therefore, a well-articulated pricing strategy and commercial strategy while managing price changes, apart from reliance on price management software tools, can deliver improved staff engagement as high-performing staff feel rewarded while working toward a cohesive strategy.
Implications
- Private Equity companies tend to ignore strategic pricing schemes and hiring a capable manager. Instead, they focus on giving substantial discounts to encourage investments.
- A strategic pricing scheme must have the support of the upper management even if it is led by a skilled manager to implement pricing objectives and policies properly.
- Many private equity companies do not have the expertise in implementing and managing the most effective price changes or strategies.
- With the help of pricing managers, they can bring price, volume, and customer value to optimise the best pricing schemes.
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Conclusion
- We believe pricing power will become an increasingly common lever for PE companies to maximise value.
- AI price management tools and other machine learning computers will analyse the data and present the right pricing scheme.
- Price strategy is essential to the private equity company to maximise profits and increase company value. Hence, we believe pricing power and mastery will become an increasingly common lever for PE companies to maximise value.
Why private equity needs to hire more pricing managers is written by Joanna Wells Author of TeamBuilder360 and Director of Taylor Wells
Taylor Wells is a specialist advisory firm that has developed a search, evaluation and recruitment process; in the field of pricing, commercial and analytics. Our business was started after identifying weaknesses in the traditional agency recruitment model. Thus, its purpose is to support management and HR to eliminate the risk of a bad hire.
Our workshops and diagnostics ensure pricing or commercial teams are deeply engaged; with the sales and marketing teams to achieve greater levels of margin and earnings growth. We have developed our own digital platform to identify and evaluate talent. And we partner with subject matter experts to help us operate efficiently.
Director of Taylor Wells
BA/ MA Psych. CANTAB, Msc Org. Psych, Dip.Couns Psych
Read the book: TeamBuilder360
From losing good staff, changing the business commodity midset, dealing with procurement, managing talent and skill gaps, and making sense of complex pricing arrangements — you face many challenges daily. Thus, the pressure of business, work, and everyday life is unprecedented. It is now more difficult than ever to choose the right path for a business.
The right pricing and commercial teams can help you generate low risk, sustainable revenue, margin, and profit growth.
Leading companies like GE, DuPoint, and Caterpillar have all invested in their people and pricing. Over the past 10 years, they have improved their HR initiatives to build powerful and rare pricing teams. The purpose is to drive revenue, margin, and profit growth.
TeamBuilder360 shows you how to build teams that work together to drive revenue, margin, and profit growth using a TeamBuilder360 canvas and a wealth of real-life examples. TeamBuilder360also gives you advice and guidance on how to build a more productive and successful career in pricing, without compromising important career choices and goals.
For a comprehensive view on driving profitability and pricing capability in your company,
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Are you a business in need of help to align your pricing strategy, people, and operations to deliver an immediate impact on profit?
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You can also email us at team@taylorwells.com.au if you have any further questions.
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