Pricing power: Why private equity need to hire more pricing managers  

Written by Joanna Wells, Author or TeamBuilder360 and Director of Taylor Wells

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 in 2015(market cap of c. $2bn). The private equity is commonly based on holding an investment for 3-5 years before seeking an exit (from a hopefully transformed business) by either a listing or a trade sale. The model has traditionally relied on financial engineering (utilising debt), combined with a renewed management focus (often through management shareholders driving the turnaround). We note that the Link Group was managed by shareholders John McMurtrie (CEO) and John Hawkins (CFO), both with considerable financial interest in a successful exit.

The points to gain from this revenue and commercial model are three fold; 1. The vital importance of engaged and capable senior management; 2. The potential utilisation of pricing power as a lever to increase exit valuations for a business and 3. The currently untapped opportunity presented to private equity of a pricing power and optimisation role.

Importance of engaged and capable senior management

A fish rots from the head down; 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. For a pricing function to deliver on its potential (no matter how skilled the pricing manager), that function will require a mandate and clear support from senior management. Pricing power optimisation is a multi-departmental role and requires support from executive leadership to ensure that pricing benefits can be delivered. The team must be set up in the right way and be given the appropriate remit. We believe that a private equity backed business with engaged management can provide this environment (i.e. to cut through office politics and turf protection) as all parties have a clear objective (financial) 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

Private Equity as with the financial community generally will commonly utilise certain metrics to value a company such as EV/EBIT, EV/EBITDA, P/E etc. multiples. These metrics will generally be a multiple of some definition of “profit”. Other things being equal (ceteris paribus for the economists out there), a dollar increase in revenue from price adjustments will result in a dollar (one for one) increase.

Pricing power optimisation as an empirically proven mechanism to provide 1-2% profit increases with a 1-2 year period should be a prerequisite component of the business model rationalisation and business turnaround required for an optimal exit. Taylor Wells believes that the majority of PE companies do not have sufficient in house expertise in pricing power currently to deliver on this potential value creation.

Pricing power potential in the private equity model

Private equity houses tend to be staffed by former consultants, Investment bankers of financial industry employees. It is rare for the standard CV to have a significant commercial background in a B2B environment. Whilst this can be a clear advantage in cutting through corporate politics and focusing on the financial turnaround of the business, Taylor Wells believes that it can underperform in engaging, motivating and delivering on sales staff performance particularly from a pricing perspective. Top line revenue growth can often seem less tangible than more seemingly concrete and secure cost reductions. A P&L has two components; revenue and cost- optimal results require optimising both aspects. Another common perception of PE driven businesses is that the cost control focus can lead to an unwillingness to invest in talented staff or sales force drive. A well-articulated pricing strategy and commercial strategy (not just reliance on pricing software tools) can deliver improved staff engagement as high performing staff feel rewarded and working to a cohesive strategy.

In conclusion – we believe pricing power will become an increasingly common lever for PE companies to maximise value.

Why private equity need to hire more pricing managers is written by Joanna Wells Author of TeamBuilder360 and Director of Taylor

 

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.  Our 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 businesses’ commodity mindset, dealing with procurement, making sense of complex pricing arrangements and managing talent and skills gaps, you face many challenges daily. The pressure of business, work and everyday life is unprecedented. It is now more difficult than ever to choose the right path for the business.

The right pricing and commercial teams can help you generate low risk, and sustainable revenue, margin and profit growth.

Leading companies like GE, DuPont 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 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. It also gives you advice and guidance on how to build a more productive and successful career in pricing without compromising on important career choices and goals.