Key Takeaways
- Private equity value creation can accelerate when strategic pricing improves both revenue and margins across a portfolio.
- Assess pricing capability before acquisition and during the first 100 days to identify opportunities, risks, and potential ROI.
- Build strong pricing capabilities, including the right people, processes, data, governance, and price structures.
- Reassess pricing before exit to capture profit opportunities, strengthen the investment case, and demonstrate value to prospective buyers.
What is private equity value creation? How can PE increase the value of a portfolio business by making further investments in the business’s strategic pricing capability?
Private equity firms don’t always devote enough time and resources to improving pricing in a portfolio business. Pricing capability is often overlooked in the PE 100-day agenda, particularly when firms are focused on acquiring a new investment or preparing an existing investment for sale. Much of the emphasis and investment goes towards cost optimisation, operational improvements and financial restructuring.
>>Download Now: Free PDF How to Build Hiring Capability To Get The Best Pricing Team
One reason for this oversight is that historically, many private equity value creation strategies have placed significant emphasis on financial engineering, operational improvements and management changes. This focus can mean that less time and effort is spent examining a portfolio business’s pricing strategies, models and operations as potential sources of profitable revenue growth.
At Taylor Wells Advisory, we believe this approach can leave PE firms unnecessarily exposed to underperforming investments when greater attention to pricing capability could identify additional opportunities and risks earlier.
In this article, we explain how strategic pricing can help PE firms accelerate value creation across their portfolio of investments.
By the end of the article, you’ll have a better understanding of how pricing can support value creation from acquisition through to exit, while helping PE firms identify margin risks and profit opportunities.
The Problem with Private Equity Value Creation
Often, private equity investors view pricing and growth initiatives as a trade-off. It can seem like the choice is between investing time in optimising prices and focusing on cost reduction. However, a repeatable and sustainable pricing system can complement growth and cost strategies while improving sales execution and profitability.
We find, for example, that establishing a clear pricing system in a portfolio business can help PE firms identify and act on pricing opportunities earlier. A pricing system, in short, can enable faster and more effective sales execution. This can support sales growth at higher margins.
The following strategic pricing capabilities distinguish a strong pricing system from an average one:
- A clear understanding of the market and customer base
- A value-based approach to strategy development
- Customer agreements that grow share of wallet
- A price governance system that facilitates a faster and more effective decision-making process
- Pricing team skills that improve the effectiveness and reliability of pricing decisions
- Decision support such as tactics menus and dashboards that help sales teams win more profitable sales each time
- Integrated data systems and tools that make it easier to manage prices and revenue
- Better price models and structures that align price and product relativities with discount levels and terms to avoid excessive discounting
Unfortunately, many portfolio businesses leave money on the table without even realising it. The causes can be difficult for PE firms to identify because they are often deeply rooted in the culture and operating practices of the portfolio business. For example, an executive team may not recognise that it has a pricing problem and may view arbitrary cost markups as the best pricing method available.
Another common cause of margin loss in portfolio businesses is the late detection of pricing errors caused by human error or poor automation. For example, portfolio businesses commonly operate with limited or no price controls in place to set and manage prices.
Having a clear and consistent price architecture with value-based pricing and discount structures can help management teams avoid price errors and reduce unnecessary pricing complexity. The real problem, though, is that many PE firms continue to underplay the role of execution. In turn, they underinvest in operational price improvements. When this happens, many great initiatives don’t deliver expected results.
Many PE firms will argue, however, that they already use their industry expertise and operational know-how to identify and manage attractive investments and develop value creation plans for those investments.
However, when it comes to implementing strategic pricing initiatives, our experience reviewing PE portfolio businesses indicates a recurring problem. We have frequently found no systematic pricing approach in place. What’s more, there was often limited evidence showing whether the private equity value creation plan had delivered the intended results. This includes limited evidence showing whether the plan actually improved the portfolio company’s pricing and sales operations or contributed to investor returns.
Overall, PE firms should consider additional pricing expertise when conducting pricing diagnostics and price optimisation during the first 100 days. They should also consider hiring pricing managers to plan and execute pricing strategies in specific portfolio businesses.
Why Pricing Is a Core Lever in Private Equity Value Creation
Private equity value creation often focuses on cutting costs, streamlining operations, or increasing sales. These are all valid. But pricing can be a powerful value creation lever in its own right. Even a small price improvement can have a meaningful impact on profit, depending on the business model and underlying demand.
Pricing deserves more attention in value creation plans. Pricing is one of the few levers that can improve both the top line and the bottom line at the same time. Unlike new customer acquisition, which can require significant time and investment, pricing improvements can sometimes deliver financial impact relatively quickly.
Private equity value creation relies on speed and measurable outcomes. PE investment timeframes are finite, so firms need to demonstrate clear value uplift during the holding period. Pricing can be particularly useful in this context. It can affect a wide range of transactions and customer behaviour. And it can often be optimised without major capital outlay.
Consider a mid-size software firm acquired by a PE fund. Its pricing model has not changed in five years. Simply aligning its prices with customer value and market demand may increase margins. That can increase EBITDA without necessarily requiring additional staff or new products.
Private equity value creation also depends on investor confidence. Buyers want to see a business that captures the value it creates. A strong pricing approach signals pricing power, strategic clarity, and customer focus.
In short, pricing is not just a tactical change. It is a strategic lever. Ignoring it means leaving money on the table. For any private equity value creation strategy to succeed, pricing must move from afterthought to priority.
Aligning Pricing With Customer Willingness to Pay
PE value creation depends on unlocking hidden profit. One powerful way to do this is by aligning prices with what customers are truly willing to pay. Too often, portfolio companies rely on old pricing models or cost-plus markups. These approaches miss real revenue opportunities.
We see this gap often. Customers generally care more about the value they receive than the supplier’s underlying costs. If a product or service solves a key problem or delivers unique benefits, customers may be willing to pay more.
Value creation improves when pricing reflects perceived value, not just internal margins. For example, a B2B service provider may offer 24/7 customer support. If competitors don’t, this becomes a pricing advantage. But if the company prices like the rest of the market, it fails to capture that value.
Understanding willingness to pay requires research. Interviews, surveys, and transactional data can reveal what different segments value most. This insight supports price segmentation, which boosts both revenue and satisfaction.
PE-owned businesses can also benefit from fewer unnecessary discounts. When pricing matches willingness to pay, there’s less need to cut prices to close deals. That leads to stronger margins and more predictable growth.
Consider a PE-owned manufacturing firm. If it bundles services that customers value, like faster delivery or setup support, it can charge a premium. Without changing the product, it increases revenue.
Customer willingness to pay is central to smart pricing. When value creation incorporates this approach, the results can be more sustainable. It’s not about charging more: it’s about charging right.
How Can Private Equity Value Creation Accelerate Using Pricing?
PE firms already conduct due diligence before acquiring an asset, during the first 100 days of ownership and during the pre-exit period. We strongly believe this due diligence should include a rigorous evaluation of the asset’s pricing capability.
Improving pricing shouldn’t be opportunistic or limited to a one-off price adjustment designed to reach an arbitrary sales or margin target. Rather, it requires a change in mindset and skills to utilise pricing as a key lever for profitable revenue growth. It also requires sustainable sales and volume performance throughout each stage of the asset’s life cycle, from acquisition through to exit. This can support a stronger final exit price.
The following four steps show how PE firms can use pricing to create and accelerate value from acquisition through to exit:
1. Measure Pricing Capability and Potential ROI
Assessing the potential value of pricing improvements can be challenging. Basic pricing data analysis can help PE firms and portfolio businesses identify new pricing and revenue opportunities across existing or emerging market segments and customer groups.
However, data alone will not tell PE firms if those opportunities are right for their assets or aligned with the growth strategy PE has mapped out for a given asset. Like any due diligence process, understanding an asset’s pricing capability requires a structured approach and methodology. PE firms need to know what questions to ask and what symptoms to look for when determining the next steps. Otherwise, any subsequent roadmap and pricing strategy is really just guesswork.
PE firms need an objective assessment of pricing capability, including a clear understanding of the asset’s customer base, competition and market forces, before they consider buying or selling an asset. Understanding the asset’s total economic value to customers can help PE firms assess potential lifetime value and identify risks associated with an underperforming asset.
PE firms also want to determine quickly whether the company they are considering acquiring has the necessary tools, people and capabilities to implement pricing strategies, analytics and processes effectively. This should also include an evaluation of the executive and management teams responsible for executing the pricing strategy.
The right mix of leadership, experience and ambition is critical to ensuring that pricing works as expected.
The major advantage of conducting a clear pricing diagnostic before buying a business is that PE firms gain a more realistic view of the asset’s total economic value, rather than a rose-tinted view. Viewing the asset through a pricing lens can help PE firms identify how market opportunities match with in-house capabilities. It can help PE firms estimate potential EBIT uplift from pricing, the risks they are likely to face based on the asset’s current capabilities, what resources they need to drive growth or address problems in profitability, and the potential EBITDA uplift at different stages of growth.
2. Build a Pricing Roadmap in the First 100 Days
When it comes to pricing, the first 100 days after acquiring a new asset are an important window for identifying and acting on margin opportunities. PE firms need to take action and bring the necessary pricing expertise in-house to help them develop a coherent, functional private equity value creation roadmap for a given asset. This roadmap should guide value creation from the first day of ownership and beyond the initial 100-day period. Moving quickly can help PE firms act on priority opportunities early.
Often, PE firms turn to current executives for advice on pricing capabilities. However, this can be a mistake. Pricing is a specialist discipline that often extends beyond the operational pricing knowledge of general management teams. This lack of pricing discipline from the top down can contribute to inaction, pricing errors and a tendency to maintain the status quo.
For these reasons, PE firms should consider bringing in experienced pricing managers to assess an asset’s pricing situation. Pricing leaders can provide PE firms and portfolio businesses with the guidance and support needed to strengthen pricing capability and pursue profitable growth. This can help accelerate value creation in portfolio businesses. A strong pricing leader can use the first 100 days to assess pricing capability and begin building the right strategies, structures and operations.
3. Build Lasting Pricing Capability During Ownership
Pricing skills are key to executing a new approach to value creation. High-calibre teams working to a best-in-class roadmap, for example, can do a lot in the first 12 months of a pricing initiative. They can develop a list price, restructure discounts, adjust terms, add new talent or build sales capabilities. However, skills without clear ownership, demarcation of responsibilities and accountability for decisions will only get you so far. Clear ownership and governance help ensure that pricing decisions remain consistent and that improvements are sustained throughout the holding period.
4. Reassess Pricing Before Exit
During the pre-exit period, PE firms should revisit their due diligence process and clearly lay out the pricing opportunities for the next owner. PE firms that are in a hurry to take advantage of growth opportunities often divert their focus from pricing. In turn, this shifts the focus away from the value of the asset they are trying to sell to prospective buyers.
It is important, therefore, to prepare the investment for sale and ensure pricing performance remains well understood and documented. For example, have all results of previous pricing strategies recorded. Model past, current and future pricing opportunities and compare the results to improve forecasts. Then, update the value creation strategy and roadmap for the new buyer so they can see evidence of value.
Building Pricing Capability to Improve Portfolio Value
Taylor Wells Advisory is increasingly approached by Australian PE firms with questions about where to start with pricing and what type of pricing talent they need.
PE firms are often keen to explore pricing and pricing talent because pricing can have a significant impact on the P&L, while the right talent is critical to executing pricing initiatives successfully. However, Taylor Wells’ experience suggests that some PE firms still need to make internal changes to ensure pricing initiatives and talent are set up for success.
But the reward from doing pricing properly for PE firms is compelling. Better pricing can improve profitability and, in turn, contribute to the value of a portfolio business. This is particularly relevant when valuation is based on an EBITDA multiple.
For example, even a modest price improvement on addressable revenue can generate meaningful additional value for PE firms, especially if the asset business is using basic cost-plus pricing or ineffective rebate schemes. The actual impact will depend on changes in volume and any investment required in tools, systems and resources.
When forecasting the final sales price of an asset based on the profit it generates, investing in the asset’s pricing capability can be an important part of the value creation strategy.
Implications
- Assess pricing capability early during due diligence and the first 100 days.
- Build the right pricing capabilities across people, processes, data, governance and price architecture.
- Track and reassess pricing performance throughout ownership and before exit.
〉〉〉 Get Your FREE Pricing Audit 〉〉〉
Bottom Line on Private Equity Value Creation
It is encouraging to see private equity firms in Australia incorporating strategic pricing initiatives into their value creation strategies. However, some PE firms still follow a traditional approach of acquiring an asset without making significant operational investments during the holding period.
Investing in pricing as part of an asset’s value creation strategy can involve a more hands-on approach to portfolio management, including closer involvement in operational improvements alongside traditional financial engineering.
To accelerate value creation in changing markets, PE firms should treat strategic pricing as part of the investment strategy rather than an afterthought. This means assessing pricing capability during due diligence, addressing priority opportunities in the first 100 days, building the right pricing talent and governance during ownership, and reassessing pricing before exit. A stronger pricing capability can help portfolio businesses improve profitable revenue growth and demonstrate a clearer value creation story to prospective buyers.
For a comprehensive view on building a great pricing team to prevent loss in revenue, Download a complimentary whitepaper on How to Build Hiring Capability To Get The Best Pricing Team.
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
