A horizontal bar chart. The top bar shows the global inflation rate in 2022. The bar below shows the average price rise achieved by the companies included in EY survey. The chart illustrates that companies’ price increases did not keep pace with inflation in 2022.
A horizontal bar chart. The top bar shows the expected global inflation rate in 2023. The bar below shows the average price rise expected to be achieved during the same period by the companies included in EY survey. The chart illustrates that companies’ price increases are expected to match inflation in 2023.
So, although companies have raised their prices in response to inflation, they have not, on average, matched it. In other words, despite raising prices, they still risk leaking value as higher input costs invariably weaken margins and damage profitability.
Seizing the pricing opportunity in PE value creation
Yet, as with all challenges in the PE world, there are also opportunities. This is a time when customers, seeing their own input costs rise, are more likely to accept price increases. As the VP of a manufacturing company put it during one of the interviews carried out as part of our pricing study, “There has not actually been much pushback from clients as demand has been outstripping supply and customers understand that prices are soaring”. In this environment, by truly understanding their pricing power – customer by customer, product by product and geography by geography – private equity companies can unlock what may be the most effective value creation tool at their disposal. Below are five ways to realize the value-creating potential of pricing:
1.Invest in advanced pricing capabilities
This approach is strongly backed up by our research, which showed that PE-backed B2B companies which have implemented higher price rises were significantly more likely to have invested in advanced pricing capabilities over the past two years. That put prices up by over 5% and enjoyed a growth rate of more than 15%.
This diagram is a horizontal bar chart showingsix different types of pricing tools that B2B companies are investing in. Where each pricing tool or capability is shown, one horizontal bar represents the companies that have achieved high price rises and the other horizontal bar represents companies that have implemented low price rises. Overall, it shows a strong correlation between investing in data analytics and pricing tools and achieving higher price rises.
This is a bubble chart examining the correlation between high-growth B2B companies and high price rises. The two bubbles at the top of the chart show companies that have raised prices by over 5%, with the larger, top left bubble representing high-growth companies and the smaller, top right bubble representing low-growth companies. The two bubbles on the bottom row represent companies which have raised prices by less than 5%. The proportion of high growth companies doing so is shown in the lower left bubble and the proportion of low growth companies is shown in the bottom left bubble. Overall, it reveals that high-growth companies are much more likely to have put up prices by over 5% than their low-growth counterparts.
Of course, higher prices are not the sole reason for higher growth, nor is high growth the only reason that they were able to put up prices more quickly, but our findings do suggest that successful companies are better able to use pricing as a strategic tool to drive growth.
Furthermore, businesses that have implemented higher price changes in the past year are 40% more likely to continue investing in pricing technologies over the next 12 months. This reflects the positive results achieved in the previous year, which they clearly believe can be sustained through continued investment in pricing.
Put those findings together and the conclusions are clear: businesses which develop their pricing power capabilities can raise prices faster, grow more quickly and therefore invest more in further improving their pricing tools and strategies. In other words, the winners will get stronger and the losers will inevitably get weaker, creating a widening gap between those who can make the most of pricing opportunities and those who risk being overcome by them.
3.Align your pricing and growth strategy
The starting point should be aligning your pricing strategy with your overall business growth strategy and customer engagement goals. For example, do you want to focus on high margin customers even if it means losing market share, or keep all your customers on board to upsell a new product? Then it’s a case of building the digital insight needed to spot and slice the information sourced from competitors, customers and prospects. From this information, pricing guidelines can be put in place that will retain price discipline, while also allowing sales teams to close deals quickly.
While a pricing strategy sets the route to value, the road taken will depend on the individual nature of the business. PE-backed B2B companies in high-growth sectors such as microchips will not have the same pricing strategy as those operating in the manufacturing or packaged food industries. Firms that are leaders in their sectors and/or have a unique product will have greater scope to price according to the value of their product to customers, whereas firms without such a strong market position will have to set their prices in relation to other providers. Yet, when implementing pricing strategies, there are certain methods which can be applied almost universally:
- Understand your customers more intimately so that you know the willingness of each customer segment or even individual customer to pay more for your products. Also, find out more about the profitability of customers at a granular level, taking into account not only price but also the full cost to serve, including cost rebates, promotions and support services.
- Harness competitor and market data and intelligence to understand your positioning in the market and keep tabs on how competitors are changing their products, pricing, features and commercial terms. This will enable better decision-making in key areas, such as identifying where prices can be increased without impacting market share.
- Establish excellent pricing execution and governance. This requires a two-pronged approach. Firstly, knowing the right target price and commercial terms to offer each customer. Secondly, ensuring salespeople are fully on board with the target price and that sales leadership has clear visibility of the pricing approval process.
4.Empower pricing teams to take the lead
Our research found that those businesses where commercial/pricing teams had greater authority to set prices were more successful than those where pricing/commercial functions acted as more of a support role to sales teams which had autonomy to change prices and/or offer discounts to individual customers. High-growth B2B companies were 31% more likely to keep pricing responsibility within their commercial/pricing teams and 37% less likely to completely delegate this responsibility to salespeople. Lower-growth companies were more likely to allow their sales teams more leeway to offer widespread discounts to customers.
So, what does good practice look like? In the case of global B2B corporations, a centralized pricing team, supported by global leadership, should be able to provide the tools and insights to their teams on the ground so they can make better decisions. For local firms, the pricing policy, and in certain situations, pricing reviews, need to sit within a pricing team which supports sales rather than salespeople having significant freedom in the application of pricing, discounting and other net price dilution. But really, this needs to be a two-way partnership in which the sales function understands its role in relationship building, proposition, knowledge education, advocacy and price execution.
Meanwhile, the pricing team must understand its role in not only setting pricing policy but also providing the guidelines within which sales teams can operate and establishing platforms to regularly engage with sales to know when the market is shifting. By doing so pricing teams can empower sales teams to feel confident when executing pricing conversations with customers.
5.Don’t forget that people make prices, too
While having insightful data and smart tools is undoubtedly vital, businesses need to know how to use them to formulate pricing strategies and then execute them correctly. Historically, people in pricing roles have learned on the job. As one pricing director for a manufacturing firm said during a survey interview, “No one is a born pricer, everyone moved into pricing through finance, marketing or another role” yet even the most advanced tools need to be operated by someone who both understands the inputs and outputs and knows how to interpret them. Therefore, companies need to invest not only in pricing tools but also in true pricing professionals, as well as training to develop existing skillsets. Furthermore, once the pricing decisions have been made, it is crucial for all stakeholders within the company to understand the rationale for these decisions and how to implement them. It is especially important that organizations’ sales teams understand and embrace any proposed changes to pricing because they are uniquely positioned to implement them successfully with customers.
Next steps
- Make pricing a strategic priority to grow revenue more profitably. Leadership and middle management should drive this change within the organization.
- Take a long-term view by investing in the pricing strategies, people and governance processes needed to anticipate and respond to changing market conditions more quickly.
- Promote cooperation, transparency and data sharing between both the pricing and sales teams. This will support the shift from purely qualitative conversations to data insight-led discussions that better empower sales teams to execute the desired price changes.
- Invest in advanced pricing tools, data and analytics to cut through the noise and gain true insight into and effective execution of, price changes.
Summary
As private equity firms renew their focus on value creation, intelligent pricing can be a powerful way to realize it. Our research reveals that the private equity firms who are prioritizing and investing in pricing are reaping the rewards. This strategy is not only helping companies to keep ahead of cost inflation but also increase profitability, fund growth and improve resilience. Organizations must therefore act to improve their pricing capabilities or risk falling behind.
For more information, connect with our pricing and profitability growth advisors.
