Recent Searches
Select your location
In brief
Current market conditions are making it more important than ever for private equity-backed B2B companies to unleash the power of pricing. A combination of macroeconomic headwinds and lower price multiples means that many private equity funds are holding onto portfolio companies longer and therefore need to create more value within them if they are to achieve their target returns. Maximizing pricing opportunities is a significant and relatively inexpensive way to create such value. Yet according to our CEO Outlook Pulse (pdf) in January 2023, just 30% of global CEOs saw pricing as a strategic priority over the next six months.
One reason for this disconnect may be that business leaders, accustomed to a long, historic period of low inflation, became used to absorbing cost increases and delaying price rises. This view is backed by our 2023 EY-Parthenon Global Private Equity B2B Pricing Study, which shows that PE-backed B2B firms’ price increases were outstripped by inflation in 2022 and are only now catching up 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.
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:
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%.
How EY-Parthenon can help
Value creation is at the core of every transaction investment thesis. Our business is organized, resourced and led to help private equity firms transform companies and increase their ability to create more value across their portfolio.
Read morePE-backed B2B businesses which raised their prices by over 5% have primarily focused on technology, including data analytics and pricing tools, with investments in these areas 25% and 48% higher, respectively, when compared to businesses that had implemented lower price rises.
Data and analytics capabilities were highlighted as a crucial area of investment because they provide businesses with the insights and tools needed to make informed pricing decisions. However, these must not be seen as standalone solutions and should be embedded into pricing considerations with sales teams, commercial governance processes and deal reviews. By doing so, organizations can shift away from using subjective, gut feelings on pricing to more data-led decision-making.
Our research also inextricably links the ability to raise prices with high-growth companies: 95% of companies which raised prices by over 5% in 2022 had enjoyed growth rates of over 5% during the same period. And a third of companies which had put prices up by over 5% had enjoyed growth rates of more than 15%.
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.
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:
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.
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.
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.
Four key areas for cost reduction and value creation in private equity
A focus on cost optimization can be used by private equity to build corporate resilience. Find out more.
Three cash disciplines to create value and resilience
Building the cash discipline and control needed in today’s markets will ensure future resiliency. Find out more.
How PE CFOs create value through all five stages of the investment lifecycle
Private equity CFOs are central to every stage of the investment lifecycle, setting priorities and spotting opportunities to maximize exit value.
