Implement strategic pricing in portfolio companies to maximize your ROI.
The best investments are the ones where you’re pulling levers to drive value.
– Marc Rowan, Co-founder of Apollo Global Management
In the last few years, private equity firms have become increasingly aware of the power of strategic pricing as a tool to drive growth and profitability in their portfolio companies (portcos).
At Acustrategy we advise some of the leading private equity companies in the world to maximize their return by ensuring their portcos use strategic pricing to
- Align with overall business strategy: Strategic pricing is never a standalone effort; it must work in tandem with, and support the overall business strategy, brand positioning, and operational capabilities of a portco. And PE firms can play a vital role in ensuring this alignment.
- Unlock value: When pricing reflects the value delivered to customers, portcos can unlock significant pricing potential. It’s not just about charging more; it’s about understanding what customers or customer segments are willing to pay for and pricing accordingly to maximize revenue and enhance both internal rate of return (IRR) and net present value (NPV).
- Enhance competitive positioning: In a competitive landscape, pricing can be a powerful tool to differentiate a portco from its competitors. Strategic pricing allows a company to position itself effectively in the market, whether as a premium provider or a competitive option.
- Improve profit margins: Strategic pricing is not just about top-line growth; it’s also about improving profit margins. By understanding the cost structure, customer willingness to pay, and competitive landscape, portcos can set prices that maximize their EBITDA.
- Drive growth: Growth is the lifeblood of private equity, and strategic pricing can be a key driver of growth. By aligning pricing with market demand, customer segmentation, and value proposition, portcos can reduce customer acquisition costs (CAC), drive sales and expand market share.
- Building strong customer relationships: Beyond the models and numbers, strategic pricing is about building strong customer relationships. Transparent, value-driven pricing sends a message to customers that a portco understands and values their needs. Building a bridge of trust with customers can lead to long-term loyalty, lower customer churn, and higher customer liftetime value (CLV).
- Mitigate risks: Pricing can be a double-edged sword. If not managed strategically, it can lead to customer dissatisfaction, compliance issues, or competitive disadvantages. However, using the right pricing strategy and consistent pricing can make for more predictable and less volatile revenue streams thereby positively impact monthly recurring revenue (MRR), cash flow, and debt-to-equity (D/E) ratios.
- Leverage technology and analytics: Data, technology and analytics play a crucial role in strategic pricing. Guiding portcos to invest in and leverage these tools can provide insights into customer behavior, market trends, and pricing effectiveness.
It is important for PE firms to remember that strategic pricing is not just a lever they can pull sometimes. It is a necessity for optimizing ROI. By insisting on a well-crafted pricing strategy, private equity firms can ensure that their portcos can thrive to their fullest.