Offsetting Shrinking Multiples by Shifting Pricing Strategy
PitchBook’s Q2 US PE Breakdown report highlights the recent hit to valuations.
“Prices paid on PE buyouts are in full correction mode. Using enterprise value (EV) to EBITDA as a metric, multiples remained in a tight band of between 11.5x and 12.4x in the four years ending 2022 before collapsing by 18.5% this year. The median EV to EBITDA multiple now stands at 10.5x for the 12 months ended Q2 2023, down from 12.1x in 2022.” (Page 10)
In response, many Private Equity firms are delaying exits waiting in hopes of rebounding valuations. For those proactively seeking to offset shrinking valuations, shifting your platform company’s pricing strategy away from Cost+ should be top of the list. Why? With higher EBITDA requiring lower costs and/or higher prices, many platform companies are stuck.
First, all addressable cost-out efforts have already been tapped.
Second, done correctly, pricing is the single greatest profit lever a company can pull. [Read the study here]
Finally, with pricing in focus, a Cost+ price strategy inherently caps profit growth.
- Cost+ price strategy waits on cost increases to drive price increases. With commodity prices stabilizing or decreasing, prices will remain flat to down. That’s the opposite of what you need right now.
- Cost+ pricing treats all customers the same. Passing on higher prices to customers won’t stick if done uniformly, especially when it can’t be justified by rising costs. You must find those pockets of customers with a greater willingness to pay.
- Cost+ pricing doesn’t respond to the market. The strategy is strictly internally focused, and often derived by aspirational margin targets. The result is likely overly discounted deals and lack of price control. There’s no path to correcting this cycle if you stick with the Cost+ approach.
Transitioning away from a Cost+ price strategy may feel daunting or risky. But it’s easier (and faster) than most think. Against the current economic backdrop, the real risk is likely sticking with the Cost+ status quo.