All-in on Add-ons: Is Your Pricing Ready?
Add-ons can be an excellent value creation strategy. Traditional plays like cost synergies or consolidated buying power alone could substantiate the investment, but compressed multiples and an uncertain macro climate suggest Private Equity firms are best suited in pulling out all the stops to drive EBIDTA growth.
Pricing, the most effective profit lever, should be part of your add-on value creation playbook to ensure maximum return on your acquisition investment. To best position the platform and add-on for success, we break down the 5 key pillars essential for effective pricing:
1. Price Strategy Alignment
When targeting an add-on, you have a hypothesis for value creation typically centered around filling holes in the platform company’s offering, expanding the business to new geographies/markets/channels, or strengthening your competitive position.
To ensure full value creation once acquired, the add-on’s pricing strategy must be aligned to that value creation hypothesis. For example, if the add-on files holes in the platform company’s offering, are you structuring pricing in a way that promotes product bundles, upsells, and bigger purchases? Doing so will ensure the value creation potential is realized.
2. Price Setting & Execution
Bringing together multiple companies is no easy feat. From a pricing perspective, it’ll likely require sifting through multiple different ways prices are set and executed. Developing a unified approach that works across the platform will be key to driving pricing efficiency and impact internally and appearing as a cohesive business externally. Examples to consider include:
- Source(s) of data – The hard truth is, to effectively set prices across companies, you need a unified source of truth for your data. It may start out as separate sources for each company, but if the objective is to price as one business, inevitably that data must be brought together to inform a total pricing approach. Without it, you’ll never have a clear pricing picture.
- Setting one price structure and approach – Does one company set a list price and discount off it while the other sets net prices for each deal? That won’t work in a cross-selling approach. Once the structure is set, you must also establish one price setting approach. If one company uses a Cost+ pricing strategy and the other leverages analytics to set a market-based price, a combined product catalog will lead to counterintuitive prices in the market.
- Defining one path to execute pricing – The combined companies likely have different systems and places where pricing “lives.” Rationalizing that may not be the top priority, but the process to get prices approved and published should be standardized, even if the final consumption point remains siloed for now. Without a standardized approach, financial evaluation becomes much more difficult.
3. Process & governance
A cohesive pricing process and associated governance structure is a key enabler of effective pricing. Finding the Goldilocks “just right” level of process and governance for your company is one part cultural (how heavy of a hand is expected?) and one part need (how heavy of a hand is needed?).
Every company is unique, but the watch-out is to avoid overcorrecting. Often, companies either go too light - minimal process and governance leads to the wild west of pricing in the market; or they go too heavy - bogging down every deal with rounds of approvals that take up precious time and resources, with little added impact to show for it.
4. Measurement
An ability to measure price performance and compliance is critical to enable continual improvement and profit uplift. Looking at key price performance metrics such as realized price, margin across business segments, and time periods will provide a solid core.
Additionally, if sales reps have any pricing autonomy, then measuring sales rep compliance with price guidance. Absent guidance, look at their realized prices and margins. It will allow proactive monitoring of compliance and buy-in. It will also help spot areas where additional training and change management can drive further pricing impact.
5. Organization
People are a key enabling factor for the four pillars above. Getting the right skill sets in place for the right roles will be essential to not only capture the value but also ensure it sticks over time. Key skill sets include data and analytics, business “translators” (those that can connect the dots between data/analytics and business actions), and change management.
You don’t need to get all pillars set out of the gate, and it’s ok if some are stronger than others. The main thing is to begin making progress immediately upon acquiring the add-on to build profitable pricing practices and skill sets that will continue to drive ROI going forward.