Pricing As A Value Creation Lever For Private Equity Firms

One of the most important factors in defining a value creation strategy is determining the pricing values for its investments. If you are using value creation to replace a lost customer base or raise profits, you need to make sure you don’t forego other forms of advertising, distribution and/or marketing.

Companies that are constantly adding customers will inevitably have their costs rise with their revenues. Since those costs tend to be fixed, this is usually a trend that takes a while to reverse. Thus, many companies, often in reaction to value pricing initiatives, increase prices to the point where they cannot make money with their investments.

If the market is reacting against price increases, then the value pricing initiative may not be working. Often, companies attempt to resolve the problem by going back to their customers with a lower price, which often results in even greater losses.

The ability to successfully price value creation means that the company needs to be able to replace a number of customers with a steady stream of new ones. Therefore, it is important that a company provides value that customers find desirable in addition to what they already purchase.

Pricing value campaigns typically include programs that improve service, streamline operations, or focus on quality. The methods used depend on the nature of the product or service.

In addition to including cost-saving elements, all pricing value initiatives should be designed to serve a specific purpose. When a company focuses on a group of customers instead of promoting service and quality, they are not increasing overall sales.

A company that wants to raise prices will want to make sure that their price initiatives can be used to replace lost sales with increased revenue and market share. If they can’t effectively use pricing, they run the risk of being “canned” out of the marketplace.

In fact, if a company has been “canned out” in a market because it has increased operating profits, it will eventually be forced to become a private-equity or hedge fund-backed company. This happens frequently because when companies are unable to increase sales or operating profits, they begin to “self-cannibalize” – another name for losing customers and sales.

Advertising and marketing efforts must be effective. If these efforts are not doing the job, then the company must look at other approaches.

Most companies fail when they raise prices to reprice unprofitable customers, but not because they have failed to establish pricing value creation. Instead, companies raise prices because they are unable to replace lost sales with more sales.

Indeed, price increases often do nothing to replace lost sales but instead raise prices to reprice unprofitable customers. This is why one of the most common mistakes is to simply raise prices, even if the customer base does not require a large enough increase to offset the lost sales.

Ultimately, if a company wants to raise prices, it must be able to reduce cost or eliminate other costs in order to reprice unprofitable customers. When this is the case, it is easy to understand why many companies fail.