Few private equity investors or their portfolio company management teams have lived through the kind of inflation surge we’re seeing in the wake of the Covid-19 pandemic. Faced with sudden price increases for inputs, labor, and other essentials to running a business, many firms have doubled down on their tried-and-true cost-reduction playbooks, a vital component of blunting inflationary impacts.
Private equity firms must look beyond cost-cutting playbooks and develop pricing strategies that can weather an inflationary storm.
But limited experience with inflation may be translating into missed opportunities to play offense. Pricing moves, executed thoughtfully and strategically, can not only help cover cost increases but also expand margins.
The most effective private equity firms are helping portfolio companies develop pricing playbooks that serve a dual purpose: tracking the cost pressures the business is under and preparing the organization to take pricing actions that better reflect the full value proposition for customers. This involves four practical steps.
The first is analyzing cost pressures across the business and then drilling down to a more precise understanding of what’s coming for specific channels and products. This is critical for establishing a new floor for prices and developing a data-driven rationale for increases. At the same time, it’s important to set an aspirational price ceiling and carefully evaluate how far the company can push toward it given competitive positioning and customer relationships.
Step two involves translating this analysis into action, establishing the specific adjustments you are going to make by channel, segment, and geography. Then comes the essential third step: winning buy-in from sales teams and preparing them to launch what can be a highly challenging initiative.
Business unit and sales executives are understandably reluctant to rock the boat with customers, especially in a period of economic uncertainty. So leaders need to make a compelling case internally for price increases and set up teams for success by establishing sales plays and communications strategies that are short, factual, and focused. Strong messaging quickly establishes the cost rationale for price increases but also emphasizes how those increases will enable the company to continue to deliver an exceptional customer experience.
The fourth step is building a tracking and learning function. Management needs to monitor and understand the ongoing impact of rising costs and the market impact of raising prices. This means establishing robust metrics and dashboards to see if pricing actions are sticking, if customer churn is increasing, and if targeted promotions are necessary. It also means tracking costs to determine if ongoing inflation continues to pose a threat, so the company can plan additional moves 6 to 12 months down the road, if necessary.
What’s clear in the short term is that the first pricing move may be the most consequential. Companies—especially B2B companies—have to be decisive, because going back for more after a few months of rising costs may not be possible (gas prices aside). Moving proactively with a clear view of what’s coming is the best approach to preserving margins amid a period of rising costs. And for those in a strong position, it may be an important chance to set the bar higher.