Pricing optimization considerations
Definition and strategy are key considerations when thinking about pricing optimization. Defining pricing comes down to aligning customers and products to market and value. When considering this in your own due diligence process, ask how today’s pricing aligns to both customer value and portfolio value (for example, IT service or a product with growing markets). Don’t forget about tracking participation in growing markets, as those shifts also can affect pricing.
But pricing isn’t all about the numbers – there’s also strategy to consider, especially in the current market. Over the past several years, it has been relatively easy to pass price increases along to customers due to a variety of market factors, including inflation. However, companies already are experiencing the need to be more thoughtful and targeted about how and why they’re raising prices, and this trend is likely to continue throughout 2024.
Pricing optimization challenges
A variety of internal challenges can affect pricing as businesses look to grow through acquisition, including the sophistication and maturity of the business being acquired. Data integrity is one of those challenges, and not just when dealing with outdated systems – businesses also might have to deal with outdated mindsets. What people in the business perceive regarding pricing might not match what the data actually shows. Investing in data accuracy, along with pricing visibility, can provide useful insights into areas for improvement that could produce immediate results, as well as contribute to more accurate standard costing. It’s also important to remember that pricing approaches vary regularly, even inside one business, depending on markets, geographies, and internal stakeholders.
Internal overrides and legacy accounts also can pose a challenge. This type of challenge is common in private equity acquisitions when an owner has sold the business and transitioned out of their role. Reviewing and questioning pricing on these accounts during due diligence can unveil legacy accounts for which internal overrides were made because the customer was a core account. While improving pricing and delivery or offering that customer additional benefits might have helped build relationships and keep the business growing in the past, such actions might no longer fit within the confines and structure of the business moving forward. It’s important to delineate between those external and internal factors when looking at products and performing an ABC segmentation.
4 ways to monetize diligence through pricing optimization
- Conduct market research on your customers. Market research is an excellent way to uncover customers’ willingness to pay, allowing businesses to map a demand curve across different price points and competitive intensity to get a solid measure of where to start (and where to grow). This research can help a business understand what price points are going to be fully realizable in which markets.
- Understand and adjust to other market-driven factors. Market-driven factors can fall outside of what is reported in a customer-focused survey. For example, Crowe managed a large-scale engagement for a client with 50-plus branches and service locations across the country. During the due diligence process, we asked each location about its market policy on specific products, processes, and charges, because we noticed some discrepancies. In this case, a location in Houston charged a flat-rate service fee but no trip-charge fee because of the traffic in that city. Another location with less traffic, Indianapolis, was able to successfully introduce a trip charge. Finding the pricing elements that truly are market driven can help you adjust pricing in a way that’s successful and effective in both the short and long term.
- Get alignment with your salespeople. Your salespeople are your front line, and they need to understand any pricing changes. Educate salespeople on the entire picture of a pricing change, using numbers, data, and facts. If a sales team is clear on not just how things are priced, but why they are priced the way they are, that team can effectively communicate the entire value of the product or service to customers.
- Communicate price increases thoughtfully. Over the past few years, unprecedented supply chain disruption has led to a high number of significant price increases. Companies at times communicated with consumers about price increases, but most didn't communicate the strategy behind the pricing changes. Going forward, it’s important to pay attention to both the message communicated and how the information is distributed.
In the current market, pricing optimization is more important than ever, as it’s possible that a significant clawback in the market is on the horizon. Taking time to understand market challenges, incorporating information from the due diligence process, and applying revised strategies can help your pricing optimization, both now and in the future.
