July 27, 2023
Portfolio Insights – Pricing Strategies
At Endless, we pride ourselves on being a hands-on investor, working closely with our management teams to deliver value-enhancing projects, these range from bolt-on acquisitions to key operational improvements, all with a focus on making businesses better, more robust, and more sustainable.
With the UK seemingly in a permacrisis and inflation continuing to be a critical issue, management teams now need to review their pricing strategies on a regular basis to ensure that they keep pace with changing costs and customer expectations in ever-evolving market conditions. The Endless team have worked closely with our portfolio to support these reviews, in some cases rolling up our sleeves to create new tools to analyse customer profitability dynamically before sitting down to review and challenge pricing strategies with our management teams.
In this article, I want to share some insights from recent projects I have worked on with some of our portfolio companies, where we have helped them review and update their pricing strategies. Here are four key areas to consider:
1. Understand the impact of inflation on input costs
With different inflation figures hitting the headlines everyday it can be difficult to keep track of what is happening to individual input costs, especially for people or energy intensive businesses where inflation maybe running materially higher than the headline rate.
To avoid being caught off guard by rising costs, we work closely with management teams to analyse purchases in detail and set up trackers for the key inputs that affect margins. This way, we’ve been able to create and monitor company specific inflation metrics, and use them to support pricing decisions and discussions with internal and external stakeholders.
2. Customer segmentation and profitability analysis
Whilst a one-size fits all pricing strategy is in theory easy to create and implement it is unlikely to be as effective as envisaged as customers react differently dependent on their value perception, switching costs, and loyalty.
Detailed customer segmentation is a valuable tool when setting individual pricing strategies if used appropriately, focusing on customer behaviours and their drivers rather than simply customer size. For example, two customers may buy the same basket of goods, but one may receive a single weekly delivery and the other may receive multiple deliveries throughout the week. How does this affect the costs of servicing and margins for each customer?
Working through the customer analysis with the teams selling and delivering those products or services will provide significant insight into what makes a customer tick. Taking the example above, the customer with multiple weekly deliveries maybe taking advantage of a low free delivery threshold that you can adjust or remove to boost margins more than a headline price increase. Or it maybe the case that they have limited storage capacity and would appreciate a solution that helps them reduce their inventory costs.
3. Internal communication and monitoring
Successful price changes require alignment and buy-in from everyone involved in selling or delivering the products or services, not just the senior leadership team. We have seen a lot of management teams take the time to communicate clearly and consistently why, when, and how prices will change, and what impact is expected to be delivered.
One way to ensure alignment is to implement incentive schemes for the teams that are responsible for delivering price changes. These schemes should not only reward achieving a headline price increase, but also prevent leakage of benefits of the increase through other areas such as higher discounts or longer payment terms.
4. External communication
Everybody is facing price increases from many sources, so most customers will not welcome another with open arms. However, we have seen across the portfolio the benefits of communicating with customers proactively and transparently in reducing the resistance to change and maintaining trust.
In a lot of cases the key to delivering new pricing structures has been taking the time to sit down with customers to explain why the need to adjust prices and why they are fair and justified. This includes providing clear and relevant information about how inflation has affected specific costs, and the steps tried to mitigate or hedge them. Also, highlighting the steps being taken to improve products or services and deliver long-term value.
Given the current high volatility in all inputs and the need to constantly update prices, we have seen portfolio companies agree metrics to simplify future price discussions with key customers, such as agreeing to link to an appropriate index, usually specific to the industry rather than a national measure such as CPI.
Over the last couple of years businesses in the UK have seen unprecedented levels of volatility in input costs and with that a need to be more proactive and agile in revising their pricing strategies to match market conditions and customer needs.
Working closely with the Endless portfolio we have seen the benefits of deep-diving into transactional data to create bespoke pricing strategies for individual customer or segments of customers, and investing the time to sit down with both internal and external stakeholders to explain how and why prices are changing. These upfront investments can improve acceptance of new pricing structures and reduce margin dilution through unnecessary discounting.