In today’s high-priced deal market, a reasonable exit multiple demands more top-line growth. As a result, many portfolio companies (portcos) quickly realize that managing all their customers the same way leaves too much revenue on the table. As an economist would say, “plain vanilla” go-to-market (GTM) and pricing approaches leave too much unmonetized space under the demand curve, i.e., at the high-end, buyers with bigger needs will gladly pay more if the value is clear, and at the low-end, targeted discounts can bring in new high lifetime revenue buyers.
However, Alexander Group’s recent research with 50+ PEs in our GTM Council showed that 90% of operating partners (OPs) thought their portcos were not maximizing customer willingness to pay and that they lacked the GTM motions to deliver the right value message to the right buyers. In addition, the OPs thought that less than half of their portcos have a clear pricing strategy for new products or buyers.
Additionally, many portcos aren’t confident they can pull off a strategy of pro-actively adapting GTM and pricing to different customer types. It is a new organizational muscle for many portcos and PE operating partners. This article discusses how portcos can start building this new skill and leverage it as a key growth driver in 2022.
Asking sales reps to systematically determine which customer should pay more and which is worth a discount is unrealistic. However, giving them a set of ‘customer types’ to identify, and a clear play to run for each is very effective. Connecting pricing models with savvy account management delivers top results.
So why are so many portcos still missing this pro-active synergy, and the many opportunities to expand revenue and CLV it brings? Often, portcos cite lack of leadership bandwidth or support resources, low rep tolerance for complexity, or they simply assume the sales organization will figure it all out. Big mistake.
To get to a consensus on how to use differentiated pricing/GTM, management often needs to surface and align competing internal philosophies, e.g., Sales (sell more), Marketing (promote more), Finance (raise the price), and Operations (manage supply). This siloed thinking results in a tunnel vision approach to pricing, leaving pricing/GTM to product managers, or maybe to Finance, which often limits growth potential.
Another challenge in using pricing to drive revenue and margin is turning front-line sales managers into effective value selling coaches. Transactional or relationship selling models often do not align with a more targeted higher-value, higher-pricing model. If they do use pricing, it’s often traditional cost-based pricing and/or blanket sales processes for every account. So, managers have to learn to pro-actively coach reps to use a more differentiated approach. However, in this, managers are relying on rep performance/funnel reports that track revenue and margin but neglect the value-based nuances critical to customer motivation. So, the bottom line: managers may lack both the visibility and the skillset to see when reps are missing customer value signals or running the wrong GTM/pricing play. Managers need coaching and exec oversight to get better at this, particularly the use of two key perspectives to help assess account value:
If leveraged correctly, the organization can better demonstrate quantitative value versus the competition, while sharpening its sales messaging. Tracking these components also helps focus the sales rep/manager on the value the customer really wants and will pay more for, thus guiding organizations in developing more targeted pricing strategies.
Customer value perception occurs along a spectrum. For example, a modern sales rep should be able to understand if Customer X values offer features B and C as “high-value,” “nice to haves,” “required,” or “no value.” The rep can then invest in the right sales motion including through meetings, solution design, specialist involvement, wooing influencers, and other investments etc. A well-prepared rep can therefore also deploy the right value pricing play, e.g., value banding, bundling, pricing up or discounting. Through this GTM/pricing synergy, he/she will be able to increase average revenue and margin per account, while increasing customer retention and lifetime value (CLV). PE firms recognize this as a major opportunity to improve portco top-line and EBITDA. Indeed, Alexander Group’s research showed that operating partners believe less than 50% of portcos understand the differing customer value perceptions of their products/services, let alone what sales motion to run in each case.
Traditional financial statements are done at a very high level and focus on top-line revenue, costs and margin. As a result, pricing is often a late or knee-jerk response to financials, resulting in actions including blanket price increases or greater discounting that may boost short-term margin at the expense of growth, CLV and longer-term margin. To get it right, portcos today require a scorecard that shows the impact of differentiated pricing/GTM performance across three key performance-related variables:
These performances, together with regular analysis of funnel, revenue and margin, will clarify the current impact of the pricing/GTM relationship, and which levers to pull to improve growth, EBITDA, CLV and other priorities.
To quickly build a differentiated pricing/GTM capability, portcos should start with four priorities:
Keeping it simple will avoid resistance to change from departments used to traditional pricing strategies and will create the momentum for accelerated growth.
To learn about Alexander Group’s Private Equity practice or to sign up for a briefing on our latest GTM/Pricing research and benchmarks, please contact us today.