{"id":8031,"date":"2023-12-14T14:32:52","date_gmt":"2023-12-14T14:32:52","guid":{"rendered":"https:\/\/www.pearsonhamgroup.com\/?p=8031"},"modified":"2024-04-10T16:40:44","modified_gmt":"2024-04-10T15:40:44","slug":"capitalising-on-untapped-potential-how-to-assess-the-earnings-upside-from-pricing-due-diligence","status":"publish","type":"post","link":"https:\/\/www.pearsonhamgroup.com\/es\/capitalising-on-untapped-potential-how-to-assess-the-earnings-upside-from-pricing-due-diligence\/","title":{"rendered":"Capitalising on Untapped Potential: How to Assess the Earnings Upside from Pricing Due Diligence"},"content":{"rendered":"

Our work with private equity firms shows that pricing\u00a0 can increase portfolio company EBITDA by 1%-7%, opening up a potential valuation uplift variance of 30%-120%.\u00a0Yet a generally narrow and light touch approach to pricing due diligence means that private equity firms rarely\u00a0 assess the full upsides. So how can you dig further and deeper to capture the valuable, but still largely untapped pricing potential?<\/em><\/p>\n

High interest rates are enduring and the economic outlook is still uncertain, making reliable earnings upsides a scarce commodity. So, It’s more\u00a0 important than ever to assess the potential upsides within your portfolio, have a clear view on the levers of value creation available to you and how to capitalise on them. In this way, you can make fully informed investment decisions.<\/p>\n

Pricing is a clear case in point. It opens up significant opportunities to boost EBITDA \u2013 a 1% to 7% uplift, depending on the business, its sector and its current margins.\u00a0 The result is a variance of 30% to 120% in the valuation upside. This needs to be assessed as it could make the difference between accretion and dilution at a time when value creation is so hard won.\u00a0<\/p>\n

Scratching the surface<\/strong><\/h5>\n

Yet pricing remains a surprisingly under-appreciated and under-realised opportunity for EBITDA improvement. Yes, private equity firms are ahead of the curve in incorporating pricing into their overall commercial due diligence. But the main focus tends to be undercharging in areas such as poorly targeted discounts. Plugging these value leaks would increase margins and earnings. But it\u2019s only part of the story. It misses the earnings uplift that could come from overhauling commercial (pricing) models<\/a> in areas such as bundling and subscription, better understanding of customers\u2019 willingness to pay and gearing pricing to the value delivered rather than just \u2018cost plus\u2019.<\/p>\n

Sharper decision-making<\/strong><\/h5>\n

Thinking more strategically about pricing within due diligence would open up a more informed view of the value EBITDA improvement opportunities after acquisition. This would in turn help to ensure that the true value of the company is assessed. The results could also provide the starting point for an executable plan following acquisition.<\/p>\n

Size of the prize<\/strong><\/h5>\n

But the complexities that come with this more comprehensive approach to pricing due diligence can be daunting. As well as quantitative analysis, there would need to be a qualitative assessment of the strategic potential and how to deliver it. This calls for expert judgement and customer insight.<\/p>\n

So what\u2019s the most effective way to evaluate the pricing upside? In our view, there are three key stages to developing an informed and verifiable foundation for pricing due diligence, which blends quantitative and qualitative insights:<\/p>\n

    \n
  1. Pricing situation.<\/strong> Assessing the external environment that drives pricing within a particular industry in areas such as markets, customers and channels (\u2018pricing context\u2019), how pricing is currently set in areas such as implementation and offers (\u2018pricing solutions\u2019) and the target company\u2019s ability to deliver these strategies (\u2018pricing capabilities\u2019).\u00a0<\/li>\n
  2. Opportunities<\/strong>.<\/strong> Identifying openings for improvement that come to light when assessing the misalignments between the pricing context, possible solutions and delivery capabilities.<\/li>\n
  3. Value synthesis.<\/strong> Quantifying each opportunity based on associated financial returns, methodology and ease of implementation.<\/li>\n<\/ol>\n

    This may sound like a lengthy undertaking. But experience has helped to develop an approach that can be both robust and delivered at pace. Here are the key priorities to consider at each stage:<\/p>\n

    Pricing situation<\/strong><\/h5>\n

    To gauge the headroom for improvement, it\u2019s important to understand the target company\u2019s current pricing situation. The components that come together to develop this understanding fall into three main areas:<\/p>\n

    Pricing context\u00a0<\/em><\/p>\n