When input costs increase, businesses must adjust their pricing strategy accordingly. But it’s not as simple as passing along those costs to the consumer.
First, the sales team must buy in to the new strategy. (This can be particularly challenging for private equity firms and their portfolio companies.) Secondly, you must do so in a way that doesn’t scare off the customer.
Let’s learn more from these two about how to strategically raise prices, whatever business and industry you’re in.
Challenges of Raising Prices
Sales Team Buy-In
“I think our portfolio companies might be hesitant to think about price increases or think about value-based pricing,” Zheng said.
Mooney agreed, calling it the “number one area that’s underutilized” by private equity firms that BluWave supports.
“In part because it gets the most resistance from the portfolio companies, particularly from sales leadership,” he added. “Because it’s really scary if you’re a head of sales and you say you got to raise price.”
Zheng said this is best overcome by generating belief in the company’s products or services.
“If you think about the amount of investment that we’re putting in, in an ideal world, your best-fit customers are also valuing what that is and you’re able to get a value-based price for it,” Zheng said. “At the end of the day, it comes back to, if we really feel [that] the types of companies we invest in have great products, great NPS scores, great retention scores.”
Related to resistance from the sales team is often a fear that customers will be scared off by a higher price point. And the thought of being the one to share that increase can be daunting.
But once again, belief in the product is a great weapon in this situation.
“What are our product managers and heads of engineering and engineering talent doing? They’re continuing to invest in that product,” Zheng said. “Hopefully we’re able to convey this to the sales team who have to be at the front line to convey it to the customer of like these are not price increases for the sake of price increases.”
The beauty of value-based pricing is that businesses attract customers who are willing to pay for a superior product. Portfolio companies owned by ParkerGale and like-minded private equity firms aren’t courting bargain hunters anyway.
Zheng said that this high-quality approach “justifies what we think this product actually provides to you. And if you were really looking for the cheapest price, then we wouldn’t be having this conversation because that’s usually not the positioning that we have.”
After all, if the business is working so hard to create a quality product or service, why wouldn’t they expect customers to be willing to pay more?
“We’re going and improving the products and updating the modules and features and all these things,” Zheng said. “Are we on the flip side also making sure we’re getting that value-based pricing from our customers?”
Knowing that pricing isn’t the top priority for their target customers gives portfolio companies more flexibility, dousing the fear of scaring them off.
Data-Driven Pricing Strategies
No matter how much a business believes in its products and services, it can’t blindly adjust its prices and hope for the best. They must make data-based decisions.
One way to do this is by paying close attention to macroeconomic factors.
“We’re thinking a lot more intentionally about pricing and making sure that we’re not just staying flat, we’re looking at what’s going on in the market,” Zheng said.
There are other metrics that can influence a pricing strategy, though. According to Zheng, NPS scores and retention data are strong indicators of whether a business has a “very solid product.”
For private equity firms, much of this crucial research can be done before a company is ever acquired.
Zheng said that during the commercial due diligence phase, ParkerGale often deploys voice of customer studies to learn what are customers’ top three key purchase criteria. Pricing seldom makes the list.
“Especially when we’re selling enterprise software, these are mission-critical tools and products,” Zheng said. “The customer is not looking for the cheapest one.”
READ MORE: What is Commercial Due Diligence?
In-depth analysis can also help companies learn when they have taken their increases too far, allowing them to adjust back down.
“I would argue if you’re never losing on price, then you’re priced too low. You should be losing a certain percentage of your deals on price,” Zheng said. “But if you can collect the data on the other side, if you’re doing win-loss analysis and calls like that, then you should be able to say, ‘OK, we are hearing now that we have enough actual data, not anecdata, to say we are actually losing on price too much, and so therefore we need to adjust.’”
READ MORE: Voice of Customer Metrics, KPIs, Analytics
Benefits of Pricing Consultants
As meticulous as private equity firms and other top business leaders are about their companies, a world-class pricing strategy often requires world-class help.
Mooney mentioned how underutilized pricing resources are, but that’s not because they’re in short supply.
The Business Builders’ Network is full of pricing experts who work on an industry-specific basis. They know the questions to ask, the data to analyze and the levers to pull to make sure you’re setting prices with confidence.
“We’re in contact with the service providers in our network nearly every day,” Co-Head of Research and Operations Keenan Kolinsky said. “Before clients even reach out, we already know which providers will likely be best suited for their pricing project. That way, we can hit the ground running as soon as we scope a client’s need.”
These third-party resources are experts in segmenting customers, identifying value drivers, developing measurement tools and pricing structures, conducting sensitivity analyses and more.
They’re on standby to help you determine your target customer base’s key decision factors, willingness to pay, preferences and perceptions.
Lastly, they’ll present this information – with speed and accuracy – in a way that’s actionable for your business.
Within a single business day, you’ll be connected to a shortlist of options that will be chosen for your exact situation and vertical.