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From higher interest rates to rising input costs, more demanding regulation and supply chain challenges, private-equity backed B2B businesses have rarely faced such pressures on profitability.
How should they respond? Any failure to increase prices in line with rising costs will inevitably damage the margin. But raising prices too high and too quickly can alienate customers, reducing top and bottom line.
For PE funds, a combination of uncertain macroeconomic conditions and lower price multiples means that many are holding onto portfolio companies longer and need to create more value within them if they are to achieve their target returns. Maximizing pricing opportunities is a significant and relatively inexpensive way to create value.
In this context, pricing may never have been so critical to success. Yet it remains relatively low on the leadership agenda. In our EY CEO Outlook Survey January 2023 (pdf), just 30% of global CEOs saw pricing as a strategic priority over the next six months.
EY research reveals the true picture and the key actions to consider. We track business price rises against headline inflation figures and, more crucially, examine the role of advanced pricing capabilities in creating value and powering growth.
Chapter 1
Many businesses have not kept pace with inflation, but now they are catching up.
PE-backed businesses raised prices by an average of 6.9% during 2022, behind the International Monetary Fund’s (IMF) global inflation rate of 8.8%.
However, our research shows that gap looks likely to close in 2023. PE backed B2B businesses expect to raise prices by an average of 6.6% in 2023, which matches the IMF’s predicted global inflation rate of 6.6%. It presents PE businesses with the challenge of implementing further price rises at a time when customers are already facing the prospect of economic uncertainty. What are the sources of rising costs on an individual business, service line or product? And what is the risk of sales being negatively impacted if a price rise is implemented? The ability to manage such risks successfully will depend on B2B companies having a greater understanding of individual customer tolerances, better visibility over the value of the services provided to each customer and the deployment of intelligent pricing.
While all geographies expect to implement inflation-busting price rises in 2023, one region stands out. According to respondents in Asia, the region will see businesses raise their prices by more than 2.5 times the headline inflation rate of 3.1%.
This may be a reflection of the inflationary impact of China’s post-COVID-19 pandemic recovery as the country exited lockdowns. Given the traditionally faster-growing nature of many Asian economies, these rapid price rises may also reflect a trend away from a “growth at all costs” approach to a more balanced view that places greater emphasis on profitability. This view is supported by EY research interviews, which found some firms that had traditionally experienced double-digit growth are, in response to economic uncertainty and slowdowns, now putting greater emphasis on profitability by setting new margin targets for their leadership and sales organizations. This means an increasing need to perform targeted price increases rather than blanket price changes across the portfolio of customers.
Chapter 2
There are many reasons why some companies can raise prices faster than others.
Businesses that implement higher price rises are significantly more likely to have invested in advanced pricing capabilities over the past two years.
These companies focused their investments in pricing capabilities primarily on technology, including data analytics and pricing tools, with investments 25% and 48% higher respectively when compared to businesses that had implemented lower price rises.
During the research, data and analytics capabilities were highlighted as being a crucial investment, with 61% of companies choosing to spend money in that area. Such investments are seen as being a vital first step, as data and analytics can provide businesses with the insights and tools needed to make better informed decisions. Additionally, having better data insights, particularly better predictive and forecasting data on the market, will ensure pricing is not based on describing the past, but rather is predicting future value expectations. B2B companies can then make far better decisions around where to drive up price, without impacting market share.
Furthermore, businesses that have implemented higher price changes in the past year are 40% more likely to continue investing in pricing technologies over the next 12 months. This reflects the positive results achieved in the previous year, which they believe can be sustained through continued investment in pricing.
The primary focus of upcoming investment will be on data analytics and pricing tools, which businesses believe will help them better understand price setting and dynamics.
Those businesses who continue to invest in these capabilities will greatly benefit even more in the future. The gap between those who fail to do so will therefore widen, meaning that the strong will get stronger, and the weak will get weaker.
Chapter 3
The strong get stronger because they profit from higher pricing.
EY research shows that high-growth B2B companies, which typically invest more in advanced pricing capabilities, achieve higher price rises. In fact, 95% of companies that raised prices by over 5% in 2022 enjoyed growth rates of over 5% during the same period. And a third of companies that put prices up by over 5% enjoyed a growth rate of more than 15%.
Of course, higher prices are not the sole reason for higher growth, nor is high growth the only reason that companies were able to put prices up more quickly, but our findings do suggest that successful companies are better able to use pricing as a strategic tool to drive growth. B2B companies effectively apply pricing as a strategic growth tool in conjunction with an understanding of the overall proposition and commercial function in the organization, ultimately informing the decision-making.
Furthermore, while high-growth companies anticipate raising their prices by an average of 9.3% in 2023, this is still lower than the 10.5% price rise they implemented in 2022. So, although their average 2023 price hike will be well above the headline inflation rate of 6.6%, it is unlikely to surprise customers significantly.
There actually has not been much pushback from clients as demand has been outstripping supply and customers understand that prices are soaring.
Conversely, low-growth companies plan to double their price increase in 2023 compared to 2022, jumping from 2.6% to 5.6%. This sharp increase reflects their seemingly inadequate understanding of pricing in the previous year, which led them to underprice their products and services. Consequently, they must now increase prices more rapidly to preserve their margins in 2023. Although their planned increase is lower than that of high-growth companies, the sudden price spike could well catch customers off guard and be viewed negatively by stakeholders.
For some products we did not increase our prices proportionally to cost increases as we are experiencing competition from private labels and are concerned about losing market share
EY teams’ experience and research finds that pricing and profitability growth go hand-in-hand with businesses’ pricing and commercial capabilities. This is where businesses need to invest in their pricing and commercial governance, data, analytics and technology capabilities. Pricing should be holistic and ensuring the commercial strategy links to price execution (how to sell and go to market) and the overall customer centric operation model, will ensure price logic is executed in the market and adherence to logic and terms is sustained.
Chapter 4
Companies must develop their own approach to pricing but are being limited by data and skills.
Having spoken to many business leaders and pricing experts across industries and geographies, we found that there is no “silver bullet” in terms of pricing. Said an oil and gas firm VP, "We grew our prices by over 30% and still acquired new clients in this environment."
The wide range of approaches by firms reflect the different environments in which they operate. Companies in high-growth sectors such as computer chips, software, or even IT services will not have the same pricing strategy as firms operating in the manufacturing or packaged food industries.
"No one is a born pricer, everyone moved into pricing through finance, marketing, or another role,” said a manufacturing firm's pricing director in April 2023.
While having insightful data and tools to understand pricing is key, firms need to know how to use them to formulate pricing and then execute correctly. During our conversations with multiple pricing experts across industries, we often heard that there was a distinct lack of specialist pricing expertise.
We grew our prices by over 30% and still acquired new clients in this environment.
Another factor that drives a company’s pricing strategy is its positioning in the market. Firms that are leaders and/or have a unique product can price according to the value of their product to customers, whereas firms that do not have such a strong market position will need to set their prices in relation to other providers.
“In the alcohol beverage industry, market-leading brands drive price changes, and everyone who prices themselves relative to these brands needs to react to maintain their position,” notes a sales director from an alcoholic beverage firm.
These differences can also be seen within firms, with the same product having a different market position across geographies. While an item might be considered premium in one market, it might not in another. We can see greater variation, as more brands face local competition, the local market variation has become more distinct and can require far more customization this will require conscious and collective decision making when global brands are involved.
No one is a born pricer, everyone moved into pricing through finance, marketing, or another role.
Historically, people in pricing roles have learned on the job, many coming from finance and not commercial backgrounds. Yet, even the most advanced data and analytics tools need to be operated by someone who understands the inputs and outputs and knows how to interpret them. Therefore, companies need to invest in not only pricing tools but also true pricing professionals.
“Not all data is equal” has also been a point that has come up multiple times in EY survey responses. The quality of inputs dictates the accuracy of predictions.
Furthermore, once the pricing decisions have been made, it is crucial for all stakeholders within the company to understand the rationale for these decisions and how to implement them. It is especially important for sales organizations to both understand and embrace any proposed changes to pricing, as they are uniquely positioned to either deliver the desired outcome or resist it.
Chapter 5
The steps that winners can take and four recommendations for all businesses to consider.
The first key to pricing success identified by EY research is to have stronger centralized pricing capabilities within the business.
High-growth companies were 31% more likely to keep pricing control within their commercial and pricing teams and 37% less likely to delegate them to salespeople. By keeping pricing decisions centralized, these companies ensure that they are making informed decisions that align with their overall business strategy. Lower-growth companies are more likely to allow their sales teams more leeway to offer discounts to customers.
“Pricing is the accelerator and brake of a business. You need to define a speed limit and use inputs coming from the market to adjust how fast you want to be going,” said a manufacturing company pricing director in April 2023.
In the case of global corporations, a centralized pricing team, supported by global leadership, should be able to provide the tools and insights to people on the ground so they can make better decisions. Similarly, for local firms, the pricing decisions need to be held within a pricing team that supports sales, rather than salespeople having significant freedom on the application of pricing, discounting and other net price dilution. Pricing teams need to be able to empower salespeople with clear insights to justify prices so they feel confident when having pricing conversations with customers.
Companies also need to understand what data to rely on to inform their pricing strategy. While historical pricing data is useful for calculating price elasticity, EY research revealed that high-growth PE firms were more likely to be proactive rather than reactive. In doing this, they typically look at real-time indicators from the market, suppliers and customers to use pricing as a tool to adjust their performance. Successful companies are more likely to look for vertical (supply chain/customer) rather than horizontal (competitor) inputs and know how to interpret and implement data that is aligned with their overall strategy to successfully position themselves in the market.
Pricing is the accelerator and brake of a business. You need to define a speed limit and use inputs coming from the market to adjust how fast you want to be going.
How EY-Parthenon can help
EY-Parthenon provides strategy consulting to private equity firms by helping clients maximize value throughout the investment lifecycle. Learn more.
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EY survey results reveal that private equity backed companies who prioritize and invest in pricing and broader commercial capabilities and are doing it well are reaping the rewards. As the business environment becomes increasingly challenging, these B2B companies are more likely to emerge stronger and more resilient. However, holistic commercial & pricing strategies are often forgotten and restricted to policy and price setting in isolation which does little to drive long-term impact. Organizations must act to improve their pricing capabilities, not only to mitigate the on-going inflationary pressures, but to enhance profitability, reduce leakage, create value and drive sustainable growth
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