A practical approach to address today’s inflationary environment based on 27 years of primary data
Value Creation leaders deploy Actionable Customer Segmentation
It is no secret that pricing optimization – strategic adjustments in pricing to enhance margins without losing market share – is a critical part of all Private Equity firms’ toolkits. Pricing has long stood out due to its direct impact on bottom line. Unlike cost-cutting measures, which can have limitations and long-term implications if unsuccessfully managed, pricing can improve margins without sacrificing customer loyalty.
However, even though sponsors like to tout their proven formula and repeatable value creation playbook, the reality is there is no one-size-fits-all approach to implementation. And the consequences of not getting it right in B2B can be painful.
Take tiered pricing. Complexity in the bill or confusion over the value provided at each tier can lead to churn of your best-fit customers or incorrect matching of offerings. With access from our partners to over 27 years of customer primary research, we found that price is only a strong or moderate driver of Loyalty in 23% of cases. ¹ The implications of that finding extend far beyond recognizing that there are opportunities for EBITDA expansion.
It also insinuates that most businesses have not found out how to maximize the linkage between customer segmentation and their pricing strategy. And in today’s inflationary environment, this disconnect can be exacerbated for smaller ”Main Street” businesses. According to Grant Thornton, nearly three-quarters of middle market business owners do not act on inflation. ² As operators, we get it.
An integrated approach that first starts with direct feedback from the customer (VOC) can identify pricing opportunities at a micro-segment level, surface new leads, and help structure your tactical plan against today’s inflation.
Figure A:
Loyal Customers typically represent ~65% of Enterprise Value yet are less than 20% of your base. Understanding the variation in financial outcomes within each classification can pinpoint margin expansion to address today’s inflationary challenges. ¹
This produces three primary “opportunity pools” which have different approaches to implementation.
"Win Back" Margin through New Sales: Loyal Customers with Low Price Sensitivity and High Likelihood for Cross-Sell/Up-Sell
"Low Hanging Fruit": Loyal Customers with Low Price Sensitivity and Low Price Per-Unit (PPU) today
Longer-Term Value Grab: Loyal Customers with High Likelihood for Cross-Sell/Up-Sell that might offer strong places to target other bottom-line improvement
Based on conservative examples we have seen: A business can increase EBITDA upwards of 1-2% by taking price through the “Low Hanging Fruit” approach. ¹
“We’re continuing to navigate challenges with cost-side inflation, and in some instances, are taking price. But we need to understand just how aggressive we can lean on increases to cover it.” - Leading Middle-Market Private Equity. Firm ($5B AUM)
A practical approach to act on today
Conduct a Voice of Customer (Sample): The oldest trick in the GTM book is a great starting point to both capture customer security and analyze which experiences are most impactful.
Sample and interview a subset of customers
Score Customer Loyalty (i.e., NPS + Relative Value to Alternative)
Ask for evaluations of key experiences including price (i.e., Product Quality, Customer Service) to analyze relative impact
Leverage ML/AI To Extrapolate Scoring (All Customers): All existing customer and operational data – including unstructured – is an untapped goldmine to infer VOC level insights across all customers.
Model customer scoring utilizing CRM and operational data as explanatory input
Our experience has shown that even just a small number of data points (i.e., Account Revenue, AR Past Due,, Contract) can yield powerful insights with modern ML
Model and Identify the Variation: Within the Loyalty segment analyze the variation on financial measures or KPIs to help understand customer-level pricing opportunities.
Integrate current pricing by account
Form and classify customers into the opportunity pools
Prioritize customer and segment by feasibility and greatest impact
Analyze other variations within Loyalty group
Execute, Monitor, and Iterate: Work with sales teams and CPQ motions to implement recommended pricing trends, track ongoing variation in a centralized platform.
Act on direct feedback customer opportunities (i.e., VOC respondents who identified an upsell or cross-sell interest)
Collaborate with Sales to communicate and execute opportunity pools
Monthly or quarterly refresh and platform to view ongoing variation
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Sources
Metanalysis of Loyalty Research Center Data, Conservative Estimates
Grant Thorton, 2022