How a Pricing Strategy Helps Sell a Company
If your own a company or are a shareholder of a company, sooner or later you would probably want to realize the value by selling the company through a full or partial exit. This could be a trade sale, a sale to a private equity group or other capital providers, or maybe even an IPO. Or, maybe you want to bequest or transfer company ownership to your family. In any of these situations, shareholder value becomes incredibly important if you are interested in maximizing your or your family's earnings.
The value of your shareholding depends on many things. Some of these are the industry your company is in, the growth of the industry, the market share you have, the growth of your company, the profitability of the company, the competitive position the company has, the company's history, and the experience (and quality) of the executive team. Some of these you can influence, others not (or it is very hard.)
So, where does the company's pricing strategy fit in here? Well, let's say that your company, like most, uses a simple pricing strategy such as cost-plus, pegged to a competitor, or even set prices on gut feel. Instead, I move to a value-optimized pricing strategy based on willingness-to-pay research that will have a profane impact on the company's valuation.
Here is what will happen:
Improved Market Insights
The company will get better and more detailed insights into why the customers buy the products or services. Not only from the company but why they choose to buy from the competition. How do buyers value and compare the choices they have? What does their decision landscape look like? What would drive them to increase their likelihood of buying your product or service as opposed to that from a competitor?
Related to this is to understand what business your company is in truth. This might sound like an odd statement, but not all companies are in the business they appear to be in. It goes back to the old saying that buyers are not buying a drill; they are buying a hole. I remember reading an interview with the CEO of Rolex, the Swiss watch company, and he was asked to make a statement about the state of the Swiss Watch Industry. His answer was: "I don't know. We are not in the watch industry." People buy Rolexes for all different reasons but not for the main reason of keeping track of time. So the value that Rolex provides its customers has very little to do with timekeeping and everything to do with an image and possibly with patting yourself on the back. Likewise, Red Bull is not a company whose primary job is to sell caffeine-laden surgery drinks. Instead, they are a content creator and entertainment company that monetize its business by selling drinks.
Improved Product or Service to Market Fit
Gain a detailed understanding of what product or service features, functions, or benefits will increase the buyer's willingness to pay and willingness to pay. This means you can focus your sales and marketing on the features, functions, and benefits of your product or service that will generate the highest revenue. Conversely, if those are missing from your product or service, it will create an urgency for your company to develop them.
Improved Marketing Efficacy
Without costly and time-consuming A/B testing, you will know what marketing channels and messages are most effective in driving interest and demand for your product or service. And you will know how to develop the messages that ultimately will support higher prices.
Higher Closing Rate
Understand how different sales channels and methods affect willingness to buy and pay. So you can focus sales development on the channels and methods that will lead to the highest revenue.
Let me give you an example: This company selling a home improvement service and product had elected to develop their whole business operation around a specific sales method. The bad news is that their selected sales method primarily attracted price-sensitive customers, thus creating very significant sales friction and frustration among the sales staff, which was highly commission-driven. The result was a salesperson turnover of about 125% per year. So they had the very costly operation of finding and training an entire new salesforce every 9-10 months! My recommendation was to change the compensation to the salespeople. Much less commission and a higher base. They would probably not sell more but would reduce the cost of turnover.
Pricing Strategy
Once you know what your market is genuinely willing to pay for your product or service, it is possible to develop a pricing strategy that probably is stratified one way or another to minimize sales friction, that includes product or service versions or bundles based on what specific features and functions drives higher and lower willingness-to-pay. So you can meet the price expectations of both more and less price-sensitive segments of your market - leading to higher market share. The pricing strategy may also be stratified in ways you can capture a more significant portion of the market's willingness to pay. Ensure your company eliminates the risk of leaving money on the table.
Results
We have seen instances of companies following the process outlined above and more than doubling their profits in a matter of a few weeks or a couple of months max. But the minimum results you should expect are a doubling of sales growth and some 25% - 40% increase in profit margin. Again, within a few weeks. This will do more than double the shareholder value of your holding. Longer-term, this will provide the additional resources to grow the company to the next level. But if you think of an exit, you are probably in a hurry to complete a transaction. But for a doubling of value, you can probably wait a few months...
Let me give you examples of recent customers. One company we worked with in February this year. We took their revenues from $200m to about $250 million in three weeks by the process as noted above. Another example is a company we worked with in April/May. We took a much smaller company from about 15 million to 35 million in six weeks.
Again, you can imagine what this does to the valuation of the company and your shareholder value.
So in closing, consider willingness-to-pay research as part of your exit planning. To maximize your shareholder value. It is well worth it!
Download our Guide to the 7 Easy Steps To Successfully Increase Prices.
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