Pricing & Revenue Growth Management Advisory for Private Equity Firms and Portcos

Private equity firms and portfolio companies (PortCos) operate in a highly competitive environment. Maximizing the value of their investments is always a top priority. Each of their moves can make or break their bottom line, making each strategic decision a high-stakes gamble. Yet, with buyout entry multiples declining in recent years due to rising interest rates and tighter liquidity, there's a growing need to identify new avenues for value creation. It's more than just finding the right acquisition opportunities — it's about squeezing every bit of value out of it. 

Implementing the right Pricing & Revenue Growth Management initiatives both pre- and post-acquisition can help you enhance the performance of your portfolio companies. It will allow you to overcome any challenges that may arise and boost overall valuations to achieve your investment goals.

Revology Analytics specializes in delivering impactful Pricing & Revenue Growth Management services. We empower investors like you to make data and insights-driven acquisitions for maximum returns. Here's how we can help Private Equity firms increase operating profits and valuations.

The Importance of Pre-Acquisition Due Diligence in Pricing & Revenue Growth Management 

In Private Equity, the secret to substantial returns lies in consistently identifying and acquiring promising investments. However, you must continually assess the value of these companies and understand their core business fundamentals. Doing so puts you in a place to negotiate favorable terms and maximize your return on investment. 

Thorough Pricing & Revenue Growth Management due diligence is crucial in this process. After all, evaluating pricing strategies, revenue streams, cost structures, and market dynamics can give you the necessary insights into a company's true profitability and growth potential. Effective due diligence in Private Equity transactions offers a deeper understanding of your target company's financial health. It involves a meticulous review of different elements to assess future growth and profitability, including:

• Financial statements

• Business models

• Market positions

• Management teams

A comprehensive due diligence process can also reveal potential liabilities and challenges. By addressing issues before they arise, you can reduce financial losses while you're at it. Moreover, due diligence identifies opportunities for value creation through operational improvements or strategic acquisitions. 

What Does Pre-acquisition Due Diligence Entail?

Pre-acquisition due diligence in Pricing & Revenue Growth Management consists of several stages.

1. Market and Competitive Analysis

AI and Machine Learning can help determine whether a potential target company has strong growth prospects or if there are underlying challenges that could hinder future performance. To effectively evaluate a target's market positioning, you need a deep understanding of the market and your competition. This requires exploring:

• Market share: Analyze the target's historical transactional data and compare it with industry benchmarks. This will help you understand how the company has performed relative to its competitors and identify strengths, weaknesses, and areas for improvement or expansion.

• Growth potential: Evaluate market trends, consumer behavior shifts, technological advancements, and other factors impacting the target's future expansion possibilities. This analysis will help you identify opportunities and potential challenges the company may face.

• Competitive threats: Once you've pinpointed your target companies' key competitors, analyze their strategies, market movements, and competitive advantages. Look for potential disruptors in the industry — such as new entrants or innovative technologies that could challenge the target's market position.

2. Pricing Strategy Evaluation

An effective pricing strategy is imperative for long-term business success. To determine whether your target's is falling short, you must evaluate aspects like:

• Sustainability: A company must be able to weather market storms and remain competitive. This involves assessing whether its pricing can withstand current competition and potential future market shifts.

• Effectiveness: Evaluate whether the target's pricing aligns with customer value propositions. This will help you assess whether their pricing strategy meets customer expectations and drives sales. 

• Defensive pricing: Determine your target's ability to react to competitive pricing pressures and manage price wars. This will help you understand their ability to maintain profitability in challenging market conditions.

3. Revenue and Profitability Assessment

Your company's financial health and future growth potential are directly tied to its revenue and profitability. Pay attention to trends and potential issues to assess performance. Some elements to keep in mind here are:

• Growth opportunities: You should identify untapped markets, underserved customer segments, and opportunities for cross-selling or up-selling. This analysis will let you project your future revenue streams and assess your company's ability to capitalize on them. AI/ML-enabled solutions (turnkey or bespoke) can suggest complementary products that customers might be interested in purchasing alongside their initial choice. Likewise, it can pinpoint which customers are most likely to upgrade to a higher-tier product or service.

• Risk assessment: You must spot threats and operational inefficiencies that may cause trouble for your target company in the future. These can include revenue concentration, predictive customer churn, market volatility, and other internal and external factors hindering revenue growth.

4. Customer, Product Mix Analysis & Growth Decomposition

To optimize margins and drive growth, thoroughly analyze your customer base and product portfolio. To learn what drives your target's revenue and gross profit, keep the following in mind:

• Margin impact: Assess how customer segments and product lines influence your margins. This analysis will guide you in making the necessary adjustments to improve profitability.

• Growth potential: Break down your product mix and customer segmentation to uncover opportunities for optimization. Focus on more profitable products and adjust pricing for various customer types that are over- or under-priced (or over/under-discounted).

• Key drivers: Examine pricing, cost structure, unit volumes, customer/product mix, and other core factors determining your revenue and gross profit. This will reveal where your growth originates and how sustainable it is.

• Refocus efforts: Align your sales team to prioritize the most profitable products, customers, or geographies. This strategy is crucial for maximizing returns after acquisition.

5. Voice of the Customer Acknowledgement

The customer has the final say on the viability of your pricing strategy. Their perspective provides a deeper understanding of price sensitivity, perceived value, and areas where you can improve. Keep an eye out for:

• Customer feedback: You need to gather and analyze opinions on your pricing and value propositions in the form of market research or dynamic conjoint analyses. Listening to customers is key to refining your pricing strategy to meet market expectations.

• Switching behavior: Research the factors that prompt customers to switch to competitors. The most common are price changes, service issues, or more appealing value propositions elsewhere. Understanding the price-value relationship between your portfolio company and its competitors is crucial.

 Price-Value Maps (PVMs) help you understand the differential value of key PortCo products and those of its competitors. PVMs help guide long-term price positioning and suggest ideal competitive responses to market disruptions. (image source: Pricing Strategy by Tim Smith, PhD).

6. Financial Data Analysis

You can validate the achievability of your business plan through a thorough analysis of your target's financial data. This process will help you identify discrepancies or risks affecting the deal's success. Make sure not to overlook the following:

• Data quality: Review data sources, methodologies, reporting practices, and more to guarantee the financials accurately reflect the company's true performance.

• Red flags: Detecting inconsistencies in financial reporting and unusual patterns in revenue recognition will help you identify underlying issues that could impact the acquisition.

7. Industry Margin Pool Analysis

Margin distribution across the industry's value chain will help identify where your target stands and where improvements are necessary:

• Negotiation insights: Your pricing and sales teams need detailed data for better negotiation outcomes. This way, you can help them secure more favorable terms with suppliers, distributors, customers, and other relevant stakeholders.

• Rebate programs: Design attractive cashback offers, price reductions, discounts, incentives, and promotions as pay-for-performance agreements. Too many companies have promotion and rebate programs for years, without a corresponding pay-for-performance scheme. Try turning these rebate programs into a tool for driving profitability rather than just a built-in expense. Advanced analytics capabilities can determine which marketing and promotional campaigns delivered the best returns and which channels were most effective. This allows you to allocate your marketing budgets more strategically, focusing on initiatives that are proven to drive business growth.

What To Do Post-Acquisition

Contrary to what some might believe, your Pricing & Revenue Growth Management efforts don't end after you've completed an acquisition. After all, the market is constantly evolving, and you must keep adapting your strategies to these changes to remain competitive. 

Maintain ongoing efforts to ensure portfolio companies operate like clockwork. This is the only way your PortCos will continue to deliver strong returns.

1. Pricing & Revenue Growth Management

After an acquisition, align your pricing strategies with new business objectives and market conditions. Consider these key actions:

• Pricing strategy development: Continuously reassess pricing tiers, discount policies, and customer/product segmentation. This will help you keep your pricing competitive while maintaining profitability.

• Pricing governance and policy formulation: Create and enforce insights-driven guidelines for pricing decisions that are consistent and aligned with your company's goals. Doing so will facilitate consistency and accountability throughout your firm.

• Organizational capability building: Invest in targeted training and workshops to strengthen your team's pricing and revenue management skills so they can be agile when challenges arise.

• Pricing technology implementation: Select and integrate the right tools into your operating systems. You'll empower your team to simplify processes and improve decision-making.

2. Pricing & Margin Analytics

Data is everything when it comes to supporting your strategic decision-making. That's why you should use strong methodologies and advanced analytics that offer a clearer view of pricing and margin performance. Look for tools that give you:

• Descriptive and diagnostic pricing analytics platform development: Implement platforms that deliver near real-time data on pricing performance. Some examples include Power BI, Tableau, or custom web applications.

• Price waterfall and profit leakage analysis: Examining your pricing decisions, discounts, and other factors affecting margins will help you identify where you're losing. This information will allow you to take corrective action where necessary.

• Growth decomposition and optimization: Examine what gives you the most revenue and gross profit to uncover opportunities for growth and optimization. This includes detailed, dynamic visibility into net price realization, cost structures, unit volumes, and the impact of customer and product mix on gross profit performance.

• Industry margin pool analysis: Comparing your PortCos to industry benchmarks will help you identify opportunities for margin improvement. This will allow you to ​​refine strategies to increase overall profitability.

An example of a Gross Profit Deep Dive tool to help Pricing and Finance teams at a global Medical Device client understand what drove Gross and Operating Profit over- or under-performance.

3. Pricing & Margin Optimization

Improving pricing and margins can directly boost the profitability of the acquired company. Effective pricing strategies can increase revenue. At the same time, optimizing margins keeps your PortCos competitive in the market:

• Price elasticity modeling: You can use statistical and machine learning models to analyze how price changes impact demand and profitability. This will lead to better pricing decisions that improve your bottom line in the long run.

• Dynamic pricing implementation: The right tools will help you adjust prices based on market conditions, competitor actions, customer demand, and other relevant factors. Try applications that offer machine learning-enabled scenario analysis capabilities. While dynamic pricing is a key capability for most industries, don’t force it to be AI or ML-driven. For many mid-market companies, building a rule-based automated pricing capability will deliver 90+% of the potential value realization. 

• Pricing markdown optimization: To better manage inventory and maximize liquidity and profitability, implement optimized, automated clearance pricing strategies.

• Competitive pricing intelligence and lead/follow analyses: Monitor industry price positions for a significant advantage over your competitors and help you stay ahead in the market.

• Pricing sentiment analysis: Using Natural Language Processing will let you measure customer perceptions more accurately. This information is critical when adjusting your pricing strategies.

4. Advanced Sales & Marketing Enablement

Effective post-acquisition initiatives in Private Equity should also prioritize efficient sales and marketing efforts. Incorporating AI/ML-enabled tools into your sales and marketing strategies can unlock growth opportunities that could otherwise go unnoticed. One of the most significant advantages of doing so is its ability to transform your sales strategy into a living system that evolves with your business needs. On the other hand, AI-driven marketing strategies are particularly effective in creating personalized experiences for your customers. Artificial Intelligence and Machine learning are also practical for:

• Sales enablement strategies: These advancements provide sales teams with the tools, training, and resources they need to succeed, including recommendations on which customers will churn and why, and advising sales teams on the next best action to take on a particular customer.

• Marketing effectiveness: AI and ML help analyze campaign performance through marketing mix modeling or attribution analysis, and optimize marketing budgets. All these aspects are critical in optimizing strategies for enhanced results.

• Sales optimization: Artificial intelligence can gather large datasets for sales and marketing knowledge graph development that helps you analyze and optimize customer journeys.

5. Global Data Warehouse and Analytics Hubs

Creating a solid data and insights infrastructure is an essential aspect of post-acquisition decision-making. It allows you to consolidate data from various sources into a single repository, providing a unified view of information. Global data warehouse services and analytics hubs also enable:

• Centralized data management

• Automated data integration

• Data governance and quality management

• Advanced BI tools deployment

• Predictive and prescriptive analytics

An example of a Global Sales & Finance Analytics Hub built for a mid-market agricultural client.

Increase Your Profits and Valuations Today with Revology Analytics

In today's market, driving superior returns requires more than a strong acquisition strategy; it demands a disciplined focus on Pricing and Revenue Growth Management.

Integrating these elements into your investment strategy can unlock significant value, enhance profitability, and ensure a robust exit multiple.
Revology Analytics offers deep RGM expertise and AI/ML-enabled tools for mid-market portfolio companies. Our tailored solutions provide the insights needed to build or refine pricing strategies, identify untapped growth opportunities, and sustain competitive advantage. Partner with us to leverage insights-driven Pricing/RGM strategies that align with your investment objectives and maximize portfolio performance.

Contact us today to explore how we can help you drive value creation and optimize returns.

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