When the Price is Right

Business executives involved in mergers or acquisitions face a full plate of prickly issues, from early due diligence to negotiating deal terms to organizational integration, including who ends up in the C-suite. However, one thing they typically don't pay enough attention to is pricing strategy.

This is a bit puzzling, because pricing can well determine the level of success or failure a merger enjoys, and while companies are often quick to pursue fixed-cost reduction strategies in the wake of an acquisition or merger, pricing improvement initiatives can have a greater impact on a company's profitability going forward.

Given its potential benefits, why isn't pricing more of a priority, particularly in a down economy when cash flow and liquidity are at a premium?

For some, the benefits may seem too good to be true. Plus, there's plenty else to worry about during a deal. Sometimes, limitations on what pricing and transaction information can or will be shared during due diligence make it difficult to tackle pricing up front, and the narrow time window and hectic pace of the deal-making further limit the opportunity to analyze pricing and develop insights. The revamping of a pricing strategy and its execution often requires fundamental policy and operational changes for one or both of the entities. For instance, salespeople may be compensated in different ways, and the way in which customer relationships are handled may also be altered. Moreover, employees very likely will need to learn new processes and technologies.

Pricing Challenges Shouldn't Get in the Way

Still, companies must not permit such barriers to derail pricing initiatives. In fact, an M&A transaction can be an opportune time to address pricing strategy and its often neglected companion, margin management. By definition, a transaction is a time of change in which different systems, policies, structures, and strategies are brought together. Organizations can use the transaction to motivate its people to transform. Customers, vendors, and employees -- notably the sales forces of both companies -- usually expect things to be different after Day One. In many respects, there is no better time to start the process of adjusting pricing practices and instilling a system and culture oriented toward margin management.

Advances in pricing technology are making transformation more easily achievable today than in the past. While most of the analytical methods used to set and examine the components of pricing have been known for decades, more powerful and lower-cost computing resources now enable the regular use of those methods in business settings. Meanwhile, collaboration between vendors of consumer data and price-optimization software firms are increasing the capabilities of these products.

Companies can take action on two fronts to address pricing during transactions. Starting in due diligence, they can evaluate potential issues with respect to the pricing strategies of the two separate companies as well as potential opportunities for improvements or synergies as a combined organization. During the integration and transition phase, successful pricing improvement initiatives ordinarily involve six pricing competencies that can help to sustain effective pricing and margin management for the long term. We believe that these six competencies or keys, described briefly below, are especially important in supporting the quest for synergies in M&A deals and that the implementation of the initiatives to develop these capabilities could accelerate bottom-line benefits.

Key #1. Pricing strategy. Your company's pricing strategy needs to define a pricing framework that supports business objectives by focusing an organization on understanding and capturing the value of a product or service relative to customer demands and competitive alternatives. Customer value should be the primary driver of pricing decisions and transactional behavior. It is important that all levels of the merged organization understand the pricing strategy; a comprehensive framework can help achieve this. Also, pricing strategy that is tightly integrated with advanced analytics and price execution -- the next two competencies -- can help organizations to avoid a disconnect between merged sales organizations while supporting value creation and the capture of synergies envisioned when the deal was undertaken.

Key #2. Leverage advanced analytics. Merging companies will need to deal with a flood of information from the previously separate entities in order to identify pricing-related opportunities. Competitive and confidentiality considerations may preclude bringing this information together until Day One. One answer is to set up a pricing clean room, where an independent group can receive and analyze information from both entities and prepare recommendations for the merged company once approval is received. A pricing "waterfall" can support these assessments by providing a graphical depiction of factors that affect the pocket margin. Analytics can also help companies to better predict the impact of price changes on business volume and to benchmark actual performance relative to those predictions. Predictive modeling can help to improve profitability by focusing an organization on key profit levers such as pricing, customer retention, and collections effectiveness.

Key #3. Price execution. Effective price execution is built on the implementation of defined policies and processes. These policies and processes govern profitable decision-making and establish the framework for the correct implementation of tools used to gain a pricing advantage in the marketplace. Capitalizing on price execution opportunities requires that the entire organization be in alignment on profitability-based decisions, leveraging the outcome of the prior capability. Price information, including promotions and price exceptions, needs to be quickly and accurately communicated to the field to support profitable deals. Field sales must adhere to profitability guidelines in deal negotiations.

Key #4. Organizational alignment and governance. The sales organizations of two merging entities are likely to have different structures and incentive programs. To align these two structures and determine their correct level and compensation can be the most complex part of a merger and has to be done correctly to maintain the drive of the sales organization and help to prevent profit drain on future sales. Sales incentives can be another issue. Aligning incentive programs, both with each other and with price strategy, is crucial. As mentioned earlier, mergers and acquisitions are a time for change -- organizations can use this opportunity to implement changes to the pricing strategy that might not be possible outside of the context of a transaction.

Key #5. Pricing technology and data management. Merging two companies presents an array of technology considerations. Effective technology integration and utilization can help the combined organization make timely and effective pricing decisions. Pricing analytics, optimization, and execution tools can support better pricing decisions and enhance the quality and consistency of pricing processes. A merger or acquisition can also present an opportunity to develop more robust data management and governance policies. Technology upgrades undertaken during a merger or acquisition can also support efforts to track, manage, and report pricing and margin performance.

Key #6. Tax effectiveness. By incorporating effective tax planning into product pricing initiatives, companies can better position themselves to differentiate themselves from their competition by improving their after-tax cash flows and effective tax rate. The tax rates in the countries where incremental product-pricing profits are taxed are one of the most important determinants of the net profit realized. As early as possible during the transaction planning and due diligence processes, companies should carefully consider tax planning to help to deliver higher profit to their bottom line while reducing the chance of being exposed to unfavorable tax rates.

Don't Let Pricing Be an Afterthought

Pricing shouldn't be the last consideration in a merger or acquisition; it should be an integral part of transaction planning and execution. By carefully considering pricing and margin management issues early in the transaction, the combined entity can begin to capture planned synergies from the deal quickly, including pricing advantage, expanded market share, and improved margins.

Learn more by watching Patricio Simpson's video "Unlocking M&A's Pricing Potential."