Often, consumers believe price and value are interrelated. In other words, that price signifies product value. Thus, firms can use value creation and pricing to boost their own worth.

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McKinsey Research: Value Creation and Pricing

To address these topics, we turn to recent research by McKinsey.

As McKinsey consultants observe:

“Over the years, private equity (PE) firms have mastered creating value via cost reduction, talent upgrades, and financial engineering. Moreover, they built valuable experience in recognizing patterns to spot and invest in the best portfolio targets. In contrast, most PE owners do not use the same fluency or confidence in commercial productivity. Especially in pricing.”

“At a typical midsize U.S. company, a 1.0 percent rise in pricing raises profits by 6.0 percent. See Exhibit 1. By comparison, a 1.0 percent reduction in variable and fixed costs yields an increase in profits of 3.8 and 1.1 percent, respectively. A midsize firm acquiring a business about 30 percent of its own size with a similar P&L structure would have the same impact on its bottom line as a 5 percent gain in margin.”

Value Creation and Pricing

“To create value in their portfolio companies, PE firms often start by gaining efficiencies from cost control. Which has a lower perceived risk. PE leaders cite multiple reasons for putting less emphasis on pricing to create value. See Exhibit 2. Top concerns are competitive responses and customer defections. From experience, we know that when pricing improvements are done correctly, the risk of customer loss is widely overestimated. Likewise, investments in pricing typically have a high and quick return.”

Value Creation and Pricing

“Even among those who view pricing as a promoter of earnings, many underestimate its potential impact. Thus, their investments in pricing opportunities are low. Especially compared with procurement and other cost-saving measures. It is not surprising that most management teams feel under-prepared. And that they lack resources to capture the opportunity. See Exhibit 3.”

Value Creation and Pricing

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