Pricing after Merger and Acquisition Part 1: Why Pricing is Critical to M&A Success
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
The 1st in a 3-part series on pricing after a merger.
Mergers and acquisitions are part of technology and innovation. If your company is successful, it is almost certain to acquire other companies. In 2021, there were more than 2,000 mergers with a deal value of more than $100 million in the US (from Statista). The received wisdom, supported by a fair amount of evidence, is that mergers often destroy value. There are many reasons for this, see ‘Antecedents of M&A success: The role of strategic complementarity, cultural fit, and degree and speed of integration’ by Florian Bauer and Kurt Matzler, but one of them is pricing. Pricing is where buyers give a verdict on your offers and whether or not they are valuable. Alignment on pricing is critical to a successful merger.
Why pricing can be critical to M&A success
There are 4 main reasons for mergers:
Consolidate a market
Achieve economies of scale
Have more things to sell
Have more people to sell them to
Pricing is critical to the final 2 of these. Many mergers are based on the assumption that the offers of one or other of the companies, often both, can be sold to the combined customer base.
To execute on cross sell and up-sell opportunities across the combined customer base, one must be able to create new bundles and packages and price them in a consistent way. One that does not confuse the sales force or buyers. This generally means that the two sets of offers need to
Have common pricing metrics ( to simplify pricing and bundling)
Have common value drivers (to simplify sales, marketing and product development)
Pricing metric: The unit of consumption for which the buyer pays.
Value Metric: The unit of consumption by which the consumer gets value.
Value-based pricing is the best pricing methodology to apply after a merger. It moves the focus out of the organization to the customers, who are ultimately where enterprise value comes from and who will have the final verdict on the success of a merger.
There are 5 obstacles to executing on value-based pricing after a merger.
The 2 companies are not aligned on pricing goals
The 2 companies are targeting different market segments with different value propositions
The pricing metrics used by each company are incompatible and make it difficult for sales to price bundles and buyers to understand and reconcile invoices
New roles, skills and other capabilities are needed as the packaging and pricing are aligned across the two companies
Marketing automation, CRM, customer success and value management as well as billing and financial systems may all be incompatible and limit pricing options
The strategic choice cascade for pricing after a merger
Roger Martin’s strategic choice cascade (sometimes known as ‘play to win choices’ from the book Roger wrote with P&G CEO A.G. Lafley) can be applied to pricing choices after a merger.
Winning aspirations in pricing after a merger
The 1st thing to do after the merger is to get people on the same page. There are 3 ways to do this.
Establish a baseline, find out how well pricing is performing and test pricing discipline around issues like discounting; also check current contracts and EULAs (End User License Agreements) to see what constraints these put on action.
Set pricing goals, what is pricing meant to optimize? Possibilities include unit metrics like Net Dollar Retention (NDR) or Customer lifetime Value (LTV); volume, revenue or gross profit; or category metrics like category share and category growth.
Agree on metrics and KPIs (Key Performance Indicators). The metrics should measure progress towards the pricing goals and be easy to update, view and understand (Ibbaka is currently conducting a survey What do you want from a pricing dashboard).
The pricing goals and aspirations need to support the combined company’s overall strategy. They are a subset and supportive of these goals.
Where to play pricing choices after a merger
A merger opens new where to play choices. There may be opportunities to change the revenue model, to target new markets and to drive cross sell and up-sell between the two customer bases. The where to play choices include the growth model (Product Led Growth, Sales Led Growth, Service Led Growth, Community. Led Growth), the target segments and the value drivers that will be prioritized.
How to win pricing choices after a merger
At this level, we are talking about execution and tactics. Issues to be considered include:
How to align value and pricing metrics
Creating bundles for cross sell and up-sell
Defining up-sell and cross sell paths
Developing pricing models to support the strategy
Migrating joint customer base
See What are the biggest challenges in introducing a new pricing model
Pricing capabilities after a merger
Given the many things happening right after a merger it is easy to overlook the support that the team will need. People will likely be moving into new roles and new skills will be needed.
For companies with a Sales-Led Growth model, the immediate pressure will be on the sales force. They will need to learn new product lines, new value propositions and new ways to communicate value. They are also likely to have new packaging and pricing that they will need to understand and sell.
1 Key Business Question to Ask is …
Does your team have the skills to deliver on your key goals?
Ibbaka provides a simple solution for role coverage and skill gap analysis that can help you to answer this question.
Pricing systems after a merger
One of the nagging problems that many companies face after a merger is unifying their marketing, sales and pricing stack and updating all of the applications and processes.
There are 3 key groups of systems where changes will need to be mapped out.
Marketing and Sales (especially the CRM)
Pricing and Customer Value Management
Billing and Finance
In Part 2: Finding pricing alignment after a merger we will look into the role of market segmentation, value drivers and pricing metrics in more detail.
Read other posts on usage based pricing
How to get ready for usage based pricing
Pricing under uncertainty and the need for usage-based pricing
Enabling Usage-Based Pricing - Interview with Adam Howatson of LogiSense