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Pricing after Merger and Acquisition Part 2: Finding Pricing Alignment After a Merger

Steven Forth

Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.

The 2nd in a 3-part series on pricing after a merger.

Customer overlap and value driver overlap

In Part 1 of this series, we looked at some of the critical choices that companies need to make after a merger. One of the most important choices is around what to sell and who to sell it to.

Most mergers, especially between tech companies, assume some synergy at the level of offers and target markets. There are several common patterns here. The two areas to look at are the overlap in customers and the overlap in value drivers.

One of the critical steps in pricing, especially value-based pricing, is to conduct a value-based market segmentation. A value-based market segment is a group of customers that get value in the same way (share value drivers) and who buy in the same way. One of the first things to do after a merger is to develop a value-based segmentation of the combined customer base.

The key questions to ask are

  1. What is the overlap in the customer bases?

  2. What are the value drivers for each customer?

  3. How do the value drivers cluster the companies?

Value driver: A ‘value driver’ describes the impact of a product or service, or a set of functionality, on a customer’s business. There are three flavors of value driver: economic, emotional and community. See Core Concepts; Value Driver.

The variables in the value driver determine the value metric and are used to define pricing metrics and to fence different offers and packages.

An economic value driver is an equation that quantifies the economic impact on the customer. As an equation it has constants, mathematical operators and variables for each customer.

When there is no overlap in value drivers, go deeper and see if there is an overlap in the underlying variables. If this is the case it can provide a path to coming up with shared value metrics and pricing metrics.

The Customer x Value Matrix

Simplifying this into a 2x2 matrix, there are four possibilities. Each of these calls for a different response.

High overlap of value segments and customer base

When this is the case the two companies were often competing and the merger is part of a market consolidation. The challenge will be to come up with an integrated solution that is attractive to the merged customer base. This can take some time, so a having a common pricing model is a good place to start. One needs to be careful to understand how the integrated pricing model will impact the customers and how to migrate customers into the new model. See What are the biggest challenges in introducing a new pricing model?

High overlap of value segments, low overlap of customers

This is the ideal situation for a merger. There are likely to be many cross sell and up sell opportunities. Pricing and packaging needs to be designed with this in mind. Create logical paths for customers through your offers to make it easy for them to slot themselves into the package that best aligns with their needs.

It will be important to come up with a common pricing metric to make it easy to combine offers. As the value drivers overlap this should be quite possible.

Low overlap of value segments and low overlap of customer base

These mergers are often about building organizational scale. As value drivers and customers are both different it is generally best to price and sell the solutions separately while working out back office integration.

Each business will want to optimize pricing, share best practices and be aligned on the pricing process, but there is no need to have the same pricing metrics.

Low overlap of value segments but high overlap of customers

When this pattern shows up deeper research often finds that there are underlying variables that determine value shared between the two solutions. The solutions are often complementary and used together they can create more value than when used separately. It can take some work to find these connections but they will be important to defining a packaging and bundling strategy.

If after research there is still no overlap in value drivers then the situation is similar to bottom right and these are two separate businesses that happen to sell to the same customers. When this happens, customers often look at things like ‘share of wallet’ and brand crossover effects can become a concern.

Understanding how value segments and customer bases overlap is critical in pricing. It is so important it would be best if this analysis was done before the merger, but in the real world this seldom happens so it is a critical step in laying the foundation for an aligned pricing.

In part 3 of this series we will provide a checklist to use when planning pricing after a merger.

Read other posts on usage based pricing