Exit strategy: Pricing your business for maximum value

Whether you’re a company owner or a keen investor, there will inevitably come a time when you start thinking about an exit strategy. So, how do you ensure your company is set up to offer the best return on your investment? And how can you be confident that you’ll be able to maximise the value of your business? Well, pricing strategy can play a huge part in this.

Maybe you’re ready to cash out your investment, perhaps you’ve achieved what you set out to with this company, or after years of hard work maybe it’s now time to take a step back and enjoy the fruits of your labour? Whatever your connection to the business you’re looking to sell, everyone’s aims will be the same – to position yourself as an attractive investment, to command a high price for the sale and to facilitate a smooth transition to new ownership. In all these areas, pricing strategy could be key.

In fact, simply by ignoring or de-prioritising pricing your business can become less profitable over time which will ultimately devalue it, making it a less attractive investment. But fear not as pricing experts, it’s our job to help clients understand how an effective pricing strategy can help any business maximise their profits, and in this case maximise their sales value.

So, if you’re keen to kickstart your exit strategy straight away or even if you’re years off exit, we’re here to offer our top tips on how to use pricing to aid a successful exit and some actions you can take to start heading in the right direction. There really is no time like the present to begin investing in a future-proof pricing strategy that will set your company up for a smooth and profitable leadership transition.

What is pricing strategy and how can it directly impact your exit strategy?

Pricing strategy, at its most basic, is a framework that enables companies to charge the best price for their products or services to help them maximise their company’s profitability. From marketing to new product development, pricing touches virtually every area of any business. As pricing consultants, we’ve worked with thousands of business leaders to mitigate the risks of overlooking pricing strategy and guiding them through the steps to unlocking missed opportunities to drive up the value and sustainability of their business.

When it comes to pricing for exit, we’ve seen countless times how pricing strategy, or indeed a lack of it, can directly impact profitability, market position and attractiveness for sale. An effective pricing strategy can:

Establish a strategic approach to pricing based on in-depth data analysis and market research rather than gut feel, helping to raise profits and allowing for better forecasting
Remove companies’ reliance on founders who, often emotionally invested, take the lead on pricing
Outline a clear process for setting pricing which will aid a smoother transition to new owners
Demonstrate a secure and sustainable revenue stream to potential buyers
Ensure there is nothing left on the table to maximise your profits
Use pricing psychology to help boost your conversion rate which in turn raises profits
Help companies understand market research and audience behaviours to take away guesswork and improve sales to establish more secure revenue streams
Ensure your brand is reflected in your prices and vice versa to show potential investors that the business has a strong and sustainable position in the market

By using pricing as part of your strategy for exit, a business is able to position itself as an attractive investment, command a higher sale price and facilitate a smoother transition to new ownership. It’s not uncommon for owners to invest in outside support on this. That spend may not always be on what you think of as a traditional pricing strategy, either.

According to Henry Sallitt, the managing partner at FPR Capital, businesses looking for PE backers can start to prepare by investing in gaining a solid understanding of how your customers perceive your brand and the value you deliver. For example, Henry says:

“A big chunk of commercial due diligence is going to be customer referencing—you want to know what people are going say about you beforehand because it can upset a process if people start saying the wrong (or unexpected) things.”

In this article, we’ll look at the benefits of an effective, holistic pricing strategy that is grounded in a firm understanding of the value you deliver and the actions you can take to start putting one in place.

When’s the best time to establish a pricing strategy to aid exit?

Pricing strategy gives business leaders the clarity and confidence to optimise their pricing and drive performance, so when is the best time to start?

Set up for success from the start

The best time to think about establishing a pricing strategy is from the very beginning when you start designing your product or service. Take IKEA, for example. They set out to be affordable and attractive to the masses. So, whereas other brands often design prices around their products, IKEA understood willingness-to-pay before they started, and designed their products around that price point. That decision influenced how they packaged, designed and built (or rather didn’t build) their products from day one. Clearly defined, confident, and the public loves them for it. Okay, we can’t all be IKEA, but every business can consider from the start where they want to position themselves in the market as they design their products and services. That way you can build your products and services with their ultimate price in mind to ensure you maximise your returns from the outset.

There’s no time like the present

Even if you’ve got one foot out of the door, it’s never too late to get help to sell your business by thinking about pricing. Established businesses continuously need to respond to external pressures, an adaptable pricing strategy will help you navigate these and remain at optimum profitability. Here are some of the pressures we often see:

Competitor price changes: Often the main trigger for companies to adjust their pricing is competitor activity. Whether your competitors’ prices go up or down, customers will naturally draw comparisons with your own, which may lead to a dip in sales. It’s important that you respond to these changes, but doing so without strategic planning can be equally risky.
Inflationary forces: These can have a big impact. As costs rise and your margins are squeezed, it’s important that your prices change to cover any shortfall.
Inactivity: If you haven’t changed your prices for a while, if ever, you may have been unknowingly damaging your profits. Every year that you don’t raise your fees you’re devaluing your service because every £ or $ is automatically worth less due to inflation.

An effective pricing strategy will enable you to take control of these missed opportunities to raise profit and in turn, make your business more attractive for sale.

Common problems when planning for exit without a pricing strategy in place

Pricing is often an overlooked or neglected growth area, capable of driving behaviours and resulting financial performance. There are a number of common mistakes companies make when planning or implementing their pricing and each can have a negative impact on a business’ attractiveness when it comes to sale. So, what are the problems and how might pricing strategy be applied to help us overcome these?

Ego is one of the biggest barriers to pricing strategy success

Problem: It’s understandable that SME business owners are keen to stay in control of pricing. Because they are emotionally invested in the company, they can feel protective of their approach, which is often based on gut feel, rather than research or strategic business rigour. However, this, ‘if it’s not broken, why change it?’ approach to pricing could be damaging to your business. Gut-led decision making becomes the norm, while your under-informed pricing decisions may be stunting your company’s growth and therefore its ability to appeal to potential buyers.

Solution: If you’re even close to considering your exit it may be time to put ego to one side and stop emotional attachments from leading to missed opportunities to maximise your company’s value.

Action: Establish a clear and consistent process for who, when and how pricing is set. Appoint a small cross-company team to discuss how a potential pricing shift may impact every area of the business, and then appoint an owner, probably someone in senior leadership, to take responsibility for making the final decision and overseeing the rollout of the new prices. Bringing in a pricing consultant to offer the support of an objective third party could help with this. Having a clear chain of command and sharing this important first step with the wider company will help get the message out that pricing strategy is part of the business that needs to be taken seriously.

Competitor-led pricing is a risky pricing strategy to rely on

Problem: If you don’t have a strategy attached to your pricing you end up offering similar prices to your competitors. The only comparison a potential client can make is, ‘Who is the cheapest?’, which means you can lose out on sales. There is a tendency for companies to be driven by competitor-led pricing, in the absence of a better plan. However, this gives your competitors control when it comes to setting your pricing. If the competition changes their prices, you follow suit. So you have to decide where to pitch yourself – above, below or beside the competitor’s price.

The real issue here though is that your customers may see things completely differently from how you perceive your position vs. the competition. They may be looking elsewhere, they may opt to take the project in-house, or they may decide against doing it at all. The competitive benchmarks you had set yourselves therefore could be irrelevant. Without understanding this thought process, you can’t fully understand how best to approach your pricing and therefore you could be losing more profitable opportunities.

Solution: By using a pricing strategy you can remove the guesswork. We help you build the evidence that can clearly inform your pricing decisions to move away from competitor-led pricing. In turn, you’ll take back control of your profits. To do this you need to better understand your audience and their motivations.

Action: Talk to your customers and prospects by carrying out surveys and interviews. Understanding your customers, their needs and their decision-making processes is a major part of understanding value and pitching your prices at the right level. From a prospective owners’ point of view, seeing that you are pitching your business to a proven and reliable customer base will give them confidence that the revenue stream is reliable and sustainable, making your business an attractive investment.

You could be missing a trick if an understanding of your market isn’t part of your pricing strategy

Problem: Why leave anything to chance when it comes to demonstrating your revenue? If you can build a case for your prices based on evidence, and demonstrate regular, successful price increases, your company will be a more attractive offering. So, what if your products aren’t quite hitting the mark with customers and you’re leaving money on the table? Your Pricing strategy can help you address areas you may have been overlooking.

Solution: It’s time to understand exactly how your products or packages land with customers, and whether you’re offering solutions that genuinely appeal.

Action: Draw up a good, better, best range of packages and go and ask customers what they think. How do they respond to the language you’re using? Who do they think they have been designed for? And finally, how willing would they be to pay for them (more or less)? Frame your questions in a way that will put them at ease “As a valued customer, we would love to get your opinion.” “We’re thinking about how we optimise our products and services to serve you better. Here’s what we’re considering.” Start to build that evidence that you can eventually take to your investors.

If you service big communities, quantitative survey work will give you statistically robust data to understand willingness to pay for certain elements of your service and start to spot the differences between certain industries, different products, and different audiences.

Perhaps you have an existing offering. The business thinks it’s valuable, but when you ask clients, you learn they could do without certain elements. If they don’t actually value this bundle as much as you think, uncover what’s missing. Or equally, a rarely used feature of a bundle might be very valuable to some, but not others, creating the ideal opportunity to build an add-on. Adding rigour to the products you are offering can only help build your case as a viable business and will help build that pricing strategy story that builds confidence with investors.

Understanding customers’ willingness to pay is pricing strategy gold

Problem: Not properly understanding what your customers are willing to pay for your product or service can lead to missed revenue, in that you could be undercharging, and therefore lowering your company valuation and profit margins. Equally, you might be over-pricing. Pricing too high will deter customers and can lead to a reduction in your market share. You may also find that there is a disparity between what customers are buying and what your company thinks they are selling which could really hinder your business’s approach to pricing. If you knew what customers really wanted, perhaps you could charge a bit more for it?

Solution: Remove the guesswork with customers. Now is the time to better understand your customers’ need perceptions, what they value, what drives decisions and uncover their genuine willingness to pay.

Action: Testing for willingness-to-pay in pricing isn’t one of those places where you can say “How much would you pay” and expect a reliable answer. A good starting point would be a powerful set of four questions known as the Van Westendorp price sensitivity metre. Ask customers the following questions about a package or product:

At what price would you consider this to be great value for money?
At what price would you consider this to be getting expensive but you’d still consider it?
At what price is it too expensive to consider?
At what price is it so cheap that would make you question the quality?

The answers will start to give you a sense of what they are willing to pay for and how broad the range is that we’re talking about.

Further to this, it’s worth asking the interviewee what was on their mind when answering these questions. You might gain an insight into a competitor’s offering or uncover some unexpected pricing anchors. In that the prices they compare yours to might not be what you expected. For example, if your client is looking to develop a subscription service but the customer has subscription fatigue. The idea of buying yet another subscription, for a product that they would rather buy as a one-off purchase, just doesn’t feel good value for money. Questioning your pricing, by strategically analysing your products in the eyes of your customers offers valuable insight that can help you build a more profitable business approach.

You need to get clear on your value proposition

Problem: Are you constantly discounting? Or perhaps you haven’t increased your prices for a number of years leaving you one of the cheapest in the market? Or maybe you’ve over-increased your prices due to market rises. As a result, you might find that your pricing no longer reflects your brand and vice versa. A brand whose prices don’t live up to its image will always struggle to sell, reducing potential market share as well as confidence in potential investors.

Solution: To build your strategy to exit you need to demonstrate your positioning in the marketplace. That means being clear on what you offer, how you’re different and giving customers a price that links to your offering. To do that, you need to work on your value proposition.

According to Harriet Hunt, Investment Director at FPE:

“Getting concrete pieces of evidence around the Return on Investment (ROI) of a product or service would likely make us pay more for a business on the way in than a business that has a highly penetrated market or a commoditized offering.
A market where buyers are buying on price rather than value is less attractive.”

Connecting value proposition to pricing, Harriet shares, is “the biggest lever, of growth that we have.”

Action: A value proposition is built by doing research to understand three key things about what motivates your customers:

Tangible benefits: Understand the tangible benefits offered by your product or service. To get a proper grasp of what you offer to customers from a value point of view you need to ask what genuine benefits you offer to them. Do you save them time? Drive revenue? Drive profitability? Generate more customers? What are those measurable outcomes that you can take forward into your value proposition?
Intangible benefits: Does your product or service have an impact that is less measurable but perhaps no less impactful? Ask, how does your offering help shape your customer’s brand? Does it have an impact on employee well-being, risk reduction, staff retention, or reputation?
What are their alternatives: The answer isn’t always you vs. the competition. It could be that the client could perform your service in-house at a more affordable rate, just without your level of expertise and insight. It might be that they could use an individual or freelance consultant for less to do half of the work at half the fee, rather than employ your company. Maybe they aren’t convinced that the job really needs doing or is really worth the financial investment. Take an employee training package. If they don’t see a clear return on their investment they may decide not to do it at all.

Having considered these three things, the tangible outcomes in the eyes of your customer, the intangible benefits, and their alternatives for not choosing you, you’re left with a powerful set of evidence to help inform your brand positioning, marketing, strategic decision making and pricing strategy. Along the way, you’ll be building on the attractiveness of your company as a viable investment with a clear position in the market.

Finding the margins for growth

Problem: A prospective investor is going to be interested in the growth potential of your business. While your company accounts will offer great insight, they won’t prove to a potential buyer that you’ve got a clear plan to keep building sustainable growth. And maybe that’s actually true. In this case, now’s the perfect time to put one in place.

Solution: It is worth investing the time to generate the evidence to make you and your potential purchasers more confident that you’ve got the right pricing strategy that will lead to sustainable future growth. Simply looking at your internal data in a new way can be very revealing.

Action: Create your own bubble charts by plotting your services, projects or clients into high- and low-growth margin quadrants. Dividing the space into four, place your high growth, high margin clients at the top right, and low margin, low growth at the bottom left. You could also do this with product lines, markets or even sales leads within the organisation. These will present you with a powerful view of where growth and profitability lie within your business.

What can you learn about that prime growth area that you can bring into your business? The star performers are the high-growth, high-margin clients or packages in that top-right space. Prioritise these.
Equally, those low-margin, low-growth areas are the red flags, directing us to question whether it’s time to de-invest in these areas.
Consider also the high-growth, low-margin projects. Are you losing out on profit here or are you comfortable with forgoing margin there? Perhaps, for example, even though these don’t yield as much revenue as you might elsewhere, as some are your ‘bigger name’ clients, you can use these to build your reputation, and therefore you’re comfortable with these having a lower margin.

This level of detailed exploration will help you find those opportunities to enhance your strategy on pricing, grow your profit and present your company as an attractive prospect.

Summing up pricing strategy and its role in exit planning

You’ve just read our whistle-stop guide to how pricing strategy can have a huge impact on your exit strategy. There is so much more we could share but this is a great base for kickstarting your own pricing strategy to drive your company towards the profitable sale you dream of in the future.

For founders in particular, it’s really important that you can separate yourself from the company. Of course, you’ll be emotionally attached, but for you to have a successful exit, it’ll be crucial that you’re able to put that to one side.

Instead, put yourself in the shoes of the prospective company buyers. Can your company consistently demonstrate reliable revenue streams? Can you confidently demonstrate a strong and sustained profit margin? Can you show that you’ve changed prices as the company has evolved, how you communicated this with customers, and managed sentiment? Do you have a well-documented pricing strategy? The last thing you want is for the price of your products to be reliant on you, the owner. Does your team know how prices are set and changed and is accountability clear? If you can answer yes to all of the above, then you’re on the right track to building a successful company that will easily attract investment.

The ideas in this article were designed to be actionable for any company at any stage of its journey. The bottom line is, the sooner you start thinking about pricing strategy differently, the sooner you’ll be able to start building a sustainable business model with an attractive story for buyers, that’s even if you’re just getting started. If you have questions about any of the ideas presented in this piece or you’d like help to get started, we’d love to hear from you.

Interested in getting a health check on the current state of your pricing? Visit thepricingscorecard.com for a 4-minute yes or no survey that will give you personalised tips on where things stand and how to get started. To help you build confidence and build the right pricing strategy to help secure the business success ready for the exit you want.