The Price is Right: Maximizing Value Capture Through Effective Pricing Strategy and Deployment - Q&A with Geoff Greulich
According to veteran private equity Operating Partner and CEO Geoff Greulich, great financial results and strategic leadership go hand in hand. With more than 20 years’ experience in Private Equity and the C suite, Geoff’s expertise lies in ensuring there is adequate short-term cash flow stability that supports the long-term vision-vision for growth and change.
As the Managing Director of Operations for Corridor Capital, Geoff provided process and strategy management for companies primarily in specialty manufacturing and business services. Prior roles include CEO of Ironclad Performance Wear, Managing Director of Oaktree Capital, CEO of PE owned Levlad LLC, and various functional roles with public companies including Silgan, ABP, and Pactiv/Tenneco Packaging. He cut his teeth in sales and marketing for GE Capital and LTV Steel. Geoff has a degree in Engineering and Economics from Vanderbilt University and an M.B.A from The University of Chicago.
We had a chance to sit down with Geoff to share a few of his key elements for effective pricing strategies.
A lot of people are afraid to raise prices. Why should they take that risk?
Pricing can be the number one lever to improve profitability. In many industries, it takes significantly less effort to improve the bottom line by raising prices than it does to reduce costs or generate growth. However, the changes must be done strategically and carefully, ensuring the preservation of valuable customer relationships.
If you have a well differentiated product and/or service and good relationships with your customers, you shouldn’t be afraid to periodically raise prices. In today’s economic environment with significant uncertainty around steel, aluminum, freight and other major cost drivers, businesses should try to be ahead of the curve and announce pricing changes early while the market is buzzing with inflationary news and uncertainty
Customers may threaten to leave, or leave temporarily, but if you provide great value, they will typically stay at the table for the long term.
What are your best thoughts for announcing a pricing change?
Be sure to arm your entire organization with bullet points on why this change is happening. Here’s an example: “With the announcement of tariffs on imported steel, our Chinese suppliers have already pushed through price increases. This change is hitting us rapidly because we have minimal inventories and few alternatives for the grades of steel we buy from China.”
Brainstorm every possible negative customer response, and then be sure to include answers to these concerns in your bullet points. Also, provide your team with the specific source articles or posts so that they can reference them in their conversations.
Why is it imperative that pricing come ‘from the top?’
Pricing needs to be controlled by the CFO or the CEO. It always easier to put the blame on someone higher in the chain of command. You should clearly communicate who controls the pricing and be clear that only the CEO or CFO can approve waivers of announced increases. It also comes back to how the sales team is compensated – revenue versus margin contribution and who in the organization explicitly knows the profitability by customer.
Why is it important that C-Suite leaders focus on both the day-to-day management of their business and their long-term vision.
Ultimately, performance comes down to free cash flow. Stable cash-flow finances long term investments either directly or through borrowing. I often see visionary leaders particularly those trained in large corporations who lose focus on short term cash flow and are unable to execute the long term vision.
With respect to pricing, I cannot overemphasize how important it is to know your numbers. It is critical to know your profitability by product, customer, channel, end-user market, and the rate of change in sales and margin generated by price changes. To do this, you need to understand your costs in great detail – what’s variable, semi-fixed, and fixed.
Sometimes this takes a second level of strategic thinking to maximize cash flow. If you have a lower margin product line, it may be prudent to raise prices on those products at a disproportionately higher amount. There must be a supporting story or rationale to support the difference – “we don’t make enough much money,” won’t work.
If you have capacity constraints in certain products, also consider raising those prices higher, without signaling your constraints to your customers.
It goes without saying that you should know your terms and conditions. Make sure that your salespeople know the contractual boundaries, if there are any, before rushing ahead with price changes. If the changes are not allowed under the contract, you must communicate that fact clearly up front…in other words, play it straight up and don’t try to catch your customers asleep at the switch.
How important is it to account for your competition in your pricing strategy?
First, you should understand your current position in the market relative to the competition. For example: if you are a high cost provider who has historically competed “through better service and personal relationships,” then you may decide to follow the rest of the market from a timing perspective, and implement lower increases than the competition.
Before you actually raise prices, contemplate the responses of your closest competition……Who will follow, who will respond opportunistically, and who will try to go it alone? Periods of price uncertainty can actually provide an opportunity to rid yourself of the lower margin, less desirable customers to more aggressive price competitors.
What’s one thing you must never do?
That’s easy. Don’t ever surprise your customers. Execution of price increases are extremely sensitive topics. Never send out a formal announcement without first contacting your customers personally. Have your salespeople call every customer and have them use their talking points to answer the “why”. It is better to have bad news than no communication at all. This may provide your salespeople an opportunity to engage with their customers to whom they not have spoken recently.