This is the sixth article in our series on Identifying Opportunities to Improve Operations. We have divided the opportunities to increase the market capitalization of a company into seven value lever buckets. For each area we describe the signs we look for that indicate the company can improve their financial performance. In other words, we are highlighting points you want to know BEFORE you buy the company; things that expose opportunities to increase EBITDA, capacity and asset utilization.
The Seven Value Levers include:
- Throughput. Can we increase the output of a plant, office, service location, or other facility?
- Variable Costs. Can we reduce the costs directly tied to our volume and revenues?
- Fixed Costs. Can we reduce the costs that do not change in the short term, based on customer demand?
- Order to Cash Cycle. Can we shrink the time between investment on our part and collection from our customers?
- Pricing. Can we collect more revenue for the services we are providing?
- Asset Utilization. Can we increase inventory turns, the use of plant equipment, or the use of facilities?
- Risk. How can we reduce risks related to running our business?
In this article we share with you the signs we look for that indicate a company may be able to effectively increase their revenues and EBITDA through pricing. From a results perspective, we are looking for indications that our client can:
- Increase overall pricing levels, often from 1-3% of total revenues
- Reduce or eliminate “leakage” from designed pricing strategies or plans
- Identify price elastic and inelastic items
- Address any issues related to the gap between gross and net sales
- Collect more revenue in the current market
This is a powerful topic; finding opportunities to get paid more for what you do. Effective pricing strategies and practices lead to designed increases in margins where customers are willing to pay more. The following indicators demonstrate that a company is not consistent in the pricing approach, is leaving money on the table, or is allowing the company to execute policies that are out of alignment with company strategy and direction.
Recently, we worked for a company that had hundreds of sales people in a dozen regions. The company retained us to find out what was causing a double digit gap between gross and net sales. While there was a companywide, executive driven mandate to hold firm on pricing, we found that sales people were routinely providing discounts. The sales people had good intentions and wanted to close the sale, but the executive team had developed their pricing strategy on sound principles and needed their mandate to be carried out. The company’s regional controllers were aware of the mandate, but lacked conviction that it was truly in the best interest of the company. After uncovering the issue, we were able to design simple reports that tracked compliance and allowed management to monitor pricing levels. Within a short time management’s strategy was carried out throughout the company and net margins increased by over 3 points. Because this company had a 10% EBITDA margin to start with, this increase generated a 21% increase in EBITDA.
Another client, a consumer packaging company, recognized that low volume and highly volatile sku’s did not carry any premium pricing over high volume and stable items. Correcting this added $500,000 in margin, an increase of 8% in overall EBITDA.
There are many examples like these. Look for these indicators. When you find them, it is time to investigate and take action!
If you have any questions or requests, please feel free to contact me at tvm@proactiongroup.com.
