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, 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, as the author explains. Steven Forth is a Managing Partner at Ibbaka. He can be reached at steven@ibbaka.com.

The Journal of Professional Pricing, June 2022

Why pricing is critical to M&A success

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. 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 four 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 two 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 upsell 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 five obstacles to executing on value-based pricing after a merger:

1. The two companies are not aligned on pricing goals
2. The two companies are targeting different market segments with different value propositions
3. 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
4. New roles, skills, and other capabilities are needed as the packaging and pricing are aligned across the two companies
5. 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 first thing to do after the merger is to get people on the same page. There are three 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 place 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.

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 upsell 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 upsell
• Defining upsell and cross-sell paths
• Developing pricing models to support the strategy
• Migrating joint customer base

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.

One key business question to ask is: does your team have the skills to deliver on your key goals?

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 three 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

Finding pricing alignment after a merger

Customer overlap and value driver overlap

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 functionalities, on a customer’s business. There are three flavors of value driver: economic, emotional, and community.

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 2×2 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 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.

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 upsell opportunities. Pricing and packaging need 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 the 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 the bottom right quadrant 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 aligned pricing.

The M&A pricing checklist

There is a lot to keep track of after a merger and it is easy for things to drop through the cracks. This is especially true of something like pricing, where there are a lot of hidden dependencies.

In such situations, checklists are valuable tools to help the team align on what needs to be done and then to make sure it does get done. There is a wonderful book on this (The Checklist Manifesto by Atul Gawande) that shows the power of checklists in complex operating environments.

A checklist for pricing after a merger

Checklists can perform three key functions in the post-merger environment.

• Get alignment on what needs to be done
• Allocate responsibilities for each piece of work
• Make sure that nothing slips through the cracks

Once you have alignment on pricing strategy, you can use the following checklist to prepare for post-merger pricing. You will want to customize it for your own situation. There are two reasons for this. The combined company strategy and how that is being implemented through pricing will impact priorities. Where the company falls in the 2×2 customer-value matrix will shape the next steps. You will be in a position to make this determination after you have compared customers (Step 2) and mapped the value-based market segments (Step 3).

1. Perform basic pricing hygiene on both companies
   • Build the pocket price waterfall and look for price leaks
     • Do the leaks happen in the same place?
     • Can you segment customers by where the price leaks occur and how extensive the price leaks are?
   • Do a pricing dispersion (map actual price to the pricing metric(s))
     • Do the pricing metrics predict price?
     • Look for clusters that are above or below the regression line, investigate the reason for this
   • Compare contracts to actual billing
     • Are contracts being followed?
     • What price changes can be made under the current contracts?
2. Compare customers
   • How much do the customers overlap between the two companies?
   • What are the underlying similarities between customers at each company?
   • What are the differences?
   • How do usage patterns and engagement compare between the customers of each company?
     • Usage
     • Engagement
     • Value paths and completion of value paths (a value path is a sequence of actions taken by a user that results in something of value)
3. Map the value-based market segments between the two companies
   • Are there segments that overlap?
   • What value drivers overlap?
   • Are there any common variables in the two companies’ value drivers or pricing models? If ‘yes’, then how do value-to-customer and pricing vary with these variables at each company?
4. Compare the value metrics and pricing metrics
   • Assuming that each company has a value model, look at the variables in the value driver equations. Are the same variables showing up for both companies?
5. Align Marketing, CRM, billing, and financial systems
   • Marketing and CRM configuration of stages and conversion criteria
   • Definitions of Marketing Qualified Leads MQLs), Product Qualified Leads (PQLs) and Sales Qualified Leads (SQLs)
   • Billing systems
   • Revenue recognition
   • Customer Success
   • Pricing and Customer Value Management (like the Value Pricing Dashboard)
6. Revise Pricing and Packaging
   (Once you have completed steps 1-5, you will be in a position to change pricing). The following is more of a simplified version of a pricing process than a checklist, but it helps to define the work that needs to be done.
   • Choose the target segments that you need to package and price for
   • Within each target segment, define the value drivers and value metrics and use these to select pricing metrics
   • Validate the value drivers (again) with
     • The current customers
     • Target customers
   • Develop a value model that can be used to estimate economic value for each customer
   • Design a new pricing model
   • Design a communication plan
   • Plan the migration of current customers
   • Set up a process and systems to gather the data you will need to adapt the value model and pricing model
   • Track the pricing metrics and KPIs at a weekly cadence

This is hard work, but pricing investments can have a big payback. They are especially important at transition points like after a merger.