How Machine Learning helps PEs Boost their Returns

The goal of any private equity (PE) firm is to provide a return to its investors by acquiring companies and profitably exiting them after the holding period. While most PE firms seek to create value through cost optimization, efficiency improvements, financial engineering, or talent upgrades, only few are skilled at effectively implementing pricing strategies to enhance the value of their portfolio companies. However, pricing initiatives can generate tremendous value for both the portfolio company and the PE owner. This is particularly true in software deals, where EBITDA growth makes a significant contribution to value enhancement.

Current pricing challenges in private equity

PE firms are highly skilled at increasing the value of their portfolio companies through cost optimization, efficiency improvements or talent upgrades. However, little emphasis is placed on driving return through effective pricing strategies. According to a McKinsey survey, the fear that competitors might react aggressively to price changes or that customers turn away from the company if prices increase are the most named reasons for PE investors shying away from implementing new pricing strategies.

In addition to these uncertainties many PE firms lack appropriate tools and commercial capabilities. For instance, only 6% of PE professionals feel “very prepared” for pricing challenges in terms of tools, processes and capabilities. Although, 40% believe that pricing is a top driver of earnings expansion.

Figure 1: Buynomics can cover several value levers in PE software deals

How Buynomics creates value for PE software deals

• Buynomics helps to set effective sales and pricing initiatives.

  With Buynomics, an unlimited number of price-product combinations can be tested using the Virtual Customers technology. The effects on unit sales, revenue, and profit are immediately transparent. Each iteration takes only five minutes to conduct, allowing PE firms to thoroughly test different pricing strategies in real time and without any risk. This enables executives to grow sales profitably.

• Buynomics optimizes the product portfolio.

  Buynomics lets users dynamically select and add product features and variations. With just a few clicks, new products can be created and immediately shown to the Virtual Customers to assess market reactions, providing an accurate forecast of how real shoppers might react to the new portfolio changes. Product testing has never been easier and less risky.

• Buynomics supports pricing model transformation.

  When transforming from traditional product distribution to Software-as-a-Service (SaaS) subscription, questions around products, bundles and pricing of the new services need to be answered. buynomics can help by testing all possible price and product combinations. Private equity funds can easily choose the price and product combination that promises the greatest success.

Summary

Every PE investor aims to increase the value of the portfolio companies. However, the potential of improved pricing and product initiatives as a value enhancement method is often ignored. Besides a lack of in-house knowledge, most private equity investors are not equipped with the necessary tools. This leads to potential returns being left on the table. Especially in software deals, where price and product initiatives can have a particularly high impact on a companys’ valuation.

Buynomics creates actual value to a PE firms’ portfolio companies. PE managers can test price and product strategies with a sample of Virtual Customers that behave just like consumers in the real world. Testing a new scenario takes only a few minutes, and after each iteration, the effects on profit and revenue are instantly visible. As such, Buynomics contributed to a 20% increase in profits for a major software provider and delivered 70% additional profits on promotions for a large telco firm.

Lastly, competitor moves can be easily integrated into the analysis as well. Thanks to its unique capabilities, buynomics helps to meet KPIs and avoids unwanted effects. With its predictive accuracy of >95%, you can be confident to launch campaigns that create sustainable competitive advantage for your businesses.