Pricing Power Assessment

When to use

Use this skill whenever the value creation plan contains a pricing line, and always when the seller calls the business "underpriced". Commercial analysis establishes buyer power at the market level; this skill establishes what this company has actually realised, account by account. Price drops through at close to 100% margin -- one point of price on a 15%-margin business is a 6-7% lift in EBITDA -- so it is the highest-leverage and least-evidenced line in most models.

What it does

Produces a pricing assessment: a price/volume/mix decomposition of growth, a pocket-price waterfall from list to cash received with discount dispersion, a contract review of escalators and caps, and the outcome of the last increase attempted.

Method

Step 1 -- Separate price from volume and mix

Build a price/volume/mix bridge for each of the last three years. Most claimed pricing power is mix -- a richer product or a richer segment lifts average selling price without one customer paying more for the same thing. Only the price bar is evidence. If the data cannot support the bridge, that is itself the finding.

Step 2 -- Build the pocket-price waterfall

Walk list down to cash received: list, less headline discount, gives invoice price; less volume rebates, settlement discounts, returns credits, free periods and SLA penalties, gives pocket price. Track realisation across three years; erosion here is invisible in reported revenue growth. Then read dispersion, not the average: where small accounts hold large-account pricing, discounting is an approval failure, not a strategy -- and it is fixable.

Step 3 -- Read the contracts, not the summary

For the top 20 accounts, extract the escalator clause verbatim: fixed uplift, CPI or RPI linkage, index cap, or silence. A CPI escalator capped at 3% in a 6% inflation year is a real-terms price cut with the seller's signature on it. Note most-favoured-nation clauses, benchmarking rights and notice periods -- they decide who holds the option at renewal.

Step 4 -- Find the last increase and what it cost

The best evidence is the natural experiment the company already ran. Identify the last broad increase: what was announced, what was realised, how many accounts negotiated it away, and what churned over the following four quarters. Realised over announced is the price realisation rate, and that is the number to underwrite.

Step 5 -- Price the conclusion into the model

State the annual increase you will underwrite on the evidence of Steps 1-4, drop it through at full margin, and quantify any gap to plan in EBITDA and, at the entry multiple, in EV. Assume any increase you cannot evidence has already been given away: sending a price-increase letter is not pricing power, and pricing power is only what survives the renewal conversation.

Inputs

• Transaction-level sales data: list, invoice, discounts, rebates, credits
• Volume and product mix by year (three years minimum for both)
• Top 20 customer contracts, with escalator and renewal clauses
• Announcement and outcome data for the last increase attempted
• The pricing line in the seller's value creation plan

Output format

A pricing assessment with five sections:

1. Price/volume/mix bridge by year (prose, never a table)
2. Pocket-price waterfall, realisation trend and dispersion
3. Escalators and renewal options, top 20 contracts
4. The last increase: announced, realised, and what it cost
5. The underwritten price assumption and the gap to plan, in EBITDA and EV

Total length: 900-1,200 words. No assertion without a transaction behind it.

Example

Waterfall and bridge (excerpt -- Harlow Brake Components, fictional): Aftermarket brake distribution: LTM revenue $120.0m, EBITDA $18.0m at a 15.0% margin, offered at 9.0x for an EV of $162.0m. The CIM claims "consistent 4% annual price increases". The bridge from $110.0m to $120.0m decomposes as volume $3.3m, mix $5.5m and price $1.2m -- price contributed 1.1%, not 4%; the rest is a shift into premium-brand pads. The waterfall agrees: list 100 falls to invoice 91, then to pocket 83.5 after rebates of 4.0, settlement discounts of 1.5 and returns credits of 2.0. Pocket was 86.2 three years ago; that 2.7-point erosion is $3.8m at LTM volume -- 21% of the EBITDA being bought, $34.2m of EV at 9.0x. Underwrite 1.0%, not 4%.