Pricing Power: The Golden Lever of SaaS
Atlasview Insights -- bite-sized weekly insights that are relevant to all small business owners, dealmakers, and investors.
Welcome back for another week of insights brought to you by the team at Atlasview Equity. Our team was recently reflecting on the importance of pricing power, an often underleveraged aspect of value creation in business. For this week’s Atlasview Insights, we decided to share our two cents on how we distill pricing power.
Explore a Partnership With Atlasview Equity
Before we begin, if you are a business owner, deal intermediary, or advisor with a company that could be of interest for a transaction, feel free to reach out. Atlasview has ample dry capital and LP relationships excited to invest alongside us!
We look for the following characteristics in our partner companies:
Industry: Software and tech-enabled businesses
Business Profile: Sticky B2B customer base
Size: Minimum $1m EBITDA or $5m ARR
Geography: The US & Canada
By choosing mountaineering over moonshots, Atlasview takes a disciplined approach to deliver consistent results as we ascend towards each summit with our partners.
The Value of Pricing Power
Pricing power is the ultimate measure of a business moat. The stronger the moat, the more durable the business is, which leads to higher returns on invested capital.
A breakdown of how our team approaches the nuances of pricing power:
There are many levels to the game: This is measured by how much and how consistently a business can increase prices.
Inflation isn't included: If a business only increases prices to keep up with inflation, it does not have pricing power.
Supplier leakage: If a supplier can increase prices at the same rate (or higher), a business doesn't have pricing power.
The Impact on a Businesses Economics
Pricing power gives a business operational leverage. It is the least risky way to increase earnings, as the extra money goes straight to a business's bottom line.
Unlike investing in opex or capex to grow revenues, which both lead to unpredictable results, consume capital, and may not deliver a return above the business's cost of capital.
Many niche vertical software businesses have access to this operational leverage. Pricing power multiplied by low ongoing capex and stable opex equals phenomenal returns on invested capital. Bottom line is, exercising pricing power in the right business can lead to a phenomenal return on investment.
How Do We Assess Pricing Power?
It often comes down to a simple question:
“Has the business been increasing prices year over year, without losing customers?”
High customer retention amidst steady price increases was one of the things that stood out when our team discovered Atlasview Equity’s portfolio company, Soutron Global. Soutron is an enterprise software business that provides integrated library systems to power libraries around the world. For the past several years, the company has successfully increased prices well above inflation without experiencing any resulting churn. This was a telltale sign of pricing power and a testament to how sticky the software is.
If the answer to the former question is “no” the next logical question is:
“Tell me what happens if you were to raise prices today”
Depending on the answer, the business may have untapped pricing power. We frequently come across businesses with untapped pricing potential. Business owners often don’t realize the pricing power they possess, are too afraid to increase their prices, or simply prefer to maintain the status quo for pricing because that’s how they’ve always done things.
One of Atlasview’s major post-acquisition value-add strategies is implementing a sound pricing strategy. If you want to learn more about our value-add strategies make sure to check out one of our previous newsletter issues.
Finally, if you run a software or tech-enabled business that has significant pricing power, feel free to reach out.
Thanks for tuning in to another edition of Atlasview Insights. We’ll be posting bit-sized content every Wednesday with longer-form pieces going out on a bi-weekly/monthly basis. We have a ton of content lined up for small business owners, deal makers, and investors.
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Atlasview Equity is a private equity firm specializing in software and tech-enabled businesses. We combine patient capital with proven operational strategies to deliver predictable results for our stakeholders.