An across-the-board increase always looks bigger on paper. The test is how much churn it can absorb before a rise aimed at the underpriced customers overtakes it.
On the plan, a blanket increase usually adds more EBITDA, because it prices every customer. On an illustrative portfolio company with 120.0 million of revenue and a 40 per cent contribution margin, 4 per cent on everyone adds 3.08 million after expected volume losses, against 2.11 million for moving only the cheapest quartile 8 per cent towards its band median. But each extra point of lost volume costs the blanket rise 0.528 million and the targeted one 0.144, so if churn runs 2.53 points above the estimate, the targeted increase wins, and a two-quartile version matches the blanket plan at 3.05 million with half the exposure.
Worked in full in The Private Equity Operating Partner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A blanket increase is the default in a first hundred days: one letter, one effective date, one number for the board. A targeted increase starts from the price band, the spread of what comparable customers actually pay, and lifts only the accounts sitting well below it. The blanket plan always looks bigger on paper, because it applies the rise to the whole revenue base. The targeted plan looks small and slow.
The comparison that matters is not the price gain but the price gain net of the contribution that leaves with lost volume, and how fast that net figure falls when the churn estimate turns out to be optimistic. Churn estimates in pricing plans are almost always optimistic, and they are least reliable for exactly the customers a blanket rise hits hardest: the ones already paying above the median.
| Input | Value |
|---|---|
| Revenue | 120.0 |
| Contribution margin | 40% |
| Contribution | 48.0 |
| Blanket increase, every customer | 4% |
| Targeted increase, cheapest quartile only | 8% |
| Exit multiple of EBITDA | 9.0x |
Customers are ranked into four quartiles of equal revenue, 30.0 million each, by their price against the band median for what they buy. The cheapest quartile pays 16 per cent below the median; moving it halfway there is the 8 per cent rise. The commercial team's volume loss estimates are higher for customers who already pay more, because they have the strongest reason to call a competitor.
| Quartile | Price vs median | Loss, blanket 4% | Loss, targeted |
|---|---|---|---|
| Q1, cheapest | −16% | 1% | 2% at 8% |
| Q2 | −4% | 2% | none |
| Q3 | +4% | 4% | none |
| Q4, dearest | +12% | 6% | none |
Change in contribution = R × [(1 − L) × (c + p) − c]
where R is the segment's revenue, p the price rise, L the volume lost and c the contribution margin. Fixed costs do not move, so the change in contribution is the change in EBITDA.
In Excel, per quartile: =R*((1-L)*(c+p)-c), then =SUM() over the quartiles.
Blanket, cheapest quartile: 30.0 × (0.99 × 0.44 − 0.40) = 1.068. Doing the same for the other three gives 0.936, 0.672 and 0.408.
Targeted: 30.0 × (0.98 × 0.48 − 0.40) = 2.112.
| Quartile | Price gain, no loss | Contribution lost | Net, blanket |
|---|---|---|---|
| Q1 | 1.20 | 0.132 | 1.068 |
| Q2 | 1.20 | 0.264 | 0.936 |
| Q3 | 1.20 | 0.528 | 0.672 |
| Q4 | 1.20 | 0.792 | 0.408 |
| Blanket total | 4.80 | 1.72 | 3.08 |
| Targeted, Q1 at 8% | 2.40 | 0.288 | 2.11 |
On the plan the blanket increase is ahead by 0.97 million of EBITDA, 1.46 times the targeted figure, or 8.75 million of enterprise value at 9.0x. That is the number that usually wins the board discussion. Look at where it comes from, though. The dearest quartile is a quarter of revenue and contributes 13.2 per cent of the blanket gain: it earns 1.36 per cent of its revenue, against 3.56 per cent on the cheapest quartile. Most of the extra EBITDA is earned on customers who were already underpriced, which is the targeted plan's whole thesis.
The second number is the one the plan leaves out. Every extra point of volume lost across the customers whose price moved costs the blanket plan 120.0 × 0.44 × 1% = 0.528 million, and the targeted plan 30.0 × 0.48 × 1% = 0.144 million: 3.67 times less exposure. The blanket lead disappears at 0.972 ÷ (0.528 − 0.144) = 2.53 points of extra churn.
| Extra loss, points | Blanket 4% | Targeted Q1 | Q1 8% + Q2 4% |
|---|---|---|---|
| 0, the plan | 3.08 | 2.11 | 3.05 |
| 1 | 2.56 | 1.97 | 2.77 |
| 2 | 2.03 | 1.82 | 2.50 |
| 3 | 1.50 | 1.68 | 2.22 |
| 4 | 0.97 | 1.54 | 1.94 |
Two findings. First, if the estimates for the two dearer quartiles are simply doubled, to 8 and 12 per cent, the blanket rise falls to 1.76 million and is behind the targeted plan before any general churn is added. In the dearest quartile a 12 per cent loss makes the rise destroy EBITDA, −0.384 million, because it exceeds the 9.09 per cent break-even for a 4 per cent rise at a 40 per cent margin. Second, the choice is not binary. Taking the cheapest quartile 8 per cent and the second 4 per cent gives 3.05 million on the plan, within 0.04 of the blanket figure, and loses only 0.276 a point of extra churn. It is ahead of the blanket rise from 0.14 points of extra churn onwards, which is to say almost always.
The repriced base for the targeted plans is smaller, so their average increase on total revenue is lower: 2.00 per cent for the cheapest quartile alone against 4.00 per cent for the blanket rise. Report the realised price on total revenue, or the board will compare a 4 per cent headline with an 8 per cent one and draw the wrong conclusion.
Applying one average churn rate to the blanket plan. Here the quartile estimates average 3.25 per cent, and a uniform 3.25 per cent gives the same 3.08 million, so the shortcut looks harmless on the plan. It is not harmless on the risk. The average hides that the losses sit in the quartiles that earn least from the rise and have the most reason to leave, and it hides that the blanket plan's exposure per point is 3.67 times larger. The test that matters is how far churn can overshoot before the ranking flips. Run each segment against its own break-even, as in how much volume a price increase can lose before EBITDA falls, and use the band itself to pick the accounts, as in setting a price floor from a pocket price band.
The book's own version of this comparison, with the price band and the churn sensitivity on separate sheets, is in the free workbook for this case.
On the plan it usually adds more EBITDA, because it reprices all revenue. In the illustration 4 per cent on everyone adds 3.08 million against 2.11 million for 8 per cent on the cheapest quartile. But it carries 3.67 times the exposure to churn, so if volume losses run 2.53 points above the estimate, the targeted increase is ahead.
The ones furthest below the band median for what they buy: they earn most from a rise and have least reason to leave. In the illustration the cheapest quartile yields 3.56 per cent of its revenue from a 4 per cent rise, the dearest only 1.36 per cent, and at a 12 per cent loss the dearest quartile loses 0.384 million.
Per segment, revenue times [(1 minus volume lost) times (contribution margin plus price rise) minus contribution margin]. At a 40 per cent margin, a 4 per cent rise losing 1 per cent of volume on 30.0 million of revenue adds 30.0 x (0.99 x 0.44 minus 0.40) = 1.068 million. Fixed costs do not move.
Chapter 8 of The Private Equity Operating Partner sets out the segmented method; the companion files price it against a blanket rise. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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