Acquisition Aftermath, Part III: Managing Pricing Transitions

By Marteann Bertrand

As I sit down to write this third and final article in our “Acquisition Aftermath” series, I realize there is not a whole lot more to be said about managing pricing transitions that hasn’t already been said in the installments on managing account or employee transitions. The watch-words are again, “know thyself”, “honesty is the best policy”, and “know what you’re getting yourself into!”

The first step is to have a solid grasp of the profitability of your own pricing structure. What is your average labor-to-revenue ratio? One way of doing a “quick and dirty” analysis is to add up your total operations payroll dollars (including FICA, FUTA, and benefits) for one billing period and divide that number of minutes billed. This will give you an average labor cost per minute. Then divide your total revenue for the same period by total minutes billed to get your average revenue per minute.

Hopefully, your revenue per minute is a good deal higher than your labor cost per minute! It’s a fairly simple spread sheet calculation, or even by-hand calculation to analyze every account by dividing monthly revenue by number of minutes used and comparing the per minute revenue, account by account, to your labor cost and average revenue per minute. I’ve done this simple analysis numerous times for our consulting clients, and its surprising how often I find large numbers of accounts billing less per minute than the average labor cost per minute! It is actually costing these service bureaus, sometimes thousands of dollars, to service these accounts.

Our recommendation is always to raise the rates for these accounts as soon as possible. If the customer accepts the new rate, you win. If they do not accept the new rate, and go elsewhere, you still win!

But back to our acquisition. Just as it is important to know what you are buying, in terms of account structure and employees, it is also of critical importance to know the labor to revenue ratios, and account-by-account profitability of your acquisition. Only then will you know if you want to leave the rates as they are, or transition these accounts to your own rates.

If your new accounts are just as profitable, or more so, than your own accounts, it could be that the only notification you may have to give the customers is that your billing cycle is different, or that your invoices look a little different, or whatever. If you find you do need to raise rates, the increase will go over a lot better with the new customers if you have implemented all the recommendations in the previous two articles in this series.

We usually recommend the acquiring company not raise rates for the acquired accounts for at least one, if not two, billing cycles. This gives you time to work out all the transition bugaboos and also time to prove to this group of accounts that your service is indeed better, and thus deserving of higher rates.

After one or two billing cycles, send a letter of notification to the accounts for which you are raising rates. Explain, thoroughly but succinctly, what the new rate will be and why the increase is necessary. Then prepare your billing or customer service staff with all the right answers to give when these customers begin calling to complain.

Whoever answers your telephone should be able to explain all that you have done to increase the quality of the service provided to these customers. They should have thorough knowledge of the process you went through to gather all information and program the accounts properly. They should know what kind and how much training your operations staff had in order to effectively service these accounts. And they should know what kind of remedial and on-going training your company has in place, as well as all of your quality assurance processes and techniques.

If the customer accepts your answers and the rate increase, you win. If this is an account that bills less per minute than your labor cost per minute, or even less per minute than you will accept for your own profitability goals, and this customer does not accept the rate increase and goes elsewhere, you still win, without having to beat yourself up for losing a customer!

[From Connection Magazine – March 1999]