I don’t mean what makes something self-adhesive… that’s glue. I am talking about a product that customers seem to carry on buying with little chance of the competition getting a look in.

Investors will often salivate over a business that appears to be operating in a sticky market. There is a fairly simple definition of this type market in rational economic terms:

The cost or risk of changing supplier is greater than the likely saving in price or increase in value to be gained by doing so.

There are common conditions which often indicate a market is sticky:

Relatively Low-priced Items
This means that any saving from switching is likely to be small. A 20% saving on next to nothing is next to nothing.

Perceived as Critical
Anything where failure has a cost to the organisation or disruption to everyday life i.e. a new untried supplier might bring things to an ugly or chaotic halt.

Repeating Purchase or Subscription
The purchase decision was already made some time ago. The rationale may be lost in the mists of time but people assume it was logical, hence you automatically purchase from the current supplier.

Effort Required to Disengage or Switch Supplier
Difficult to cancel subscription, complicated to research and evaluate a substitute supplier. Reconfiguration, reorganisation or re-training needed to use an alternative.

These are the logical and rational reasons that make a product sticky. There are loads of other emotional and instinctive drivers of sticky markets some of these are perfectly logical when dig a bit into the human psyche. Popular sayings often give clues to these. For instance: “Better the devil you know…” “There’s no such thing as a free lunch” “They are not perfect, but they do the job”. If any of these show up in market research or commercial due diligence, they are good indicators.

Often, but not always, businesses like this have pricing power – headroom to increase prices without losing too many customers. The reason for this is simple if you think about it:

It is not the supplier, but the category of product that is sticky. Therefore, it takes a lot to win business in the first place. The incumbent may have had to offer an eye-watering discount. So, when the customer was first won, the supplier had under-priced the product. Unless there has been a strategy to increase the price significantly over time, they are likely to be still under-priced now.

Herein lies the catch that many investors don’t spot. It is by definition difficult to grow in a sticky market. Salespeople will struggle to get appointments, products will find it difficult to get listings or shelf space and worst of all, the heavy discounts required to shift the incumbent make the price look too good to be true.

So, a word to private equity… If it looks like a sticky market, check it ticks the boxes above. If it is a sticky market, don’t expect any organic growth… even if the product has competitive advantages. The exception to this is where the product category is new and the market not fully penetrated or the supplier’s offering is unique and ideally has some IP associated with it.

The good news is though, unless the management have been actively on the case, there is usually a fantastic pricing opportunity with all the pleasing results this brings to EBITDA and enterprise value.

Occasionally we get approached by the CFO rather than the CEO. What is usually on their mind is a need to ‘tidy-up’ pricing in their business. You see hundreds of different prices for different products to different customers seems unnecessary and confusing to them.

It is true that the price file in most mature companies is a deal more complex than it needs to be and could stand some sorting out. However, the CFO is usually forgetting something. They seem to think that the tidy up is an administrative exercise performed by someone sitting at a computer staring at a spreadsheet.

We sometimes have fun shattering this illusion by asking a simple question: “If we are going to harmonise the prices for you, would you like us to harmonise them up or down?”

It takes a mere moment of thought before they say “Up please”. Whereupon, we say “Then someone is going to have to tell some customers they are going to get a price increase… hadn’t we better talk to the Sales Director?”

It had not occurred to them that generally speaking (but not always) customers notice price movements.

A price file filled with lots of different prices might be a sign that someone has carefully assessed the sensitivity of each customer and each product and priced it accordingly. If this were true, the more price combinations the better in theory. However in our experience much of the untidiness comes from poor attempts to price by badly trained salespeople and then negotiated down by customers. Often the deal was done years ago against a promise of mind-boggling volumes that never materialised in a marketplace with different dynamics and a different competitive landscape…. just nobody has had the gumption to go back to the customer and re-negotiate an up-to-date appropriate price.

Tidying up a complex price file can make you a fortune. But our advice is let’s get the Sales Director in on the project at the outset… because sooner or later we are going to need him.

…unless of course you really want to harmonise prices to the lowest common denominator. In which case you probably don’t need our help.

Nobody likes a price increase and nobody likes a nasty surprise. So why is it that most companies insist on delivering their price increases as a nasty surprise.

The trouble with increasing prices to regular existing customers is that they have the strongest of benchmarks upon which to base their judgement of your new price…. namely the price you used to charge them. The issue then becomes, not whether the product constitutes value at the new price (in reality a few percent difference in the price is unlikely to fundamentally make the value unappealing), rather that you have had the temerity to move the price.

So logically what you want the customer to do is make a rational evaluation of your product at the new price and say to him or herself  ‘It is not worth risking moving my business for a couple of percent’. The closer you can get to ambivalence the better. We call this Staying the right side of the line of rationality.

What many companies manage to do is drive their customers across to the wrong side of the line of rationality by making a price increase a nasty surprise and bouncing it on the customer at the last minute. Remember those emails or letters that start ‘Dear Customer…. due to cost pressures beyond our control…. with effect from the first of next month…’ You can almost imagine the supplier sending them out then taking the phone off the hook and hiding under the desk.

On the wrong side of the line of rationality lies anger, a desire for revenge, retribution and rash decision making. We have seen customers cut their noses off to spite their faces by shifting their business hastily to an unsuitable alternative supplier.

The trick to implementing an increase is to do it slowly and gently. Drop hints well in advance that the price in on the move without saying when and by how much. Use the passive voice to depersonalise the action “Price changes are likely to happen in the new year”. Use all communication channels open to you to lodge the notion of an increase in the customer’s head without giving them a chance to argue the detail.

If you place a sufficient time between announcement of the intention and final confirmation, then even those customers who were furious at the outset will have had time to let the steam out of their ears.

People worry about competitors hearing about the increase and taking advantage. In most markets your increase will go unnoticed. In any case any sensible competitor would take the hint and raise their prices too. (PS Don’t call them and suggest this. Collusion is illegal)

Do you remember the scene in the movies when the hired assassin opens the brown envelope and takes out a complete dossier on his next target?

Now I am sure that none of you have ever wanted to bump off any of your customers – no matter how difficult they are and no matter how little they pay. However there is something to be said for going into negotiations with all the facts at your fingertips.

A little while ago we completed a project which involved three senior directors going out to the market to present a new pricing system that we have helped them develop. The end result was that ten specific customers would end up paying quite a lot more. Seems they had been underpaying for the service they had been getting for years.

The culmination of our process was a full day and a half of training for the directors in question. We presented them with a complete dossier on each customer drawn from their own data and external sources. Each dossier included:

1.    A copy of the new price list (printed nicely and laminated so it looked like it wasn’t negotiable)

2.    Notes on the way the pricing mechanism works including some calculated examples

3.    A set of notes from the training sessions we had run explaining how to present the prices at this stage and how to answer common objections

4.    A history of the customer’s trading over the last three years showing ratios and trends indicating that their business had cost more to service

5.    A financial model showing how the new charges would affect their costs based on recent months’ activity

6.    A copy of their forecasts for their activity compared with actuals showing how hopeless they were at helping us plan the capacity to service them

7.    Details of the customer’s business with his marketplace – his overall strategy and performance, the price of his products, his approach to market etc.

8.    Details of the current relationship with the customer from the people at the sharp end including their quirks and how they make life difficult

9.    A list of all the little favours that were done for the customer at no charge (including all their cock-ups that we helped brush under the carpet)

10.A set of carefully thought through arguments supported by statistics justifying the cost increase and showing how they could work with us to save costs in the future by changing their behaviour

There was around £4m of profit either way riding on the outcome of these meetings. I can’t remember anyone being more thoroughly prepared.

The moral of the story is: Why would you go into major negotiations that could earn you or cost you millions without doing everything you could to prepare?