What is it?<\/strong><\/strong><\/p>\n\n\n\nLet’s begin with the basics.<\/p>\n\n\n\n
By and large, private equity funds strongly “request” that their portfolio companies increase prices 1-2x annually.<\/p>\n\n\n\n
And it’s a blanket 2-5%.<\/p>\n\n\n\n
Virtually no fund or portfolio company is undertaking the data science to determine either the optimal price increase, or the effect on customer churn.<\/p>\n\n\n\n
Parametric survival analysis? <\/p>\n\n\n\n
Inflated Poisson? <\/p>\n\n\n\n
Hierarchical Bayesian?<\/p>\n\n\n\n
In your dreams.<\/p>\n\n\n\n
They run the price increase like a Nike commercial: just do it. <\/strong><\/p>\n\n\n\nNow, a logical person would examine this tactic and come to the following conclusion:<\/p>\n\n\n\n
If I increase my prices and my customers don’t like it, they’re going to churn.<\/em><\/p>\n\n\n\nAnd this is where the greatest arbitrage in the history of private equity is being entirely squandered.<\/strong><\/h4>\n\n\n\nAccepting credit cards (and to a lesser extent ACH and other electronic funds transfers) is a very<\/span> material business cost.<\/p>\n\n\n\nFor A1, about 300 basis points of their top line revenue evaporates thanks to the cost of payment acceptance.<\/p>\n\n\n\n
If we set A1’s EBITDA margin to 20% – which is what it was before they implemented their fee – those 300 bps becomes 15% of their EBITDA.<\/p>\n\n\n\n
And payment acceptance costs only ever increase for two reasons:<\/p>\n\n\n\n
1. Visa and Mastercard are duopolies who perpetually increase fees to meet shareholder expectations. Despite being perfectly indexed to inflation, swipe fees have outperformed inflation at a rate of 4.4x.<\/p>\n\n\n\n