The Mid-Market Squeeze: Why Pricing is Private Equity’s Last Best Hope

The golden era of private equity, fueled by a decade of near-zero interest rates and soaring market valuations, is officially over. For years, the playbook was deceptively simple: acquire a company using cheap debt, apply some financial engineering, ride the wave of market growth, and sell for a handsome profit. This strategy, known as multiple arbitrage, worked beautifully in a bull market. But today, with interest rates at multi-decade highs and economic uncertainty clouding the horizon, that playbook is broken. Nowhere is this pressure felt more acutely than in the mid-market, where buyout groups are now facing a stark reality: the old levers for value creation are jammed.

In this challenging new landscape of modern finance, cost-cutting and aggressive sales pushes are yielding diminishing returns. A more potent, yet historically overlooked, strategy is emerging as the critical differentiator between success and failure: strategic pricing. As Carrie Osman, CEO of the private equity advisory firm Cruxy, recently argued, mid-market firms, especially in the B2B tech space, must shift their focus from financial maneuvering to mastering the “value lever” of pricing. This isn’t just about raising prices; it’s about fundamentally re-engineering how value is defined, communicated, and captured.

This article dives deep into the crisis facing mid-market private equity, unpacks why the traditional value-creation model is failing, and explores how a sophisticated, data-driven approach to pricing offers the most powerful path forward for investors and business leaders navigating a turbulent economy.

The End of an Era: Deconstructing the Old Private Equity Playbook

To understand why pricing has become so critical, we first need to appreciate the mechanics of the model it’s replacing. For the better part of a generation, private equity returns were driven by two primary forces: financial leverage and multiple expansion.

Leverage: The Double-Edged Sword

The classic Leveraged Buyout (LBO) involves acquiring a company using a significant amount of borrowed money, with the assets of the acquired company often used as collateral for the loans. In an environment of low interest rates, this was a powerful tool. It amplified returns for the equity investors (the PE firm and its partners) because they only had to put up a fraction of the purchase price. As the portfolio company paid down debt using its own cash flow, the PE firm’s equity stake grew in value—a process known as deleveraging. However, with central banks aggressively hiking rates to combat inflation, the cost of this debt has skyrocketed, eroding margins and making the LBO model far riskier.

Multiple Arbitrage: Riding the Market Wave

The second pillar was multiple expansion. This is the art of buying a company at a relatively low valuation multiple (e.g., 8 times its EBITDA) and selling it a few years later at a higher multiple (e.g., 12 times EBITDA). This could be achieved in several ways:

• Market Growth: Simply holding an asset while the entire stock market and private markets re-rated upwards.
• “Buy and Build”: Acquiring a platform company and then “bolting on” smaller acquisitions at lower multiples, creating a larger, more valuable entity that commands a higher multiple.
• Operational Improvements: Genuinely improving the business to make it more attractive to future buyers.

The problem, as Osman notes in her letter to the Financial Times, is that “relying on multiple arbitrage is no longer a viable option” (source). The market wave has receded, and a valuation reset, particularly in the technology sector, means that banking on a higher exit multiple is a gamble few can afford to take.

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The Pricing Revolution: A New Engine for Value Creation

With the old engines of leverage and multiple expansion sputtering, PE firms must find new ways to generate returns. The traditional operational levers—cutting costs and boosting sales volume—are still relevant, but they have their limits. Cost-cutting can only go so far before it damages the company’s growth potential. Pushing for more sales in a weak economy is an expensive, uphill battle.

This is where strategic pricing comes in. It is arguably the most powerful lever for improving profitability, yet it is often the most neglected. Research from consulting firms has consistently shown that a 1% improvement in price can increase operating profits by 11% or more, an impact far greater than a 1% improvement in volume sold or a 1% reduction in costs (source). For a PE-backed company, this flows directly to EBITDA, which in turn is the primary driver of enterprise value upon exit.

Strategic pricing is not simply a one-time price hike. It is a sophisticated discipline that involves:

• Value-Based Pricing: Aligning the price of a product or service with the specific, quantifiable value it delivers to the customer.
• Customer Segmentation: Understanding that different customers have different needs and a different willingness to pay, and tailoring offers accordingly.
• Packaging & Tiering: Creating “Good-Better-Best” options that encourage upselling and capture a wider range of the market.
• Monetization Model Innovation: Moving beyond simple one-time sales or per-seat licenses to more dynamic models like usage-based, subscription, or outcome-based pricing. This is a core competency in modern financial technology.

Comparing the Playbooks: Old vs. New

The table below illustrates the fundamental shift in thinking from the traditional PE playbook to a new, pricing-centric approach to value creation.

Putting Theory into Practice: A Roadmap for a Pricing-First Strategy

Adopting a pricing-first strategy is a rigorous process that requires buy-in from the PE firm and the portfolio company’s management team. It’s a journey of discovery, design, and disciplined execution.

Step 1: The Diagnostic Phase

The first step is a deep dive into the data. This involves a “pricing audit” to understand where value is being left on the table. Teams should analyze transaction data to identify unwarranted discounting, assess price realization across different sales channels, and segment customers to see who the most (and least) profitable are. This phase sets the baseline and identifies the biggest opportunities.

Step 2: Value Discovery and Quantification

This is where art meets science. It involves moving beyond internal data to talk directly to customers and the market. The goal is to understand what features and outcomes customers truly value. What problem are they hiring your product to solve? How much is that solution worth to their business? Techniques like value driver analysis and conjoint analysis can put hard numbers on this perceived value, forming the foundation for a new pricing structure.

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Step 3: Design, Test, and Iterate

Armed with data and customer insights, the team can now design new pricing and packaging models. This could mean creating new tiers, introducing a usage-based component, or unbundling certain features into premium add-ons. Crucially, this new structure shouldn’t be rolled out company-wide overnight. It should be tested with a small subset of new customers or in a specific geographic market to validate the model and iron out any kinks before a full launch.

Broader Implications for the Investment Landscape

This necessary pivot towards operational value creation has significant implications beyond the world of mid-market buyouts. It signals a maturing of the private equity industry and a new chapter in the evolution of capitalism.

For Limited Partners (LPs)—the pension funds, endowments, and sovereign wealth funds that invest in PE—it changes the due diligence process. LPs must now scrutinize a General Partner’s (GP’s) operational capabilities. The key question is no longer “How good are you at financial structuring?” but “What is your demonstrated, repeatable process for making good companies great?” As Carrie Osman states, the focus is on a “value lever that has a direct, and fast, impact on Ebitda” (source), and LPs will want to see proof of that capability.

The rise of fintech and advanced data analytics provides the toolkit for this revolution. Modern CPQ (Configure, Price, Quote) systems, billing platforms, and AI-powered pricing optimization software make it possible to implement and manage sophisticated pricing strategies at scale. In the future, one could even envision decentralized technologies like blockchain being used for transparent, automated, and tamper-proof metering of usage-based contracts, further enhancing trust in complex commercial relationships.

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Conclusion: The Dawn of the Operator

The macroeconomic shifts of the past two years have permanently altered the landscape for private equity investing. The straightforward path of leveraging up and riding market momentum is gone. In its place is a more challenging, but ultimately more sustainable, model of value creation built on deep operational expertise.

Mid-market buyout groups stand at a crossroads. They can either cling to an outdated playbook and risk obsolescence, or they can embrace the complexity and power of strategic pricing. By shifting their focus from financial engineering to commercial excellence, they can unlock significant value, build more resilient companies, and deliver the returns their investors expect. The future of private equity belongs not to the financier, but to the operator—and the sharpest tool in their kit will be pricing.