Flowchart
Testing the price line in due diligence
Which test to run for which revenue, and when to cut the uplift
A decision path for deal teams testing the price increases in an acquisition model. List-price revenue gets a blind price test with category buyers, negotiated contracts get a renewal question, and the answers are weighted by revenue before the uplift is kept or cut. The 70% threshold is Koji's rule of thumb from the Headroom Test, not an industry standard. Koji runs both the price test and the renewal interviews in one place.
Where this appears
What's in this flowchart
Start: The model assumes a price increase
- Does this revenue sit on a published list price?
- Yes: go to 2.
- No: Ask the renewal question. Negotiated contracts: ask what they would do if renewal came in at the uplift. Then go to 4.
- Run a blind price test. Category buyers see an unbranded offer and 5 to 7 prices around today's list price.
- Does revenue peak at or above the modelled price?
- Yes: go to 4.
- No: Cut the uplift in the model. Use the highest price the curve supports and say so in the memo.
- Weight renewal answers by revenue. Count accounts, then share of ARR, for each answer.
- Will 70% of revenue accept the uplift?
- Yes: go to 6.
- No: Model a smaller or slower increase.
- Finish: Keep the uplift and cite the evidence.
Use this image
Free to use in your docs, decks and posts under CC BY 4.0, as long as you credit Koji with a link to this page. To embed it, paste this into your page:
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<a href="https://www.koji.so/visuals/pricing-power-test-decision-flowchart"><img src="https://www.koji.so/visuals/pricing-power-test-decision-flowchart/pricing-power-test-decision-flowchart.png" alt="Flowchart for testing a price assumption in due diligence: list price or not, blind price test, demand check, revenue-weighted renewal answers, keep or cut" width="1200" height="1546" /></a>
<p>Source: <a href="https://www.koji.so/visuals/pricing-power-test-decision-flowchart">Testing the price line in due diligence</a>, Koji</p>
