Generac Pricing Spineometer: 2 of 5 Vertebrae

Generac, a backup power generation company, had a problematic Q1 2023. Revenue fell 21% to $887 million while earnings before interest and taxes fell 72% to $44 million over the same period last year.

What drove this outcome?  A review of Generac’s May 3^rd earnings call and financial report provided a modicum of insight.

In short, Generac is operating in a fast-growth industry (6% year-over-year growth) where fluctuations in demand should be expected. From an investor perspective, the key challenge is distinguishing whether growth is stalling or if the decline is just a temporary setback.   From a managerial strategy and pricing perspective, we have much more to investigate.

Generac’s revenue is 84% U.S.-based and 16% non-U.S.-based. Revenue is largely driven by residential demand but commercial and industrial (C&I) are a significant portion of their revenue.  The residential demand for backup power is largely driven by recent grid-level electricity failures while their C&I demand is somewhat driven by regulatory requirements and somewhat driven by electric grid failure predictability.

Residential sales are largely to seniors in states (the U.S. is their primary market) with unpredictable power supplies.  California (bad fires), Texas (bad grid management), and Florida (bad hurricanes) are all key markets.  A recent bout of power instability in households with a modicum of wealth leads to an increase in demand.

To address the challenges of uncertain power supply from the grid, Generac supplies backup generators, energy storage units, and a number of other solutions.

But what about their pricing strategy?

Aaron Jagdfeld, CEO stated “margin was negatively affected by significant unfavorable sales mix.  … These margin headwinds were mostly offset by favorable price cost dynamics.”

For residential customers, prices appear to be adjusted annually with interim price promotions.  For C&I customers, prices are more dynamic; and a price increase occurred at the beginning of 2023.

Based on this research, we can set expectations regarding the needed pricing capability at Generac. Revenue to pricing professional benchmarks suggest Generac should have 10 to 25 people dedicated to pricing.  The sizable residential portion of their business indicates a need for pricing professionals to address competitive pricing, inflation, and grid insecurity. Their C&I business indicates a need to address regulatory affairs and competition.  Their pipeline and focus on new technology, from in-home thermostats to electric vehicle power recharging indicates a need for new product development pricing.  And their wide geographic distribution indicates a need for pricing support at the distributor level. Pricing technology should support configure-price-quote (CPQ) at a minimum.  Price methodologies for price setting on Economic Value to Customer and primary market research techniques should be in use.  Price management and analytics should be part of their operating system.

Does Generac have the appropriate pricing capability to address its commercial goals and strategic challenges?

Research into the quality of Generac’s pricing team yielded challenging results.  We found fewer than 10 people focused on pricing. A vice president was charged with global pricing.  Supporting him were a handful of pricing analysts, researchers, and information gatherers.  It appears as though Generac has insufficient resources to address the wide variety of daily pricing decisions with proper research and analysis.

Given the importance and capability of pricing at Generac as indicated in financial reports, management statements, and our pricing capability research, and given their performance, we have come to the following conclusion as of July ‘23.

Generac Pricing Spineometer: 2 out of 5 Vertebrae.

GNRC (Generac Holdings Inc.) rose from 102.8 on the day prior to their earnings call to 112.8 one week later. FY 2022 revenue of $4.6 B with a 12.4% operating margin and P/E ratio near 34.

Currently, a 1% improvement in price would yield an 8.1% improvement in EBIT holding all else constant for Generac.

Chart your path to 5 of 5 vertebrae in your Pricing Spineometer and improve your profits with Wiglaf Pricing. Includes competitive benchmarks, a 67-point corporate inspection, and a three-year pricing improvement roadmap.