Pricing / monetization ebitda

Sharpening EBITDA Improvement Decisions

Emily Ellis · 2025-12-30

The widely held belief in private equity (PE) is that earnings before interest, taxes, depreciation and amortization (EBITDA) improvement comes from cost management. Reduce headcount, rationalize vendors, move to lower-cost infrastructure. These actions are visible in the P&L, defensible to the board, and within the operating team's direct control.

They're also the wrong first move for most software companies.

The correct first move is commercial. Better price realization, improved net revenue retention (NRR), and tighter discount governance produce EBITDA expansion faster than cost reduction, with less organizational damage, and with higher compounding effect over a hold period. Yet most 100-day plans lead with cost and add commercial work as an afterthought.

What It Actually Costs

The cost of leading with cost reduction rather than commercial improvement is not just opportunity cost. It's organizational drag.

A 15-person reduction in a 120-person software company saves approximately $2M annually. That's meaningful. But the cost of executing it: leadership bandwidth consumed for four months, attrition among the retained employees who update their LinkedIn profiles after the announcement, a customer success (CS) team stretched across a larger book of business, and a product team that slows roadmap delivery. The $2M in savings rarely materializes cleanly when those secondary costs are accounted for.

Meanwhile, a 4% improvement in average realized price on $60M annual recurring revenue (ARR) produces $2.4M in incremental EBITDA in year one. The project takes six weeks of operating team time and a VP of Sales conversation. The organizational drag is real but manageable. The margin improvement arrives in the P&L faster than a restructuring.

The Approach

Three questions to reframe your EBITDA improvement program toward commercial levers.

Step 1: Quantify the commercial gap before you model the cost cuts. Before your management team presents a cost reduction plan, require them to present the price waterfall analysis. What's the gap between list price and average realized price? What's the discount distribution by rep? What's the NRR decomposition? Those numbers will almost always reveal a commercial improvement opportunity larger than the proposed cost savings.

Step 2: Sequence commercial improvements in parallel with selective cost rationalization. Cost rationalization is appropriate where there's genuine structural overhead, redundant vendor contracts, or headcount in functions that don't scale with revenue. But it shouldn't lead the program. A sequenced plan that captures commercial improvements in quarters one and two, then addresses structural cost in quarters three and four, delivers faster P&L impact with less organizational disruption.

Step 3: Measure EBITDA improvement by source. Once the program is running, track where the margin expansion is actually coming from. Is it price realization? NRR improvement? Cost reduction? Each source has a different durability profile and a different story to tell in exit due diligence. Buyers will ask. You want the answer to show that margin expansion came from commercial discipline, not from stripping costs that will need to be rebuilt for growth.

Where This Breaks

A marketing analytics platform at $68M ARR was in year three of a four-year hold with a 16% EBITDA. The target was 22% for exit. Management's plan included two rounds of cost reduction and a vendor rationalization program projected to deliver 3-4 points of margin improvement over 18 months.

The operating partner requested a commercial baseline before approving the cost program. The analysis found a 29% average discount rate, NRR of 97% against a peer median of 109%, and no deal desk governance above $50K annual contract value (ACV).

Before: $68M ARR, 16% EBITDA, 29% average discount, 97% NRR, cost reduction plan projected to deliver 3-4 margin points over 18 months.

After: Commercial improvement program ran in parallel with a reduced cost rationalization. Price realization governance delivered 2.8 points of margin in 12 months. NRR expansion added 1.4 points over 18 months. The cost program delivered 1.8 points. Total: 6 margin points, beating the original target by 2 points with half the organizational disruption.

Next Actions This Week

Open your portfolio company's latest board deck. Find where it discusses EBITDA improvement. Count how many slides discuss commercial levers versus cost reduction. If the ratio is less than 1:1, your improvement program is underweighting the faster, larger lever.

Assess Your Commercial Health to quantify the commercial EBITDA improvement available in your portfolio company before you commit to a cost reduction program.

Frequently Asked Questions

Why do most PE EBITDA improvement programs underperform expectations?

They prioritize cost reduction over commercial improvement. Cost reduction is visible and feels controllable, but it carries execution risk through morale damage, attrition, and capability loss. Commercial improvement through better price realization and NRR expansion is faster and more durable, but it requires commercial discipline that most management teams haven't built. The programs that succeed combine governance-based commercial improvement with selective cost rationalization.

How much EBITDA improvement is typically available through commercial levers in a PE-backed software company?

In our experience working with PE-backed software companies between $15M and $100M ARR, commercial levers typically represent 300-600 bps of EBITDA improvement that can be realized within 18-24 months. The largest single source is almost always price realization improvement, followed by NRR expansion through better expansion motions.

Find out where your commercial gaps are.

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