What is Pricing Power?
There is a famous quote from Warren Buffett on pricing power.
In business and economics, pricing power refers to the rise in the price of a company’s products while maintaining its demand. If a company offers a unique product, then its pricing power will be strong. The demand for the product will not reduce even when the prices go up. When a company can command higher prices for a product, then the profits will be more. Pricing power is often associated with price elasticity. Price elasticity is how consumers react to the change in prices of products. Their demand or supply may go down and go looking for cheaper alternatives.
How is Pricing Power Used?
When the pricing power of a company is not much, the demand for the product will reduce as soon as the prices go up. A company with a pricing power that is significant is often the one that provides a rare and unique product. Also, Its competition in the market may be very low. In such cases, the company will raise its prices, but the increase will not affect the demand. It happens because the alternative products are of low quality. Take an example of the Apple Company.
When it started producing the iPhone, it had a strong pricing power as it was the only one providing that kind of a smartphone. At that time, the company had no competitors with the same device. Apple was producing the best products in the market. The iPhones were highly-priced but of good quality. When new rivals started emerging, bringing in new quality products, the pricing power of Apple went down. Instead of disappearing from the market, Apple started producing newer and improved models of iPhones. They also produced cheaper iPhone models for consumers on a budget. Another example is the pricing surge of the transportation and hospitality industries during holiday seasons. Taxi services and hotel rates are usually high because of their high demand. All these are instances where the companies strengthen their pricing power as it will not affect the demand for service delivery.
Types of Pricing Power
Monopoly
A monopoly can hike its prices usually because they do not have a direct competitor in the market. Monopolies, therefore, have strong pricing power. An example is a network company that supplies the internet all through the city. They can easily hike their prices, and people will still pay for the internet because they need it.
Luxury products and services
A brand that has a high social status has robust pricing power. Consumers increase their consumption when these brands lower their prices. Luxurious brands need to sustain high prices in the market. Lowering prices causes the brand to lose value.
Differentiated products
Refers to products or services that are superior to others in the market. An increase in price also leads to an increased market share. The presence of new rivals in the market will never affect the demand for the product.
Commodity
A commodity is a product that consumers use daily and are undifferentiated. Commodity products do not have a pricing power whatever the case. Companies selling these kinds of products have to use the set market prices.
How to Achieve Pricing Power
To attain pricing power, the company has to build on some different crucial areas. Sketch a roadmap for the prices the company will have an understanding of their prices, and how to align their pricing strategies. The roadmap summarizes the company’s price vision for the coming years. Establish standards, clear pricing principles, and share them with your colleagues within the company. These will provide guidance and discipline in pricing. If the existing guidelines lack clarity on the market strategy, then it may be time to build new ones. Let your consumers be aware of the change in future prices so that they can have a plan in advance. The sales and marketing person needs to receive proper training on how to relay this information to the public. If you have your customers contacts, send messages to your reasons for the price change.
Importance of Pricing Power
Price power is a key aspect, especially when looking for stability in profits and revenues generated. It lets the company raise the prices while still maintaining their position in the market. Investors analyze pricing power before they decide to invest in a company Pricing power helps to grow the economies of countries. The countries that export unique resources will never go out of business even when they hike their prices
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