Pricing power is a key concept in economics and business, and investors should understand how it manifests and influences competition. Almost every business wants pricing power because it gives them a competitive advantage and allows them to generate higher margins.
Pricing power has a wide range of implications for both businesses and investors and understanding the concept can help you choose better stocks.
What is pricing power?
Pricing power is a simple but powerful business concept. It means that a business can increase prices without losing more than a marginal percentage of its customers, if any. Generally, having pricing power also means a business can charge higher prices than competitors for similar products.
Competitive Advantage
Businesses create pricing power through competitive advantages, such as brand or reputation, real or perceived product quality, switching costs, and network effects. Customer satisfaction also allows a business to raise prices over time because people sometimes stick with suppliers they like, even if it means paying higher prices.
Why pricing power is important
Pricing power is an important concept for several reasons. First, it's one of the clearest indicators of competitive advantage. If a business can raise its prices and expand its margins, that's a good sign of competitive advantage. It shows investors that the company should be able to raise prices in the future.
The inflationary environment in 2022 and 2023 has given a number of businesses cover to raise prices, and many have done so successfully with little customer pushback.
The company has consistently raised prices at Disney World and other parks. And despite grumblings from some of its fans, attendance continues to swell to record levels.
Disney has also begun testing its pricing power in its Disney+ streaming service and has seen promising results. It raised its subscription service prices from $7.99/month to $10.99/month, with little customer churn. CEO Bob Iger addressed a question on pricing power on the recent earnings call, saying the company did have "pricing elasticity," another way of saying it can raise prices with little pushback.
Whether you're investing in a bull or bear market, it pays to invest in companies with pricing power. These stocks tend to have proven their worth over a long period and have sound competitive advantages that should drive above-average performances for the long term.
About the Author
