What really is Pricing Power?
A notable colleague of mine defines Pricing Power as the ability of a company to achieve the price it deserves for the value it delivers.
He, as is the rest of his team, is wrong on this issue in my opinion.
What my colleague offers is definition of pricing accuracy. Pricing accuracy is the ability of a company to charge and extract the price it deserves for the value it delivers.
Pricing Power is more than pricing accuracy. Pricing power is demonstrated when a company can unilaterally define and extract prices, within an albeit limited range, without regards to direct competitive pressures. It requires that the firm is able to deliver a product or service to the market that competitors cannot easily replicate, or can only replicate poorly. Furthermore, that product or service must be desired, if not preferred, by the market, than its nearest comparable alternative.
Consider some classic examples of firms with pricing power:
- In the 1990’s, the only newspaper in a one newspaper town had pricing power over its advertising rates.
- In the 1800’s, the general store in a small town would have pricing power over the price of tools.
- And today, one might say that firms are struggling to achieve market dominance in ride sharing, cloud storage, and home-repair contractor identification precisely because of the desired pricing power it would bring the winner.
By my colleague's definition, both Apple and Samsung could be said to have pricing power in the smartphone market.
Consider Apple vs. Samsung. By some reports, Apple earned roughly 95% of profits in the 2015 smartphone market while Samsung earned roughly 15% of the profits (other vendors lost money collectively which is why the above adds up to more than 100%). Concurrently, Samsung’s market share is size-ably larger than Apple’s market share.
Now, both Apple and Samsung could be said to have the “ability … to achieve the price it deserves for the value it delivers.” But would you really say that Samsung has pricing power like Apple does?
In contrast, it is clear, and most would agree, Apple “is able to deliver a product or service to the market that competitors cannot easily replicate” in the smartphone market. Furthermore, Apple's product's and service's are "desired, if not preferred, by the market." As such, my definition of pricing power would apply.
(Apples pricing power has been attributed to its brand, the iTunes ecosystem and store, and the seamless Apple ecosystem integration. Sorry Samsung - but keep trying!)
So which of us is right? My competing colleague or me? Is my colleague's definition of pricing power really a definition of pricing accuracy? Have I, Tim J. Smith, PhD of Wiglaf Pricing, defined pricing power better? Or do you have a better definition of pricing power?
Chief Financial Officer, Duramax Solutions, LLC
9 年I would agree with your definition Tim, but would also include price leadership as a prerequisite. A company may have the ability to increase prices for their offering without impact on volumes if they are following the move of a competitor that has true Pricing Power with Pricing Leadership. If they attempted to initiate the move first they would likely encounter market resistance. Power is in the hands of those that can lead with it.
Pricing Analyst
9 年Hello Mr Smith, According to Warren Buffett, "if you’ve got the power to raise prices without losing business to a competitor (Apple ?), you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent (Samsung ?), then you’ve got a terrible business." (the word "terrible" is maybe too much for Samsung) I think you are right : "Pricing power is demonstrated when a company can unilaterally define and extract prices, within an albeit limited range, without regards to direct competitive pressures." Thank you for your article. Hope to read your next, - Vincent -
Published Author, Speaker and Advisor on Business
9 年Ability to cover your expenses and get a better rate of return on your money than any other opportunity.
Thought Leader, Value Creation and wellbeing, Customer Value. Editor, J of Creating Value, Value Schools at Kobe U and JAIST, Value Research Centre, Kyoto; Denmark; U of Maryland; FAU.
9 年My comment is as follows: If value in your article means product value alone and not emotional and brand value than you are right. But if it does include other intangibles, then we could actually figure the right price (and call it pricing power). Second, it is unfair to compare Apple, high end, wit all Samsung. Lets compare pricing and profits for Apple and Samsung high end.